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Class Arbitration, Absent Class Members, and Class Certification Awards: Consent or Coercion?

January 6th, 2020 Arbitration Agreements, Arbitration as a Matter of Consent, Authority of Arbitrators, Class Action Arbitration, Class Arbitration - Class Certification Awards, Clause Construction Award, Confirm Award | Exceeding Powers, Consent to Class Arbitration, FAA Chapter 1, Federal Arbitration Act Enforcement Litigation Procedure, First Principle - Consent not Coercion, Practice and Procedure, Rights and Obligations of Nonsignatories, United States Court of Appeals for the Second Circuit Comments Off on Class Arbitration, Absent Class Members, and Class Certification Awards: Consent or Coercion? By Philip J. Loree Jr.
absent class members | class arbitration

On November 29, 2019 we posted Absent Class Members, Class Arbitration, Class Certification Awards, Consent, Coercion, and the Second Circuit, which discussed the U.S. Court of Appeals for the Second Circuit’s recent decision in Jock v. Sterling Jewelers Inc., No. 18-153-cv, slip op. (2d Cir. November 18, 2019) (“Jock IV”).

In Jock IV the Second Circuit reversed a district court order vacating an arbitrator’s class certification award, which the district court vacated because it made tens of thousands of absent class members part of a certified class even though none: (a) was a party to the class arbitration; (b) opted in to the proposed class; or (c) participated in or otherwise consented to the class arbitration. The Second Circuit held it was enough that the absent class members, like all other employees, had executed an identical, form pre-dispute arbitration agreement (the “Agreement”), which required the absent class members to submit, among other things, arbitrability and arbitration procedure disputes to arbitration.

Absent Class Members: The Federal Arbitration Act’s First Principle and Consent to Class Arbitration

The Federal Arbitration Act (“FAA”)’s “first principle” is that “arbitration is a matter of consent, not coercion.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 678-80, 684 (2010) (citation and quotations omitted); see, e.g., Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1417 (2019); Granite Rock Co. v. International Brotherhood of Teamsters, 561 U.S. 287, 295 & n.7, 294 n.6 (2010); AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 648 (1986).

Beginning in Stolt-Nielsen,and most recently in Lamps Plus, the U.S. Supreme Court has repeatedly emphasized the importance of consent to class arbitration. In Stolt-Nielsen, the Court required a “contractual basis” for imposing class arbitration, and explained that “[a]n implicit agreement to authorize class arbitration, however, is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.” 599 U.S. at 685.  

Most recently, in Lamps Plus the Court imposed a federal presumption against consent to class arbitration under which silent or ambiguous contract language cannot establish consent to class arbitration, and under which the FAA is deemed to preempt state-law contract interpretation rules that are not intent-based—such as contra proferentem, the rule that ambiguities are, at least in the absence of any other extrinsic evidence of intent, construed against the contract’s drafter. See Lamps Plus,139 S. Ct. at 1416-19.

The Lamps Plus presumption requires more than simply “a contractual basis” for finding consent to class arbitration. As a practical matter it means that the parties must clearly and unmistakably consent to class arbitration. (See, e.g., our Lamps Plus post, here.)

What does the Agreement Have to Say About Class Arbitration?

The Agreement is a form dispute resolution agreement that was signed by each of an employer (the “Employer”)’s many employees. By signing the Agreement the signatory Employer and employee agreed to arbitrate their disputes, “waiv[ed] [their] right to obtain any legal or equitable relief . . . through any government agency or court, and . . . also waiv[e] [their] right to commence any court action.”

The Agreement provides that the employee “may. . . seek and be awarded equal remedy” under the Agreement, that “‘[t]he Arbitrator shall have the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction[,]’ and that any claim arising thereunder will be arbitrated ‘in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association.’” Jock IV, slip op. at 4 (citations omitted).

The Agreement does not purport to be, or evidence consent to, a multi-lateral agreement – i.e., a collective Agreement between the employer and all the tens of thousands of other employees. Employees signing the Agreement do not purport to assign rights or delegate duties to other nonsignatory employees, nor do they purport to confer any authority upon any nonsignatory employees to arbitrate, or otherwise act on behalf of, the signatory employee.

