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.