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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.B

August 18th, 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, 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.B By Philip J. Loree Jr.


Part II.B: To what Extent, if at all, will Oxford Likely Influence FAA Law and Practice?

While Oxford is uncontroversial in the sense that it does not purport to change the standard of review applicable to Federal-Arbitration-Act (“FAA”)-governed arbitration awards, it will likely influence FAA arbitration law and practice concerning the judicial review of arbitration awards under FAA Section 10(a)(4) in at least three ways.

First, it should dissipate significantly any lingering confusion about the current state and scope of outcome review authorized by the FAA. Oxford reaffirms Stolt-Nielsen’s holding that Section 10(a)(4) of the FAA authorizes judicial review of FAA-governed arbitration awards under the labor-law-derived manifest disregard of the agreement standard.

After Hall Street but prior to Stolt-Nielsen and Oxford, it was unclear whether any form of outcome review—manifest disregard of the agreement or manifest disregard of the law—was authorized by FAA Section 10(a)(4). Even after Stolt-Nielsen some courts and commentators occasionally conflated manifest disregard of the contract with manifest disregard of the law, and seemed to think that whether Section 10(a) authorized any form of outcome review was an open question. But now that the United States Supreme Court has twice confirmed that Section 10(a)(4) authorizes agreement-based outcome review, further confusion about the existence or basic scope of such review is no longer warranted or likely to remain.

Second, as discussed in Part II.A of this post, Oxford and Stolt-Nielsen are excellent examples of cases that fall on one side or the other of an imaginary line separating the very large universe of awards that cannot be vacated for manifest disregard of the agreement from the very small universe of cases that can. They define in readily understandable terms the key attributes of each of these two sets of awards because both decisions concern class-arbitration-consent and their facts are materially identical in all but one respect – clear party agreement on an outcome-determinative issue in one and the absence of such agreement in the other.

Third, the decision should alleviate concerns some arbitrators, parties and their counsel may have about requesting reasoned awards setting forth findings of fact and conclusions of law. Arbitrators are not required to make reasoned awards unless both parties agree otherwise.  See, e.g., Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598 (1960); Green v. Ameritech Corp., 200 F. 3d 967, 975-76 & n.8 (6th Cir. 2000). Meaningfully detailed reasoned awards can be desirable because they “engender confidence in the integrity of the process and aid[] in clarifying the underlying agreement.” 363 U.S. at 598. And, as Circuit Judge Posner once noted, “writing disciplines thought,” Chicago Typographical Union v. Chicago Sun-Times, 935 F.2d 1501, 1506 (7th Cir. 1991) (Posner, J.), which means that requiring the arbitrators to go through the analytic exercise of explaining the factual and legal basis for their awards increases the likelihood that those awards will be grounded in the parties’ agreement.

The principal concern some have about requesting arbitrators to make findings of fact and conclusions of law is that courts may be more likely to second-guess reasoned awards than conclusory, “lump sum” awards. While it is true courts apply the same deferential standard of review to both reasoned and lump-sum awards, see Western Employers Ins. v. Jefferies & Co., 958 F. 2d 258, 261 (9th Cir. 1992), if the arbitrator outlines the reasons for her decision, then the court reviews both the arbitrator’s conclusion and the basis for it.  Put differently, the standard of review doesn’t change; there’s just more to review.

If the arbitrator’s reasoned award reveals that she reached her decision by disregarding the terms of the contract, then her award may be vacated even if a court could divine some barely colorable alternative basis upon which the arbitrator might have reached the same conclusion without contravening the clear terms of the parties’ agreement. See, generally, Edstrom Indus. v. Companion Life Ins. Co., 516 F.3d 546, 553 (7th Cir. 2008) (Posner, J.) (“Had the arbitrator in this case [involving a Wisconsin choice-of-law clause] said to hell with Wisconsin law, we could not enforce his award on the ground that had he said nothing we would imagine what he might have said to make it seem that he was applying that law.”). By contrast, awards that do not set forth the arbitrator’s rationale cannot be vacated unless the court can divine no colorable basis for them.  See, generally, Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200, 222 (2d Cir. 2002) (Sotomayor, J.); Chicago Sun-Times, 935 F.2d at 1505-06; Kurt Orban Co. v. Angeles Metal Systems, 573 F. 2d 739, 740 (2d Cir. 1978).

Those who believe parties should not request arbitrators to explain the basis for their awards might be wary of the ability of arbitrators—perhaps mostly non-lawyer, industry arbitrators, but perhaps also some arbitrators with formal legal training—to articulate bases for their decisions that demonstrate some arguable connection between the outcome and the parties’ agreement or applicable law.  Or perhaps these lump-sum-award proponents are concerned about increased costs associated with arbitrators preparing reasonably detailed findings of facts and conclusions of law, or about the risk of increased costs associated with defending an award challenge that might not be made in the absence of a reasoned award.

While these concerns may in some circumstances be valid, Oxford tends to undermine them.  For one thing, Oxford demonstrates that where an arbitrator articulates reasons for an award that are at least in some linguistically plausible sense based on the terms of the agreement, and the outcome is not foreclosed by the clear terms of the agreement, then the award should be confirmed.  That approach leaves no room for “second-guessing,” and because Oxford was a 9-0 decision by a court deeply divided about the underlying subject matter of the award—class arbitration—it should mitigate considerably any fear of judicial second-guessing some might otherwise harbor.

For another thing, Oxford suggests that, particularly in close cases, a reasoned award that articulates a plausible nexus between the agreement and the outcome may fare better than the same award might in the absence of such an explanation.  The validity of the Oxford award turned on whether there was some plausible basis for the arbitrator to have determined that the following 43 words of the arbitration agreement expressed party consent to class arbitration:

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.