The Agreement did not mention class arbitration, although the Arbitrator found in a June 1, 2009 Clause Construction Award, that the Agreement implicitly permitted class arbitration. In 2011 the Second Circuit in Jock I ruled that the arbitrator’s award should have been confirmed because, by finding that the language of the agreement implicitly permitted class arbitration, the arbitrator had at least arguably interpreted the contract.

The Jock IV Court said that the absent class members were bound by the Clause Construction Award even though they were never parties to the class arbitration, the Clause Construction Award, the certification award, or any of the Federal Arbitration Act enforcement proceedings (including Jock I, II, III, or IV, or any of the district court proceedings), and even though they never opted in to the class or otherwise consented to any of the arbitration or arbitration-related proceedings.

The Jock IV Court said that was so because each of the absent class members had signed an Agreement identical to the ones signed by the class representatives and employees who had opted into the class, and had agreed to submit arbitrability disputes to an arbitrator.

Further, said the Court, the absent class members could not collaterally attack the Clause Construction Award because the Agreement clearly and unmistakably authorized an arbitrator to decide both arbitrability questions and questions concerning procedure. Consequently, the absent class members were not entitled to a de novo determination of whether they consented to class arbitration, which, under Lamps Plus, would require the class arbitration proponents to demonstrate that the parties clearly and unmistakably consented to class arbitration.

What Result if the Court Determined the Class Arbitration Consent Issue on a De Novo Basis?

To test the soundness of the Jock IV Court’s conclusion, let’s assume that the Court should have determined on a de novo basis whether the absent class members consented to class arbitration, or, alternatively, whether the absent class members consented to be bound by Clause Construction and certification awards, which were made by arbitrators the absent class members had no part in selecting, and to which those absent class members did not consent after being given an opportunity to opt in to the class.

Lamps Plus requires clear and unmistakable consent to class arbitration. There is no possibility the arbitration agreements signed by the parties could satisfy that demanding requirement. As Jock I demonstrates, at most the Agreement was susceptible to an interpretation under which one might infer implied consent to class arbitration. But it was also susceptible to one or more other interpretations under which it contemplated only bilateral arbitration.

It was therefore ambiguous, and were the Court to have analyzed class arbitration consent on a de novo basis under Lamps Plus standard, then the Court would presumably have determined that the absent class members did not consent to class arbitration and therefore could not be made part of a class.

Did the Jock IV Court Err by Deeming the Absent Class Members to be Bound by the Clause Construction Award?   

The soundness of Jock IV thus depends on whether the absent class members’ signing of arbitration agreements identical to those signed by the Jock class representatives and opt-in class members can legitimately be construed to evidence their consent to be bound by a nearly-decade-old Clause Construction Award decided (a) by an arbitrator they played no part in selecting under (b) a legal standard that has been superceded by a 2019 United States Supreme Court decision (Lamps Plus). 

That question is closely related to the question whether the absent class members agreed to class arbitration. Because the Agreement does not, in our view, establish clear and unmistakable consent to class arbitration, and is at best ambiguous on that score, one could easily, and quite legitimately, conclude that the absent class members did not agree to be bound by the Clause Construction Award.

But for present purposes let’s disregard that proverbial elephant in the room, and assume that the only question is whether the absent class members consented to be bound by a Clause Construction Award.

There are arbitration law principles that bear on our analysis of whether the absent class members consented to be bound by the Class Construction Award.

Pre-dispute arbitration agreements, including the Agreements, are generally “not self-executing” — “[b]efore arbitration can … proceed, it is necessary for the parties to supplement the agreement to arbitrate by defining the issue to be submitted to the arbitrator and by explicitly giving him the authority to act.”  Piggly Wiggly Operators’ Warehouse Inc v. Piggly Wiggly Operators’ Warehouse Independent Truck Drivers Union, 611 F2d 580 (5th Cir. 1980). The disputes presented to the panel for resolution without objection constitute the submission, which may be embodied in a formal submission agreement or determined from the arbitration demand in conjunction with the arguments and contentions made by the parties during the proceeding.

