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National Children’s Center, Inc. v. Service Employees Int’l Union: What Happens when an Arbitrator Interprets a Contract, but does not even Arguably Apply the Interpretation to the Parties’ Dispute?

October 20th, 2014 Arbitration Agreements, Arbitration Practice and Procedure, Authority of Arbitrators, Awards, Contract Interpretation, Grounds for Vacatur, Judicial Review of Arbitration Awards, Practice and Procedure, United States District Court for the District of Columbia, United States Supreme Court Comments Off on National Children’s Center, Inc. v. Service Employees Int’l Union: What Happens when an Arbitrator Interprets a Contract, but does not even Arguably Apply the Interpretation to the Parties’ Dispute? By Philip J. Loree Jr.

Introduction

The deferential Enterprise Wheel/Stolt-Nielsen/Oxford contract-based outcome review standard the U.S. Supreme Court has applied to both labor arbitration awards under Section 301 of the Labor Management Relations Act, and commercial arbitration awards falling under the Federal Arbitration Act, is fairly simple to articulate yet often difficult to apply, especially in close cases.

In National Children’s Center, Inc. v. Service Employees Int’l Union, No. 13-1036, slip op. (D.D.C. Sep’t 19, 2014), United States District Court for the District of Columbia was faced with such a case, and the district court judge had to make a tough call. Applying the sometimes elusive standard, the Court concluded that the award had to be vacated. It was a close call— so close, in fact, that others may disagree and support their conclusions with what may appear to be compelling arguments.

On balance, we think the Court did the right thing given the somewhat unusual circumstances the case presented. But at least on some level it doesn’t matter. The district court judge did exactly what a good judge should do: she followed the law and, faced with the task of applying the law to a rather odd set of circumstances, she did so in the way she thought (and we agree) the law should be applied, even though the result was overturning an award.

It is quite likely that on remand the arbitrator will issue an award reaching the same conclusion and that the second award will be judicially enforced. While some might argue that vacatur should have been denied for expediency’s sake, that would not only have been the wrong decision, but a shortsighted one.

The Facts

The Parties and the Dispute

National Children’s Center was a proceeding to enforce a labor arbitration award under Section 301 of the LMRA. The employer (the “Employer”) had discharged an employee (the “Discharged Employee”) who had left on the premises some of her personal belongings, including a television set used in one of the Employer’s classrooms. After termination, the Discharged Employee asked another employee (the “Grieving Employee”) to remove her belongings from the premises and return them to her.

The Grieving Employee, without informing the Employer, proceeded to remove “wagons full” of the Discharged Employees personal property from the Employer’s premises, including the television set. Later the Grieving Employee discussed with her supervisor the need to replace the television set, and in the course of that discussion informed her supervisor what she had done.

Upon learning of the incident, the Employer suspended the Grieving Employee pending an investigation into whether the Grieving Employee had committed “gross misconduct” as defined in the Employer’s Employee Handbook (the “Handbook”).

The Handbock defined “gross misconduct” as including, among other things,  “Stealing or removing, without permission, [the Employer’s] property or property of another Employee, individual, or visitor.” It also stated that “gross misconduct” “may lead to any of the following forms of discipline: verbal warning, written warning, probation/suspension, or termination from employment.”

The Grieving Employee had received the Employee Handbook on two prior occasions, once in 2004 and once in 2008, when the Handbook was reissued. In 2004 she had signed a form acknowledging she was obligated to “read, understand, familiarize [herself] with, and adhere to the policies contained in the Employee Handbook.” Before she removed the Discharged Employee’s property from the premises years later, she did not consult the Handbook to determine whether she needed the consent of the Employer before she could carry out the Discharged Employee’s request without violating workplace rules.

