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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 II.A

August 16th, 2013 Arbitration Agreements, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, Contract Interpretation, Grounds for Vacatur, Judicial Review of Arbitration Awards, Labor Arbitration, Practice and Procedure, United States Supreme Court Comments Off on 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 II.A By Philip J. Loree Jr.

Part II.A:  What to Make of Oxford?

In our last post (here) we discussed the U.S. Supreme Court’s recent decision in Oxford Health Plans LLC v. Sutter, No. 12-135, slip op. (U.S. June 10, 2013), which, among other things, reaffirmed that Section 10(a)(4) of the Federal Arbitration Act (“FAA”) authorizes judicial review of FAA-governed-arbitration-award outcomes based on the labor-arbitration-derived “manifest disregard of the agreement” standard.  This post, which has been divided into three segments, discusses what to make of Oxford.  This part A addresses the scope of Oxford, including whether it undermines Stolt-Nielsen and whether it authorizes arbitrators to disregard or modify the clear terms of the parties’ agreement.

Introduction

Oxford’s interpretation and application of the manifest disregard of the agreement standard is in line with how most courts have interpreted that standard for several years.  Oxford’s explanation of the standard echoes the following pithy description penned by Circuit Judge Richard A. Posner back in 1987:

As we have said too many times to want to repeat again, the question for decision by a federal court asked to set aside an arbitration award — whether the award is made under the Railway Labor Act, the Taft-Hartley Act, or the United States Arbitration Act [now known as the Federal Arbitration Act (the “FAA”)]— is not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract.

.  .  .  .  By making a contract with an arbitration clause the parties agree to be bound by the arbitrators’ interpretation of the contract. A party can complain if the arbitrators don’t interpret the contract — that is, if they disregard the contract and implement their own notions of what is reasonable or fair. A party can complain if the arbitrators’ decision is infected by fraud or other corruption, or if it orders an illegal act. But a party will not be heard to complain merely because the arbitrators’ interpretation is a misinterpretation.

Hill v. Norfolk and Western Ry. Co., 814 F. 2d 1192, 1194-95 (7th Cir. 1987) (Posner, J) (citations omitted).

The Supreme Court – both wisely and pragmatically – did not accept Oxford’s unstated invitation to give the standard more teeth in the special context of class-arbitration construction awards, which are governed by the two FAA class-arbitration-specific rules announced in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 130 S. Ct. 1758 (2010).  Had it done so its decision would have had limited application.

Oxford may seem at first glance to limit force of Stolt-Nielsen’s strongly worded opinion, but it does not.  Nothing in Stolt-Nielsen suggests that the manifest disregard standard should be applied any differently in the class arbitration context than it is in any other.  And nothing in Oxford suggests any retreat by the Court from its commitment to the substantive, FAA-imposed class-arbitration-consent rules set forth in Stolt-Nielsen.

Oxford simply demonstrates that parties who opt out of judicial dispute resolution in favor of arbitration:  (a) cannot legitimately expect that arbitrators are necessarily going to interpret contracts in the way judges do; and (b) are bound by the arbitrator’s interpretation of the contract, “no matter how”—as Justice Kagan nicely put it—“good, bad or ugly” it might be.  Oxford, slip op. at 8.  These are uncontroversial propositions to those even mildly acquainted with arbitration law, although it is quite surprising how many persons—including business people—have agreed to arbitrate without understanding them until it was too late.

Skeptics may think that Oxford is effectively a license for arbitrators to ignore Stolt-Nielsen’s class-arbitration-consent rule, but it is not.  The Oxford arbitrator did not ignore Stolt-Nielsen’s consent-to-class-arbitration rules; he applied them by attempting to divine whether the parties expressly consented to class arbitration.  The arbitrator’s interpretation was admittedly creative and apparently result-oriented, but there was no evidence he acted in bad faith, and his interpretation was at least linguistically plausible.  In the circumstances the Court would have had no more business second-guessing it than it would any other arbitral interpretation of contract language that is at least arguably susceptible to more than one interpretation.

