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Oxford Health Plans LLC v. Sutter—SCOTUS Reaffirms FAA Section 10(a)(4) Manifest Disregard of the Agreement Outcome Review Standard and Elaborates on Its Scope: Part I

July 19th, 2013 Arbitrability, Arbitration Agreements, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Class Action Arbitration, Consolidation of Arbitration Proceedings, Contract Interpretation, Grounds for Vacatur, Judicial Review of Arbitration Awards, labor arbitration, United States Supreme Court 1 Comment » By Philip J. Loree Jr.

On June 10, 2013 the U.S. Supreme Court in Oxford Health Plans LLC v. Sutter, No. 12-135, slip op. at 4-5 (U.S. June 10, 2013) (Kagan, J.), unanimously reaffirmed that Section 10(a)(4) of the FAA authorizes courts to vacate awards that are not even arguably based on an interpretation of the parties’ agreement.

While the Court broke no new ground, Associate Justice Elena Kagan’s well-written opinion—together with Associate Justice Samuel A. Alito’s opinion in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010)—defines in fairly clear terms the scope of contract-based judicial review Section 10(a)(4) authorizes. Justice Kagan’s opinion raises not only some issues specific to class and consolidated arbitration, but also some relevant to Federal Arbitration Act (“FAA”)-governed arbitration in general.

This Part I of our two-part Oxford post begins by putting the case in context by summarizing recent events concerning judicial outcome review of FAA-governed awards and concludes by summarizing the Court’s decision. Part II will discuss what to make of Oxford.

Putting Oxford in Context: Outcome Review of FAA-Governed Awards

What we refer to as “outcome review” is the limited, deferential judicial review courts may apply to determine whether an arbitrator’s award should be vacated because it is not grounded in the parties’ agreement or because it disregards a clearly applicable, controlling and outcome-determinative legal rule or principle argued to the arbitrator. When a party argues that a commercial arbitration award was not even arguably grounded in the parties’ agreement, it is asking the court to apply the labor-arbitration-derived, “Steelworkers Trilogy” principle that an “award is legitimate only so long as it draws its essence from the” parties’ agreement. See Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960). Because there is no one universally accepted moniker for that standard, we refer to it as “manifest disregard of the agreement,” a shorthand form some courts have used to describe it. See, e.g., Ludwig Honold Mfg. Co. v. Fletcher, 405 F.2d 1123, 1128-29 (3rd Cir. 1969); Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200, 222 (2d Cir. 2002) (Sotomayor, J.). We also sometimes refer to it as the “contract-based outcome review” standard.

If a party asks a court to vacate an award on the ground that the arbitrator did not apply (or could not have applied) a clearly applicable, outcome-determinative legal rule or principal to the dispute, then the party is requesting vacatur based on the FAA-derived “manifest disregard of the law” standard. That standard was developed by Circuit Courts of Appeals based on the U.S. Supreme Court’s dicta in Wilko v. Swan, 346 U.S. 427, 436-37 (1953), overruled on other grounds, Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 479-85 (1989).

Both outcome review standards assume that the parties submitted the dispute to the arbitrator; outcome review tests not whether the arbitrator was guilty of mistakes of law, contract interpretation or fact, but whether the award violates their agreement to arbitrate or submission to arbitration.  See, generally, Wise v. Wachovia Sec., 450 F. 3d 265,269 (7th Cir. 2006) (Posner, J.) (“When parties agree to arbitrate their disputes they opt out of the court system, and when one of them challenges the resulting arbitration award he perforce does so not on the ground that the arbitrators made a mistake but that they violated the agreement to arbitrate.  .  .  .”) (discussing,  among other things, contract-based outcome review standard).

The Supreme Court’s 2008 decision in Hall Street Associates, LLC v. Mattel, Inc., 128 S. Ct. 1396, 1403 (2008), raised serious questions about the continuing viability of both outcome review standards. Hall Street held that Section 10(a)(1)-(4) of the FAA set forth the “exclusive grounds for expedited vacatur” of an FAA-governed arbitration award. None of the four grounds expressly authorize a court to review the outcome of an award – whether on manifest disregard of the contract or manifest disregard of the law grounds. The one that comes the closest to doing so is Section 10(a)(4), which authorizes courts to vacate awards where the “arbitrators exceeded their powers.  .  .  ” 9 U.S.C. § 10(a)(4). But Section 10(a)(4)’s text can also be reasonably interpreted as authorizing vacatur only where an arbitrator exceeds her authority by deciding issues not submitted to her. See DiRussa v. Dean Witter Reynolds Inc., 121 F. 3d 818, 824 (2d Cir. 1997).