During the Employer’s investigation the Grieving Employee admitted she had removed the property without the Employer’s consent. The Employer discharged her, the Union grieved the discharge pursuant to the grievance procedures of the collective bargaining agreement (the “CBA”), and ultimately the Union and Employer submitted to arbitration under those procedures the issue of whether the Grieving Employee had been discharged for “just cause” as defined in the CBA.

Applicable CBA Provisions

The CBA conferred upon the Employer the discretion to formulate and implement workplace policies on matters not specifically  and directly governed by the CBA. CBA Article 25 (entitled “[Employer] Policies”) stated: “[t]o the extent a subject or matter is not specifically and directly covered by this Agreement, the applicable [Employer] policies . . . shall govern.” Article 25 gave the Employer “the right and authority to modify, eliminate or create new policies . . . to the extent their specific subject matter is not covered by this Agreement.” And Article 42, the Management Rights provision, stated: “[a]ll management rights, authority, functions and responsibilities which are not unequivocally and expressly restricted or limited by a specific provision of [the collective bargaining agreement] are retained by  [the Employer] and shall remain vested exclusively in its sole discretion to manage  [the Employer] . . . .”

The Employer exercised its workplace-policy discretion through the Handbook. When the Handbook was first published in 2004, the Employer and Union had not yet entered into a CBA. In 2008, after the Employer and Union entered into their first CBA, the Employer republished (and redistributed) the Handbook to implement its retained management authority under the first CBA. When the parties entered into their second CBA, which governed the dispute before the Court, the Employer, under the terms of Articles 25 and 42 of the second CBA, continued to retain the authority to maintain the workplace rules it had republished in 2008.

Article 37 of the CBA authorized the Employer to discharge employees for “just cause,” and conferred upon the Employer broad discretion to determine what constitutes “just cause”:

[the Employer] shall have the authority to discipline and discharge employees for just cause. It is recognized and agreed between the parties that  [the Employer] must maintain and impose high standards of performance, quality of work and care. Accordingly, it is agreed that “just cause” is defined as  [the Employer]’s determination that an employee does not meet this high standard, so long as  [the Employer] does not exercise its discretion in a manner that is arbitrary, capricious, or without foundation and  [the Employer] bears the burden of showing that just cause existed. (emphasis added by Court)

Article 37 thus established a very deferential stand of review for decision-maker review of the Employer’s just-cause determinations, which was much like the deferential standard of review under which a trustee’s discretionary decisions are generally assessed.[1] Under that standard, the only relevant question was whether the Employer’s discretion to make the just cause determination was “exercise[d].  .  .  in a manner that [was] arbitrary, capricious or without foundation.”  

Article 41—the CBA’s “zipper clause”—further limited the scope of the arbitrator’s decision-making authority:  “[t]he arbitrator shall have authority only to interpret and apply the explicit provisions of [the collective bargaining agreement] to the extent necessary to decide the submitted grievance, basing his/her decision on the express language of [the CBA], without amending, modifying, adding to, subtracting from, or changing this Agreement. The arbitrator shall have no power or authority to . . . (ii) substitute his judgment or discretion for [the Employer’s] judgment or discretion. . . .”

The Award

The arbitrator issued an Award in favor of the Grieving Employee, the key portions of which are summarized below:

  1. The arbitrator acknowledged that the Grieving Employee had been discharged because she violated Section 703 of the Employee Handbook, which defined her unauthorized removal of the Discharged Employee’s property from the premises as “gross misconduct.”
  2. The arbitrator found that, even though the Grieving Employee had not reviewed the pertinent provision of the Employee Handbook until after she was suspended, she testified that she understood it fully after she read it.
  3. The arbitrator found that the Grieving Employee had acknowledged her obligation to review and become familiar with the Employee Handbook, and that her “professed ignorance of the rule [was] not a sufficient reason to excuse her from the consequences of violating the rule.”
  4. The arbitrator also concluded that the Employer acted reasonably in promulgating the rule and interpreting it as applicable in this case:

[Employer’s] interpretation is a reasonable interpretation of the language as written, and is consistent with most employers’ desires to control the removal of property from the work site. [Employer] especially has a legitimate interest in wanting to control a dismissed employee’s access to its premises, either directly or through a surrogate. It certainly has the authority to write a rule that prohibits any current employee from removing property from its premises on behalf of a dismissed employee without first obtaining [Employer’s] permission. That is exactly what [Employer] did in writing Section 703, Number 6.

