Welcome to 2020!

I hope that you all had a safe and rejuvenating holiday season.  A new decade brings us plenty of new opportunities for thrilling arbitration news and developments!

But, up first, more on class arbitrability.  I know.  I know.  So last decade.  But trust me, this is a case you want to keep an eye on, Jock v. Sterling Jewelers Inc., 942 F.3d 617 (2d Cir. 2019).  I’m not a betting fellow, but if I were, I’d put money on the issues raised by the case inspiring cert in the near future.

The Sterling Jewelers matter has found its way to the Second Circuit four times, so this isn’t exactly a “new” case.  (Liz wrote about it, briefly, here and here.) But the most recent ruling puts front and center a very hot circuit split and a novel but related issue about class arbitration, a perennial fascination of SCOTUS.

The underlying dispute involves tens of thousands of female retail sales employees accusing Sterling of paying them less than men doing the same work.  All Sterling employees were required, as a condition of employment, to sign an agreement mandating that they participate in arbitration.

Back in 2010, an arbitrator concluded that 254 claimants could proceed with class arbitration under this agreement. A Southern District of New York court disagreed, but the Second Circuit sided with the arbitrator.  It concluded that the lower court had impermissibly conducted a merits review of the legal analysis on the class arbitrability question rather than deciding if the arbitrator had the power to decide that question in the first instance.  See Jock v. Sterling Jewelers Inc., 646 F.3d 113 (2d Cir. 2011) (“Jock I“).  Basically, the parties had clearly submitted the question of class arbitrability to the arbitrator, so the Second Circuit said it was up to the arbitrator.

(For those keeping track, this is where the hot Circuit split comes into play: recall that the question of whether a delegation clause may assign class arbitrability to an arbitrator has created a huge mess.  See my prior post here.)

Following Jock I, the arbitrator issued a class certification award joining approximately 44,000 women into the arbitration proceeding.  That was a lot more than the original 254 claimants, and it included a bunch of absent class members. Sterling attempted to vacate the award, but the district court refused, believing that Jock I foreclosed the issue.

Turns out that the district court wasn’t very good at reading the Second Circuit’s tea leaves.  Once more, the Second Circuit reversed and this time remanded.  Jock v. Sterling Jewelers Inc., 703 F. App’x 15 (2d Cir. 2017)(summary order) (“Jock II“).  In Jock II, the Second Circuit clarified that its holding in Jock I didn’t address the issue of whether the arbitrator could bind absent class members to class arbitration given that they never consented to the arbitrator’s power in the first place.

On remand, the district court gave it another shot.  It vacated the class arbitration award.  Basically, it restated its original legal conclusion that the arbitration agreement didn’t permit class arbitration.  Then it relied, essentially, on the old saw that arbitration is a creature of contract.  Even if the arbitrator’s erroneous legal conclusion that class arbitration was allowed would bind the original 254 claimants and the company, because they’d committed that question to the arbitrator, it couldn’t bind the tens of thousands of absent class members who had not consented to the arbitration.  Only parties who bargain for the arbitrator’s decision can be bound by it.

Hat Trick! The district court got reversed for the third time!

So, what’d the district court miss this last go ‘round?

Well, first, it’s worth noting that the Second Circuit doubled down on the notion that delegation clauses can empower arbitrators to decide matters of class arbitrability.  According to the court, incorporation of the AAA Supplementary Rules for Class Arbitration, Rule 1(a) (“the arbitrator shall determine as a threshold matter . . . whether the applicable arbitration clause permits the arbitration to proceed on behalf of . . . a class”) means that the question of class arbitrability is to be decided by the arbitrator.

This part of the decision isn’t surprising.  The Second Circuit has, for some time now, stood by its conclusion that questions of class arbitrability can be delegated to the arbitrator.  In the Second Circuit, class arbitrability isn’t special.  It’s just like any other issue of contractual arbitrability.

But the stuff about binding absent class members who didn’t opt into arbitration . . . . now that’s big news.  According to the Second Circuit, although absent class members didn’t affirmatively opt into this particular arbitration proceeding, by signing Sterling’s employment agreement, they consented to the arbitrator’s authority to decide the threshold question of whether the agreement permits class arbitration.  Accordingly, “[b]ecause the absent class members, no less than the parties, . . . ‘bargained for the arbitrator’s construction of their agreement’ with respect to class arbitrability, the arbitrator acted within her authority in purporting to bind the absent class members to class procedures.”