Whether or not one or both standards survived Hall Street turns on whether the standards are non-statutory, judicially-created grounds for vacatur or whether they are derived from Section 10(a)(4), or at least could be deemed to be within its scope. A number of courts ruled pre-Hall Street that one or both standards were judicially-created and not within the scope of Section 10(a)(4). See, e.g., American Laser Vision v. Laser Institute, 487 F.3d 255, 259 (5th Cir. 2007) (manifest disregard of the agreement is a statutory ground under Section 10(a)(4) but manifest disregard of the law is a non-statutory ground); McGrann v. First Albany Corp., 424 F.3d 743, 749 (8th Cir. 2005) (both standards are non-statutory grounds for vacatur); but see Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1288, 1290 (9th Cir. 2009) (Ninth Circuit had recognized pre-Hall Street that both were derived from Section 10(a)(4)). That put one or both standards at risk of being deemed no-longer viable after Hall Street.

While the Circuits are currently split on whether manifest disregard of the law survived Hall Street,[1] in 2010 the Supreme Court in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758, 1767 (2010), ruled that manifest disregard of the agreement was a ground for vacating a commercial arbitration award under Section 10(a)(4) of the FAA. The Court first acknowledged that a Section 10(a)(4) outcome review challenge presents a “high hurdle” that a challenger could not overcome simply by showing that the arbitrators “committed an error —or even a serious error.” Id. Citing Enterprise Wheel, and subsequent Supreme Court cases concerning manifest disregard of the agreement in the labor-arbitration context, the Court said “[i]It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively `dispense[s] his own brand of industrial justice’ that his decision may be unenforceable.” 130 S. Ct. at 1767 (quoting Garvey, 532 U.S. at 509 (quoting Enterprise Wheel, 363 U.S. at 597)). But “[i]n that situation,” said the Court, “an arbitration decision may be vacated under § 10(a)(4) of the FAA on the ground that the arbitrator “exceeded [his] powers,” for the task of an arbitrator is to interpret and enforce a contract, not to make public policy.” 130 S. Ct. at 1767.

The Stolt-Nielsen parties submitted to an arbitration panel the question whether their arbitration agreement permitted class arbitration – that is, not simply bilateral arbitration between the parties to the arbitration agreement, but multilateral arbitration under which the plaintiff would represent an class of similarly situated plaintiffs who had separately agreed to arbitrate with the defendant and would consent to join the class. Both parties asserted – and thus stipulated – that their arbitration agreement was silent on class arbitration in the sense that the parties never reached an agreement about class arbitration. 130 S. Ct. at 1766. The panel’s award concluded that the parties’ contract allowed for class arbitration, basing its decision on a perceived “consensus among arbitrators that class arbitration is beneficial” in many cases. See 130 S. Ct. at 1769.

The Court held the arbitrators exceeded their powers because their award was not grounded in the parties’ agreement, but simply on their own policy preference for class procedures. Because the parties’ stipulated they had reached no agreement on class arbitration, the “only task that remained for the panel was to identify whether any of the three potentially applicable bodies of law – the FAA, New York or federal maritime—contained a “‘default rule’ under which an arbitration clause is construed as allowing class arbitration in the absence of express consent.  .  .  .” 130 S. Ct. at 1769. Instead, “the panel proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such a situation.” Id. And while the panel purported to “interpret” the arbitration agreement by referring to its broad scope, the parties’ stipulation left no room for interpretation, making an interpretive exercise “quite beside the point.” 130 S. Ct. at 1770.

The Court did not remand the matter to the arbitrators because it concluded that there was only one possible outcome under the FAA. Ruling that consent to class arbitration could not be implied based solely on the parties’ agreement to arbitrate a broad range of disputes, the Court held that the parties did not consent to class arbitration. 130 S. Ct. at 1776.

The Court also declined to decide whether manifest disregard of the law survived Hall Street but said that if manifest disregard of the law survived Hall Street, then that standard, too, would have required vacatur of the award. 130 S. Ct. 1767-68 n.3. The Court thus signaled that the two standards overlap to some extent. But it would be a mistake to conclude that the two standards are necessarily coextensive in coverage; there are plenty of legal rules or principles that an arbitrator might manifestly disregard that apply independently of – or without regard to – the parties’ contract.

Perhaps manifest disregard of the law could be deemed co-extensive with manifest disregard of the agreement if the Supreme Court were to determine that the FAA implies into every arbitration agreement within its scope party intent not to authorize the arbitrators to disregard clearly applicable and controlling legal rules and principles.  But the Supreme Court has yet to rule on whether manifest disregard of the law is a ground for vacating an award, let alone to attempt to define its basis and contours.