  1. The arbitrator determined that “the language in” the rule “adequately informs employees from whom permission must come before property can be removed from [the Employer’s] premises,” and that the Grieving Employee “violated the rule when she removed [the Discharged Employee’s] personal property without first obtaining permission from [the Employer].”
  2. But in what the Court characterized as a “striking departure from these findings,” the arbitrator ruled that the Grieving Employee’s “conduct [did] not rise to the level of gross misconduct.” See slip op. at 6.
  3. In support of that conclusion the arbitrator reasoned that: (a) the Grieving Employee “did not know of the rule, even though she should have been aware by reading the Handbook[;]” (b) [t]here is a distinction between willful flaunting of a rule and negligence in not familiarizing oneself with a rule[;]” (c) the Grieving Employee “did not steal;” (d) “she had [the Discharged Employee’s] permission;” (e) “she brought what she did to the management’s attention? and [(f)] the rule she violated is somewhat ambiguous.”
  4. The arbitrator concluded that the Employer “acted in an arbitrary and capricious manner [that is, without “just cause”] when it terminated [the Grieving Employee] for violating the rule set out in Section 703, Number 6 of the Handbook.”

The arbitrator remanded the case for the parties to determine an appropriate remedy. When the parties were unable to agree upon a remedy, the arbitrator ordered a 30-day suspension to be followed by reinstatement.

Shortly thereafter, the Employer filed a complaint in the District Court for the District of Columbia under LMRA Section 301, 28 U.S.C. § 185(a), and the D.C. Arbitration Act, D.C. Code § 16-4401, et seq., seeking an order overturning the award.

The District Court Judge’s Decision

The Court held that the award had to be vacated, and the matter remanded for the arbitrator to determine whether the employer acted arbitrarily or capriciously by deciding to terminate the Grieving Employee in lieu of imposing an alternative form of discipline for gross misconduct. The Court concluded that the arbitrator “contravened” the CBA by “den[ying] [the Employer] the benefit of” its bargained-for “right” and “discretion” to “craft workplace rules and define ‘gross misconduct[,]” and substituting in its place the arbitrator’s own “judgment or discretion.”  See slip op. at 9 (quoting CBA).

“The arbitration award,” said the Court, “included two conclusions critical to this dispute: first, that [the Grieving Employee] had not engaged in gross misconduct, and second, that her discharge was arbitrary and capricious due to mitigating circumstances.” The first conclusion “contravened [the Employer]’s right to define ‘gross misconduct,’ and ignored the contractual limits on arbitral authority[,]” and thus required vacatur of the award. See slip op. at 13.

Though the arbitrator had already found that the Employer had abused its “just cause” discretion by deciding to terminate the employee, and even though the tenor and words of the award suggested that the arbitrator made that decision under the assumption that the employee committed gross misconduct despite his earlier conclusion that she did not, the Court remanded to the arbitrator so that he could “decide whether  [the Employer] acted in an arbitrary and capricious manner when it fired Ms. Nix for gross misconduct.” See slip op. at 13.

Analysis of Decision

In one sense, the case involved a fairly straightforward application of the manifest disregard of the contract standard. (See, generally, Loree Reins. & Arb. Law Forum posts here, here, here & here.)  As long as an arbitrator “arguably interprets or applies” the contract, her award must stand, even if the award is the result of an egregious error in interpretation, for when . parties agree to arbitrate they’re bargaining for the arbitrator’s interpretation and application of the contract, and the arbitrator does her job, and the parties receive the benefit of their bargain, as long as the arbitrator at least arguably interprets or applies the contract. See Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2068 (2013); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 672 (2010) (arbitrator’s “task is to interpret and enforce contract” and “it is only when an  arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice that his decision may be unenforceable.”) (quotations and citations omitted).

