Arbitration Proceedings May Be Risky Business

In a recent ruling of the U.S. Supreme Court, Oxford Health Plans LLC v. Sutter, petitioner-defendant Oxford was forced to proceed with class arbitration with respondent-plaintiff John Ivan Sutter.

This case, like other recent rulings of the Supreme Court, has an unusual procedural history, which will limit its applicability to future cases. However, it does provide an important reminder for all parties of the great compromise arbitration represents.

Sutter, a pediatrician, entered into a contract with Oxford, a health insurance company, to provide medical care to members of Oxford’s network and Oxford agreed to pay for those services at prescribed rates. Several years later, Sutter filed suit against Oxford in New Jersey Superior Court on behalf of himself and a proposed class of other New Jersey physicians under contract with Oxford, alleging that Oxford had failed to make full and prompt payments to the doctors, in violation of their agreements and various state laws.

Oxford moved to compel arbitration of Sutter’s claims, relying on an arbitration provision in their contract. The state court granted Oxford’s motion, thus referring the suit to arbitration.

In what must be a regrettable decision on the part of Oxford, the parties agreed that the arbitrator should decide whether their contract authorized class arbitration and the arbitrator determined that it did.

As Justice Alito explained in his concurrence, the arbitrator improperly inferred an implicit agreement to authorize class-action arbitration from the fact of the parties’ agreement to arbitrate and that it is far from clear that absent class members will be bound by the arbitrator’s ultimate resolution of the dispute.

After all, it is well-established that arbitration is a matter of consent, not coercion, and the absent members of the plaintiff class have not submitted themselves to this arbitrator in any way.

Class arbitrations that are vulnerable to such collateral attack allow absent class members to unfairly claim the benefit from a favorable judgment without subjecting themselves to the binding effect of an unfavorable one. However, because Oxford consented to the arbitrator’s authority by conceding that he should decide in the first instance whether the contract authorizes class arbitration, this argument was not available to it.

It is unlikely that other defendants will make the same mistake in light of this ruling, which will limit its impact going forward.

The greater lesson is in the arbitrator’s erroneous analysis of the parties’ contract. Justice Kagan, who wrote for the majority, explained that the potential for such mistakes are the price of agreeing to arbitration. Where an arbitrator’s decision concerns the construction of a contract, it holds, however good, bad or ugly.

In summary, Justice Kagan put it bluntly: “Oxford chose arbitration, and it must now live with that choice.”

In this rare instance, the misfortune of an arbitrator’s grave error fell on a defendant with the wherewithal to appeal the decision to the highest court in our nation, albeit unsuccessfully. More often, however, the misfortune will fall upon plaintiffs who are inexperienced with the arbitration process and whose individual damages do not warrant appeal.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.