Does Oxford Authorize Arbitrators to Ignore or Modify the Clear Terms of a Contract?

It would be a mistake to think that Oxford renders the FAA manifest disregard of the agreement standard of review toothless.  Consistent with Stolt-Nielsen, and in line with decades of Court precedent, Oxford reaffirms that arbitration awards must draw their “essence” from the parties’ agreement, that is, the arbitrators must at least “arguably” interpret the agreement.  Oxford, slip op. at 4-5.  But interpreting an agreement is not the same as modifying or ignoring its material terms.  See Stolt-Nielsen, 130 S. Ct. at 1770 (panel had “no occasion to ascertain the parties’ intention in the present case because the parties were in complete agreement regarding their intent.”) (quotation omitted); Paperworkers v. Misco, Inc., 484 U.S. 29, 38 (1987) (“The arbitrator may not ignore the plain language of the contract.  .  .  .”).

“Interpretation” is “[t]he process of determining what something, esp. the law or a legal document means; the ascertainment of meaning to be given to words or other manifestations of intention.”  Black’s Law Dictionary, Abridged 680 (8th Ed. 2005).  Where a material term of the parties’ agreement is susceptible to only one plausible meaning, then the permissible interpretative exercise begins and ends with the arbitrator applying the clear, material term to the facts and making an award that reflects a result consistent with the parties’ clear agreement.

If an arbitrator disregards an unambiguous, outcome determinative term of the contract—whether by intentionally or unintentionally ignoring that term or ascribing to it a meaning to which it is not even plausibly susceptible—the arbitrator is not even “arguably” interpreting the agreement.  And an award that cannot be squared with the clear, material terms of the parties’ agreement cannot, by definition, “draw its essence” from the parties’ agreement.

In Stolt-Nielsen, for example, the parties stipulated that the arbitration agreement was “‘silent on whether [it] permit[ed] or preclude[d] class arbitration’” and that it was “‘not ambiguous so as to call for parol evidence.”  130 S. Ct. at 1770.  That stipulation, reached during the arbitration, was as much a part of the parties’ agreement as any of the terms originally included in the arbitration agreement.

“[I]n light of the parties’ stipulation,” said the Court, “the only task that was left for the panel.  .  .  was to identify the governing rule applicable in a case in which neither the language of the contract nor any other evidence established that the parties had reached any agreement on the question of class arbitration,” and “the particular wording of the charter party was quite beside the point.”  130 S. Ct. at 1770.  The parties’ clear agreement “left no room for an inquiry regarding the parties’ intent, and any inquiry into that settled question [was] outside the panel’s assigned task [i.e., to interpret and apply the contract].”  Id.

But instead of ascertaining the default rule, “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.”  130 S. Ct. at 1769.  “Perceiving a.  .  . consensus among arbitrators that class arbitration is beneficial in ‘a wide variety of settings,’ the panel considered only whether there was any good reason not to follow that consensus in this case.”  Id.  It therefore exceeded its powers by “straying” from the interpretation and application of the agreement and substituting in its place “its own view of sound policy regarding class arbitration.”  130 S. Ct. at 1767-68.

Suppose that the parties in Oxford had stipulated during the arbitration that their arbitration agreement, like the class-arbitration-waiver provision at issue in the AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1744 (2011), “required that claims be brought in the parties’ ‘individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.’”  131 S. Ct. at 1744 (quoting class-arbitration-waiver).  In that (unlikely yet illustrative) scenario the arbitrator would have had to apply the parties’ unambiguous agreement that class arbitration was prohibited to the question submitted to arbitration:  Did the parties consent to class arbitration?  Even before Stolt-Nielsen, the only answer to the question that could be expressed in an award within the arbitrator’s powers would have been “no.”

In Part II.B, we’ll turn to how Oxford will likely influence arbitration-law practice and procedure, including the extent to which it may make parties more amenable to requiring arbitrators to issue findings of fact and conclusions of law in support of their awards.

         

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