Here, the arbitrator not only “arguably interpreted” the provisions of the CBA concerning the Employer’s discretion to define just-cause, and the workplace rule issued pursuant to the CBA’s Management Rights provision,  he interpreted them quite correctly. He concluded that the workplace rule meant what it said, and that it adequately informed employees that the removal of any property, including that of former employees, was prohibited. He concluded that the employer acted reasonably in promulgating and implementing the rule and that there was good reason for the Employer to have done so.

But the problem here was not interpretation, but application. The arbitrator unquestionably interpreted the contract, but did not even arguably apply the Management Right’s provision, his interpretation of the CBA’s just cause provision or his interpretation of the workplace rule, to the parties’ dispute.

That was evident from his conclusion that the employee did not commit “gross misconduct” as defined in the Handbook. Because that conclusion did not, and could not, even arguably follow from its premises, the Court had no choice but to conclude that it must have been the product of the arbitrator’s “‘own brand of industrial justice.'” See slip op. at 10 (quoting United Steelworkers of Am. v. Enterprise Wheel & Car Corp., 363 U.S. 593, 597 (1960)).

The reason this case was not entirely straightforward lies in the submission and the arbitrator’s ultimate conclusion that the employer did not have “just cause” to terminate the employee. The issue submitted to the Panel was whether the Employer had “just cause” to terminate the Grieving Employee. Whether or not the Grieving Employee had committed “gross misconduct” is obviously relevant to the just cause determination, but the parties’ contract did not equate “gross misconduct” with “just cause” for termination. The Handbook said that “gross misconduct” could result in termination, but might also result in an alternative form of discipline, such as suspension, the remedy the arbitrator ultimately imposed.

The arbitrator’s second conclusion, that the Employer did not have “just cause” to terminate the Grieving Employee, fully resolved the question submitted to him. The arbitrator explained that there was no just cause because of mitigating circumstances, and the circumstances he set forth were consistent with an arguable interpretation and  application of the CBA and the Handbook.

That the arbitrator embarked on a mitigation-oriented analysis—which necessarily assumed that the Grieving Employee violated the Handbook provision—suggests that that the arbitrator did not intend to conclude that the Grieving Employee was not guilty of “gross misconduct.” And the remedy the arbitrator imposed—suspension—all but forecloses the conclusion that the arbitrator intended to rule that the Grieving Employee was not guilty of gross misconduct.

Critics may thus question why vacatur was necessary in this case, where it seems quite likely all the arbitrator did was fail to make the award he probably intended to make. They may argue that arbitration’s purposes and objectives would be best served had the Court ignored the flaw or perhaps enforced only the second conclusion of the award. But each of those alternative solutions would likely do more harm than good, and the solution the Court imposed made correcting the problem a pretty straightforward affair that should not undermine arbitration’s purposes and objectives by imposing significant added cost and expense burdens in this or future cases.

To render an enforceable award on remand all the arbitrator likely needs to do is simply change the first conclusion to the one that follows from his interpretation of the rule and leave all or most of the rest of the original version of the award intact. In the circumstances, this might well be a situation where counsel for the parties could save their clients some time and money by simply stipulating to, and jointly requesting the arbitrator to enter, an award that reflects what the arbitrator probably intended in the first place.

Had the Court entered judgment enforcing the award, then the parties would be left with a judgment that would make little sense and create a sense of uncertainty more conducive to industrial strife than peace. That seems particularly likely here, where the factual background of the dispute suggests a troubled workplace (though that’s simply an inference we draw from the facts of the case, and it is not the only one that might be drawn).