Oxford Health Plans LLC v. Sutter: The SCOTUS Decision

In but one material respect, Oxford’s facts were substantially identical to those in Stolt-Nielsen. The parties voluntarily submitted to the arbitrator the issue of whether the parties’ arbitration agreement authorized class arbitration, but, unlike the Stolt-Nielsen parties, did not stipulate they had reached no agreement about class arbitration. The arbitrator ruled that the parties’ contract authorized class arbitration, but shortly thereafter Stolt-Nielsen was decided, and Oxford asked the arbitrator to reconsider his decision.

On reconsideration, the arbitrator found that Stolt-Nielsen did not change the outcome because the parties had not agreed there had been no meeting of the minds on class arbitration and because he had interpreted the arbitration agreement as permitting class arbitration, an interpretation he reiterated in his second award.

The arbitrator’s interpretation was highly questionable and most likely did not accurately reflect the objectively expressed intent of the parties, but it was nevertheless a plausible or barely colorable one. The parties arbitration agreement provided, in pertinent part, that:

No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.

Slip op. at 2.

It is difficult— at least for me and I’m sure many others—to say with a straight face that the preceding 43-word sentence suggests any intent on the parties’ part one way or the other concerning class arbitration, particularly since the American Arbitration Association’s Commercial Rules do not address class arbitration. Because the key, class-arbitration-specific FAA rules Stolt-Nielsen established were: (a) parties must have affirmatively consented to class arbitration, see Stolt-Nielsen, 130 S. Ct. at 1774-76; and (b) consent to class arbitration cannot be implied in the absence of such consent, see id. at 1775-76, the thrust of Oxford’s argument for vacatur was that there was no legitimate basis for the arbitrator to have concluded that there was a contractual basis for inferring consent to class arbitration despite its purported interpretation of the contract.

As Oxford was no doubt aware—Supreme Court luminary Seth Waxman, who represented the prevailing party in Stolt-Nielsen, represented Oxford—that was a tough argument to prevail upon where, as here, the arbitrator supported his decision with an interpretation of the contract. Proving that a contract is “silent” with respect to an issue is like proving a negative, and if an arbitrator offers an even barely plausible interpretation of the contract under which consent can be inferred, then a manifest disregard of the agreement challenge was likely to fail.

Here, the arbitrator’s highly questionable interpretation was nevertheless at least barely colorable.  He reasoned that the scope of disputes the agreement required the parties to submit to arbitration was coextensive with the “civil action[s]” the agreement precluded the parties from asserting in litigation. The “‘intent of the clause’” he said, “‘was to vest in the arbitration process everything that is prohibited from the court process.’” Slip op. at 2 (quoting award). Because a class action “‘is plainly one of the possible forms of civil action that could be brought in a court.  .  .  . [,]’ ‘on its face the arbitration [agreement] . . . expresses the parties’ intent that class arbitration can be maintained.’” Id.

Oxford – quite understandably – believed that, in light of the FAA class-arbitration-specific rules Stolt-Nielsen established in its strongly-worded opinion, and even in the absence of an agreement that the arbitration agreement was silent on class arbitration, the arbitrator’s interpretation provided not even a barely colorable contractual basis for imposing class arbitration. It thus moved to vacate the arbitrator’s second award, but the U.S. Court of Appeals for the Third Circuit denied its motion because, unlike in Stolt-Nielsen, the parties disputed whether they had reached any agreement concerning class arbitration, and because the court concluded the arbitrator had at least arguably interpreted the contract. See Slip op. at 3-4.

Because there was a split in the circuits concerning the application of Stolt-Nielsen in cases raising materially identical (or at least very similar) issues[2], the Supreme Court granted certiorari and affirmed the judgment of the Third Circuit. Slip op. at 4.

In a 9-0 decision written by Associate Justice Elena Kagan, the Supreme Court explained that “[o]nly if ‘the arbitrator act[s] outside the scope of his contractually delegated authority’ —issuing an award that ‘simply reflect[s] [his] own notions of [economic] justice’ rather than ‘draw[ing] its essence from the con­tract’—may a court overturn his determination.” Slip op. at 5 (quoting Eastern Associated Coal Corp. v. Mine Workers, 531 U. S. 57, 62 (2000) (quoting Enterprise Wheel, 363 U.S. at 599)) and Paperworkers v. Misco, Inc., 484 U. S. 29, 38 (1987) (internal quotation omitted)). The “sole question,” said the Court, “is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Slip op. at 5 (parenthetical in original).