Oxford, slip op. at 2.

But suppose the Oxford arbitrator had not been required to make a reasoned award, and that he simply ruled: “The first sentence of the Arbitration Agreement evidences the parties’ intent to authorize class arbitration.” The question on Section 10(a)(4) review would have been whether there was any barely colorable basis for the arbitrator to conclude that was so, and, as Oxford argued, those 43 words simply say what practically every other comparable scope provision of an arbitration agreement says and implies:  all disputes arising under the agreement are subject to arbitration and thus cannot be asserted in court.

There is a decent chance that the Oxford award might have been vacated under those hypothetical circumstances. Once the challenging party met its burden to show that there was no colorable interpretation of the 43 quoted words supporting an inference that the parties expressly consented to class arbitration, the party defending the award would have had to posit one or more colorable interpretive paths to the award, and, to confirm the award, the reviewing courts would have had to conclude that at least one of them was colorable or posit some other plausible basis for the award.

The arbitrator’s interpretation was both highly creative and counterintuitive; even those of us who think outside the proverbial “box” would not necessarily think of it. If, under the circumstances of our hypothetical, Dr. Sutter and his counsel did not advance it either at the arbitration or after the fact in the confirmation-vacatur proceedings, and if the district or appellate courts did not independently think of it, then the award—bereft of any explanation of its basis— might well have been deemed to have no colorable basis in the parties’ agreement or the applicable law.

Even if Dr. Sutter had advanced that interpretation at the arbitration (we have not checked that point and Oxford says nothing about it), or offered it after the fact as a colorable interpretive basis for the award, that would not necessarily mean the conclusory award in our hypothetical would have survived vacatur. As Judge Posner once observed, “The zanier the award, the less plausible it becomes to ascribe it to a mere error in interpretation rather than to a willful disregard of the contract. This approach can make the line between error and usurpation waver.” Chicago Sun-Times, 935 F.2d at 1506.

In other words, assuming there is an imaginary “line” dividing the universe of awards having a colorable basis from those that don’t, its exact location on some equally imaginary spectrum of arbitral-outcome-possibilities cannot be set with anything approaching geometric precision. As is the case with most other purportedly “objective” legal standards—its perceived boundaries can and will, within a usually small margin, “waver” for reasons that are largely subjective. To paraphrase Associate Justice Potter Stewart’s famous (and, perhaps to some, infamous, or at least famously albeit unintentionally humorous) observation, made while commenting on a less definable and more controversial standard, the judge will “know” where or what the line is—and thus what crosses it— when she “see[s] it.” See Jacobellis v. Ohio, 378 U.S. 184, 197 (1964) (Stewart, J., concurring) (“I shall not today attempt further to define the kinds of material I understand to be embraced within [the] shorthand description [of “hardcore pornography”], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.”).

The Oxford arbitrator’s conclusion that the parties expressly consented to class arbitration is so far divorced from what the parties objectively intended based on the words of their arbitration agreement that, without having the benefit of the arbitrator’s explanation of what he was thinking, a reasonable judge could reasonably conclude that it crossed that wavering line between “interpretation” and “usurpation.” See Chicago Sun-Times, 935 F.2d at 1506. In the absence of the arbitrator’s explanation of his reasoning, Dr. Sutter’s argument in our hypothetical Oxford might have interpreted the agreement in the way that the arbitrator said he did in the real Oxford would, as a practical matter, be less convincing and persuasive than the arbitrator’s reasoned award advancing that same interpretation.

In theory it should make no difference. The plausibility of the interpretation should not necessarily turn on who uttered it.  But in close cases it can, and our hypothetical Oxford scenario would have been one of those close cases.

If the arbitrator says in a reasoned award that she based her decision on a questionable, but arguably linguistically plausible interpretation of the agreement, then the award is direct evidence that: (a) the arbitrator at least arguably interpreted the agreement; and (b) the parties therefore received that for which they bargained. These two findings tip the scale in favor of confirmation because they represent the reasons why, in the absence of  such direct evidence, courts consider whether the there is some barely colorable basis for the award.

But if the arbitrator says nothing about the basis of her decision, and only the party defending the award advances the interpretation as a colorable basis for the award, then there is no direct evidence that the arbitrator even arguably interpreted the agreement. And in those circumstances it is more likely that a court might conclude that the creative yet objectively suspect interpretation would not have been an interpretation at all, and thus could not be a barely colorable basis for the award.

That may seem illogical or at least counterintuitive because an arbitration award should either have a barely colorable basis or not, irrespective of whether the arbitrator articulates it.  But that ignores that the application of legal standards to close cases is not an exact science; in those cases subjective considerations will determine where the wavering line is deemed to fall.

Oxford shows us that those who wish to insulate awards as much as possible from an agreement-based-outcome-review challenge are, on balance, probably better off requesting arbitrators to make findings of fact and conclusions of law.  Because as long as the arbitrator can articulate some basis, however thin, that at least arguably does not contradict the clear terms of the parties’ agreement, the award will almost certainly be confirmed.

In the next segment of this post, we’ll address how Oxford is likely to precipitate judicial reconsideration of whether class-arbitration-consent presents a question of arbitrability for the court to decide.  That is an important point, because judicial determinations of class-arbitration consent are governed by more than baseline considerations of linguistic plausibility and the avoidance of irreconcilable conflict between the outcome and the clear terms of the agreement, and are generally subject to de novo appellate review.  If class-arbitration-consent is held to be a matter for the courts, then the frequency of outcomes finding consent to class arbitration will presumably decrease, and probably quite markedly.


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