Whoa! This holding gives some serious teeth to class arbitrability determinations by an arbitrator.  It also raises profound due process issues.

The Second Circuit brushes those issues aside, saying that “[c]lass actions that bind absent class members as part of mandatory or opt-out classes are routinely adjudicated by arbitrators and in our courts.”  But this overlooks or, at least, minimizes the persistent due process concerns that SCOTUS has articulated with class arbitrations.  Most recently, in Epic Systems, SCOTUS reiterated the problems associated with arbitrators having to decide whether the named class representatives are sufficiently representative and typical of the class and what kind of notice, opportunity to be heard, and right to opt out absent class members should enjoy. FRCP 23, governing class actions in federal courts, is aimed at providing sufficient procedures to satisfy concerns that absent class members have their rights determined without having an opportunity to be heard.  See, e.g., Hansberry v. Lee, 311 U.S. 32 (1940).

All in all, Jock presents some issues that are almost certain to get considered by SCOTUS, if not on appeal from this dispute, in some very similar situation in the near future.

The Fifth Circuit just deepened (and confused) a Circuit split over the question of who decides whether an arbitration agreement permits class proceedings.  See 20/20 Communications, Incorporated v. Crawford, 2019 WL 3281412 (5th Cir. July 22, 2019).

Liz has written about the split herehere, and here.  (You might also recall that SCOTUS flagged this issue, though it punted on it, in Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1417 n.4, 203 L.Ed.2d 636 (2019) (“This Court has not decided whether the availability of class arbitration is a so-called ‘question of arbitrability,’ which includes these gateway matters.”)  Basically, the issue is whether courts or arbitrators should determine the availability of class arbitration.

All Circuits that have spoken about the matter (the 3d, 4th, now 5th, 6th, 7th, 8th, 9th, and 11th) agree that class arbitrability is a gateway question for courts, at least absent a delegation clause.  See Opalinksi v. Robert Half Int’l, Inc., 761 F.3d 326 (3d Cir. 2014); Del Webb Cmtys., Inc. v. Carlson, 817 F.3d 867 (4th Cir. 2016); Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F.3d 594 (6th Cir. 2013); Herrington v. Waterstone Mortg. Corp., 907 F.3d 502 (7th Cir. 2018); Catamaran Corp. v. Towncrest Pharmacy, 864 F.3d 966 (8th Cir. 2017); Eshagh v. Terminix Int’l Co., L.P., 588 F. App’x 703 (9th Cir. 2014) (unpublished);JPay, Inc. v. Kobel, 904 F.3d 923 (11th Cir. 2018).  Moreover, the Second and Tenth Circuits have “assumed without deciding” that class arbitrability is a gateway question for courts.  Wells Fargo Advisors, LLC v. Sappington, 2018 WL 1177230 (2d Cir. March 7, 2018); Spirit Airlines v. Maizes, 2018 WL 3866335 (11th Cir. Aug. 15, 2018).  So, there’s substantial agreement about the notion that the availability of class proceedings constitutes a “foundational question of arbitrability.”  Herrington, 907 F.3d at 507.

The Circuit split focuses on delegations.

At least four Circuits (3rd, 4th, 6th, and 8th) have concluded that class arbitrability is a matter for courts even if the parties have included delegation provisions or incorporated institutional rules with a delegation provision, such as the AAA Rules. Similarly, the Seventh Circuit might fall in this camp.  In Herrington, the Seventh Circuit remanded the case for further proceedings at the district court level, without squarely determining whether incorporation of the AAA Rules delegated the question of class arbitrability to the arbitrator.

The Second, Tenth, Eleventh Circuits have openly disagreed.  In all of these Circuits, traditional delegations suffice to commit questions of class arbitrability to the arbitrator.

The Fifth Circuit has now joined the fray charting a confusing middle path.  See 20/20 Communications, Incorporated v. Crawford, 2019 WL 3281412 (5th Cir. July 22, 2019).  Ultimately, the court concluded that, notwithstanding delegation provisions, the question of class arbitrability was for the court.

