Third Circuit Clarifies Class Arbitration Rule – Sort Of

April 4, 2012

     On April 3, 2012, the Third Circuit Court of Appeals released its opinion in Sutter v. Oxford Health Plans (No. 11-1773). The case is one of long-standing in New Jersey, involving allegations by Dr. Sutter that Oxford failed to make prompt and accurate payments for services rendered by Sutter under the parties\’ Primary Care Physician Agreement. That Agreement contained a provision that required arbitration of all claims arising under the Agreement, but did not specifically allow or prohibit class arbitration. The Court\’s current opinion addresses a challenge by Oxford to the arbitrator\’s ruling that the Agreement permitted class arbitration, notwithstanding the U.S. Supreme Court\’s decision in Stolt-Nielsen v. Animal Feeds International, 130 S.Ct. 1758 (2010).

      In Stolt-Nielsen, the Supreme Court held that an arbitral panel exceeded its authority by permitting class arbitration when the parties had reached no agreement on that issue. Significantly, the parties in Stolt-Nielsen stipulated they never reached agreement on the permissibility of class arbitration when forming their agreement to arbitrate. On that record, the Court determined there was no basis on which the arbitrators could construe the parties\’ agreement to permit class arbitration. The Court held that the imposition of class arbitration requires a contractual basis for concluding that both parties agreed to permit it – but no requirement that class arbitration be expressly mentioned.

     Against this backdrop, the Third Circuit in Sutter allowed the arbitrator wide latitude in interpreting the parties\’ intent under their Agreement. Since, unlike Stolt-Nielsen, the parties in Sutter did not stipulate the absence of an agreement on class arbitration, the arbitrator was free to broadly interpret the intent of their Agreement on the issue. He did so and found class arbitration to be permitted.

     The arbitrator\’s rationale for finding an intent to permit class arbitration would seem to apply to most provisions that do not expressly prohibit class arbitration. Oxford made this argument to the Third Circuit, saying that affirming the arbitrator here would effectively require parties to expressly disclaim the use of class arbitration. The Court did not agree, stating that there still needs to be “some contractual basis” for the arbitrator\’s interpretation that class arbitration is permitted.

     So where does that leave us? 

1. An express statement of intent to permit class arbitration is not required for an arbitrator to allow it.

2. An express prohibition against class arbitration is not required for an arbitrator to deny it.

3. The arbitrator may not infer the parties\’ intent to permit class arbitration solely from the fact of their agreement to arbitrate.

4. The arbitrator may find an intent to permit class arbitration in the construction of an agreement that neither expressly permits nor expressly prohibits class arbitration.

At least in the Third Circuit, and probably elsewhere, a party that feels strongly about class arbitration (one way or the other) would do well to include a statement of intent on this issue in the arbitration provision.

     For parties that do not want to submit to class arbitration, the Third Circuit\’s analysis of the absence of a clause precluding class action arbitration is noteworthy:

“Stolt-Nielsen does prohibit an arbitrator from inferring parties\’ consent to class arbitration solely from their failure to preclude that procedure, but the arbitrator did not draw the proscribed inference in this case. Rather, the arbitrator construed the text of the arbitration agreement to authorize and require class arbitration. Then he observed that an express carve-out for class arbitration would have made it unavailable even under the clause\’s otherwise broad language. As the arbitrator later articulated when he revisited his construction of the clause in light of Stolt Nielsen, the lack of an express exclusion was merely corroborative of his primary holding that the parties\’ clause authorized class arbitration; it was not the basis of that holding. Thus, the arbitrator did not impermissibly infer the parties intent to authorize class arbitration from their failure to preclude it.”

It is unclear how the Sutter Court knew when in the arbitrator\’s thought process the absence of a class action carve out became determinative (i.e., it can\’t be dispositive, but it can be corraborative?), although this conclusion appears essential to upholding the arbitrator\’s decision while squaring it with Stolt-Nielsen. But whether or not you can split this hair, counsel drafting arbitration provisions must acknowledge Sutter\’s practical effect, and act accordingly.

[Image: Photo of a split end, May 2,2011, by Milful]