Applying the manifest disregard of the agreement standard, the Court held that the arbitrator did not exceed his powers because he “did as the parties requested: He provided an interpretation of the contract resolving that disputed issue.” Slip op. at 8-9. By contrast, in Stolt-Nielsen: (a) the arbitrators’ “decision was not—indeed, could not have been—based on a determination regarding the parties’ intent.  .  .  .” because the clear terms of the stipulation indicated the parties’ contract did not evidence any intent concerning class arbitration; and (b) the arbitrators did not “attempt to ascertain whether federal or state law established a “default rule” to take effect absent an agreement.” Slip op. at 7. (citations and quotation omitted) In Stolt-Nielsen the award thus had to be vacated because the arbitrators had “abandoned” their task of “interpret[ing] and enforc[ing]” the parties’ contract in favor of imposing their own notions of what outcome was best. Slip op. at 7 (quotation and citation omitted).

The Court rejected Oxford’s argument that the arbitrator’s award lacked a “‘sufficient’” basis under Stolt-Nielsen’s affirmative-consent-to-class-arbitration-required and no-implied-consent-to-class-arbitration rules. Slip op. at 6-7. It explained that it “overturned the arbitral decision in [Stolt-Nielsen] because it lacked any contractual basis for ordering class procedures, not because it lacked, in Oxford’s terminology, a ‘sufficient’ one.” Slip op. at 6.

“Here,” said the Court, “the arbitrator did construe the contract (focusing, per usual, on its language), and did find an agreement to permit class arbitration.” Slip op. at 7. Overturning his decision would require the Court “to rely on a finding that he misapprehended the parties’ intent.” Id. But Section 10(a)(4) “permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.” Id.

The Court also rejected Oxford’s argument that the arbitration agreement “submits to arbitration not any ‘civil action[s] ’but instead any ‘dispute arising under’ the agreement[,]” and that, in any event, “a class action is not a form of a ‘civil action,’ as the the arbitrator thought, but merely a procedural device that may be available in a court.” Slip op. at 8. It emphasized, however, that it did so “because, and only because, it is not properly addressed to a court[,]” and added, “[n]othing we say in this opinion should be taken to reflect any agreement with the arbitrator’s contract interpretation, or any quarrel with Oxford’s contrary reading[:]” “All we say is that convincing a court of an arbitrator’s error— even his grave error—is not enough.” Slip op. at 8.

The FAA’s “limited judicial review,” said the Court, “‘maintain[s] arbitration’s essential virtue of resolving disputes straightaway[,]’” for “[i]f parties could take ‘full-bore legal and evidentiary appeals,’ arbitration would become ‘merely a prelude to a more cumbersome and time-consuming judicial review process.’” Slip op. at 4, (quoting Hall Street, 552 U.S. at 558). The “price” of “agreeing to arbitration” is assuming the risk that arbitrators may make even “grave errors” that courts will not be able to correct if arbitration is to serve its purpose as a presumably speedy and cost-efficient alternative to litigation. See slip op. at 8.

Holding as it did in Enterprise Wheel, the Court “h[e]ld again: ‘It is the arbitrator’s construction [of the contract] which was bargained for; and so far as the arbitrator’s decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.’” Slip op. at 8 (quoting Enterprise Wheel, 363 U. S. at 599). That “construction holds, however good, bad or ugly.” Slip op. at 8.

In Part II we shall discuss the issues raised by, and implications of, Oxford, including the Court’s recognition that the issue of whether consent to class arbitration is for the court or the arbitrator remains open, and the thoughtful observations concerning that arbitrability issue Justice Alito made in his concurring opinion, which was joined by Associate Justice Clarence Thomas.



[1]See, e.g., Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349, 358(5th Cir. 2009) (manifest disregard of the law did not survive Hall Street); Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1323-24(11th Cir. 2010) (same); Medicine Shoppe Int. v. Turner Inves., 614 F.3d 485, 489 (8th Cir. 2010) (same); Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1281 (9th Cir. 2009) (manifest disregard survives Hall Street); T. Co Metals v. Dempsey Pipe & Supply, 592 F.3d 329, 339-40 (2d Cir. 2010) (survives Hall Street).

 

[2]See Jock v. Sterling Jewelers Inc., 646 F. 3d 113 (2d Cir. 2011) (Stolt-Nielsen did not require vacatur); Reed v. Florida Metropolitan Univ., Inc., 681 F. 3d 630 (5th Cir. 2012) (Stolt-Nielsen required vacatur).

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