The facts of the case are pretty simple, and I’ll simplify them even more.  An arbitration agreement between employees and their employer contained a provision permitting the arbitrator to “hear only individual claims,” and prohibiting arbitration “as a class or collective action . . . to the maximum extent permitted by law.”  Notwithstanding this provision, an arbitrator determined that the parties’ class arbitration bar was prohibited by federal law and consolidated the employees’ cases.

The arbitration agreement contained two typical delegation provisions: (1) “If Employer and Employee disagree over issues concerning the formation or meaning of this Agreement, the arbitrator will hear and resolve these arbitrability issues”; and (2) “The arbitrator selected by the parties will administer the arbitration according to the National Rules for the Resolution of Employment Disputes (or successor rules) of the American Arbitration Association (‘AAA’) except where such rules are inconsistent with this Agreement, in which case the terms of this Agreement will govern.” (The court talked about a third provision as well, but I’ll exclude it here because most Circuits would probably not find it sufficient to constitute a clear and unmistakable delegation anyway.)

The Fifth Circuit acknowledged that, “[d]ivorced from other provisions of the arbitration agreement (most notably, the class arbitration bar), these . . . provisions could arguably be construed to authorize arbitrators to decide gateway issues of arbitrability such as class arbitration.”  But the court went on to say that it didn’t need to decide if these provisions together or standing alone were sufficient to “clearly and unmistakably empower the arbitrator to decide questions of class arbitrability.” Instead, it concluded that these delegations could not be read harmoniously with the class action bar for two reasons.

First, the reference to the AAA is conditioned by the phrase “except where such rules are inconsistent with this Agreement.”  In the court’s view, the class action bar was inconsistent with a delegation of class arbitrability to the arbitrator.

Second, “even putting aside the exception clauses, none of these provisions speak with any specificity to the particular matter of class arbitrations. The class arbitration bar, by contrast, specifically prohibits arbitrators from arbitrating disputes as a class action, and permits the arbitration of individual claims only.”

I think both arguments essentially collapse to make the same point: there’s no decision about class arbitrability to delegate because the parties prohibited class proceedings. But the only way you get to the conclusion that the parties prohibited class proceedings is to read and interpret the contract.  The choice of arbitration paired with the delegation provision should send all contract interpretation issues to the arbitrator.

So, this case amounts to an elevation of the issue of class arbitrability.  Its doctrinal logic places the formation of a class action waiver on the same footing as the formation of an arbitration provision itself. If that’s right, then virtually no delegation provision, no matter how “clear and unmistakable” could ever empower an arbitrator to consider class arbitrability when the agreement also contains a class action waiver.

Class action arbitration continues to be a hot topic among the federal appellate courts this summer.

The 8th Circuit followed the lead of other circuit courts, finding that courts, not arbitrators, presumptively decide whether the parties’ arbitration agreement allows for class arbitration. Catamaran Corporation v. Towncrest Pharmacy, 2017 WL 3197622 (July 28, 2017).   In support of its decision, the court raised concerns about class arbitration, including loss of confidentiality, due process concerns for absent parties, and a concern about the lack of appellate review.  [Interesting that it didn’t cite any of CFPB’s report on this, but just cited other case law… ] Therefore, unless the parties have “clearly and unmistakably delegated” the class arbitration issue to the arbitrator, a court will decide the issue.  Furthermore, the court said that incorporating the AAA rules is not a clear and unmistakable delegation of the class arbitration decision, even though citing the AAA rules is sufficiently clear in analogous issues in regular “bilateral arbitration.”  The court remanded to the district court to determine whether there was a contractual basis for class arbitration.

Halfway across the country, the 9th Circuit held that employees could bring their claims related to a data breach as a class action in arbitration.  Varela v. Lamps Plus, Inc., 2017 WL 3309944 (Aug. 3, 2017).  The employees had first brought their class claims to federal court, and the employer moved to compel individual arbitration.  The district court found the arbitration agreement was valid, but ambiguous about whether class actions were waived.  Construing that ambiguity against the employer who drafted the agreement, the district court ordered class arbitration.  On appeal, the 9th Circuit affirmed the finding of ambiguity, sending the class to arbitration as a group.  One judge issued a two sentence dissent, noting “we should not allow Varela to enlist us in this palpable evasion of Stolt-Nielsen