On the other hand, had the Court simply vacated the arbitrators’ first conclusion, but not his second, then the Court would probably have intruded on the arbitrator’s and parties’ dispute-resolution domain by nullifying his decisions on matters the parties believed important enough to submit to arbitration and which the arbitrator thought were important enough to discuss in his award, presumably because of the obvious relationship between “gross misconduct” and “just cause.” Excising from the award the arbitrator’s conclusion about gross misconduct would leave other employees to speculate whether the Union disputed that issue, or simply accepted the employer’s position that the Grieving Employee committed gross misconduct. It would also render largely academic the arbitrator’s interpretation of the Handbook provision, something the Employer and Union arguably bargained for when they submitted the just cause issue to arbitration.

The best course was the one the Court took: vacatur and remand. The end result will likely be an award in favor of the Grieving Employee that also recognizes that the employee violated a clear workplace rule that the CBA expressly conferred upon the Employer the discretion to promulgate and implement. In the circumstances, the Court’s ruling will probably impose no more time and monetary costs on the parties than would a remand to the arbitrator to clarify an ambiguity in an award, and that is so even though there was no ambiguity about whether the arbitrator exceeded his powers.

We think the district court judge handled this deceptively challenging case very wisely. The only point of difference we’d note is relatively minor and technical, but nevertheless important.

The Court distinguished this case from Oxford on the ground that Oxford  was a commercial case falling under the FAA and this case arose out of Section 301 of the LRMA. See slip op. at 10-12.  There may well be cases where that distinction might make a difference, but a commercial arbitration award suffering from the same type of flaw as this labor-arbitration one should not be considered within the arbitrator’s power to make under Oxford.

The task of both commercial and labor arbitrators is to interpret, apply and  enforce contracts, and when they stray from those tasks, they exceed their powers because they fail to perform the task the parties delegated to them. If an award was not, or could not have been, based on even an arguable interpretation or application of the agreement—that is, does not “draw its essence from” the agreement—then it must be vacated (assuming a timely application is made). See Oxford, 133  S. Ct. at  2068; Stolt-Nielsen, 559 U.S. at 672; Enterprise Wheel, 363 U.S. at 597. An arbitrator might not set forth in the award her interpretations of all relevant provisions, or explain how she applied them to the dispute, but as long as the award is at least arguably the product of an interpretation or application of the agreement to the dispute, then it should not be vacated.

But that doesn’t mean an arbitrator does her job by arguably interpreting the agreement but not applying that interpretation to the dispute. The arbitrator cannot, as he did here, say the contract means what it says and then reach a conclusion that contradicts his own interpretation of the contract. By definition, such an award does not draw its essence from the parties’ agreement.

In  Oxford the arbitrator offered a very doubtful, yet linguistically plausible, interpretation of whether the parties consented to class arbitration. And he applied that interpretation of the contract to the dispute by ruling that the parties had consented to class arbitration. Suppose what happened in Oxford was that the arbitrator interpreted the parties’ agreement as evidencing the requisite consent to class arbitration, but then ruled that arbitration could proceed on a bilateral basis only. Had that happened, the award-defending party who prevailed in Oxford would have instead been the award-challenging party, and the U.S. Supreme Court would presumably have held the award had be vacated, for the arbitrator’s conclusion would have contradicted his own interpretation of the agreement, and thus could not even arguably have resulted from the arbitrator applying the agreement to  the dispute.

[1] See, e.g., Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 111 (1989) (Under general trust law principles, “[w]hen trustees are in existence, and capable of acting, a court. . . will not interfere to control them in the exercise of a discretion vested in them by the [trust] instrument.  .  .  .”) (quotation omitted) (ERISA); Re Estate of Wallens, 9 N.Y.3d 117, 123  (2007) (“[E]ven when the trust instrument vests the trustee with broad  discretion to make decisions regarding the distribution of trust funds, a trustee is still required to act reasonably and in good faith in attempting to carry out the terms of the trust.”).

         

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