The submission is a delegation of authority to one or more particular arbitrators to resolve one or more particular issues.  And once arbitrators have ruled on those issues, their authority is exhausted; they have no authority to hear any further disputes between the parties unless the parties delegate to them that further authority. See, generally, U.S. v. American Soc’y of Composers, Authors and Publishers, 32 F.3d 727, 732-33 (2d Cir. 1994);  Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987).

The power of arbitrators appointed to resolve a particular dispute or disputes is defined by the submission, not the arbitration agreement. The scope of the agreement to arbitrate tells us only what must be submitted to arbitration. It is the submission itself that “serves not only to define, but to circumscribe the authority of the arbitrators.” Ottley, 819 F.2d at 376.

These long-standing principles are embodied not only in the Federal Arbitration Act (the “FAA”) and the Labor Management Relations Act (the “LMRA”), but also in Ohio law, the law under which the Agreements “shall be governed. . . and . . . interpreted. . . .” (See Jock v. Sterling Jewelers, Inc., No. 18-153-cv (2d Cir.), Dk. 61, Joint Appendix (“JA”) at 130 (available on PACER, (choice of law provision).) See Miller v. Gunckle, 96 Ohio St. 3d 359, 364 at ¶ 23 (2002); Lockhart v. American Res. Ins. Co., 2 Ohio App.3d 99, 102 (Ohio App. 1981); see also Re Joan Hansen & Co v. Everlast World’s Boxing Headquarters Corp., 13 N.Y.3d 168, 173-75 (2009) (“[A]n arbitrator’s authority extends to only those issues that are actually presented by the parties.”) (New York law).

The Agreements the absent class members signed expressly contemplate that, if a dispute arises between the parties, then the parties to the Agreement will submit it to a multi-phase dispute resolution process, which culminates in arbitration before an arbitrator to be selected by the parties. (JA 129-32) Like most other pre-dispute arbitration agreements, each Agreement is a mutual exchange of executory promises (i.e., promises to perform an act in the future), the performance of which occurs when the parties do what they promised to do—submit disputes to arbitration. The act of submitting a dispute to arbitration defines the issue to be arbitrated and explicitly authorizes the selected arbitrator to decide that issue.

Like so many other pre-dispute arbitration agreements the Agreement has an arbitrator selection provision which, in conjunction with the parties’ incorporation of AAA National Rules for the Resolution of Employment Disputes, provides a method by which signatory parties (the Employer and employee) consent to selecting the specific arbitrator to whom they will submit a dispute if one arises. Among the most important terms of an arbitration agreement are those concerning arbitrator selection. See Lefkovitz v. Wagner, 395 F.3d 773, 780 (2005) (Posner, J.) (“Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.”); see, e.g., 9 U.S.C. § 5 (“If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.  .  .  .”); Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. V(1)(d), June 10, 1958, 21 U.S.T. 2519, T.I.A.S. No. 6997 (a/k/a the “New York Convention”) (implemented by 9 U.S.C. §§ 201, et. seq.) (award subject to challenge where “[t]he composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties”); Stolt-Nielsen, 559 U.S. at 668, 670 (one of the FAA’s “rules of fundamental importance” is parties “may choose who will resolve specific disputes”) (emphasis added; citations omitted).

Arbitration awards made by arbitrators not selected in accordance with the parties’ arbitrator selection agreements may be vacated. Encyclopaedia Universalis S.A. v. Encyclopaedia Brittanica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005) (vacating award by panel not convened in accordance with parties’ agreement); Cargill Rice, Inc. v. Empresa Nicaraguense Dealimentos Basicos, 25 F.3d 223, 226 (4th Cir. 1994) (same); Avis Rent A Car Sys., Inc. v. Garage Employees Union, 791 F.2d 22, 25 (2d Cir. 1986) (same).

The Agreement’s “Arbitrator Selection” provision expressly confers upon the employer, and the employee executing the agreement, the right to choose the arbitrator by striking names from a list of nine duly qualified arbitrator candidates, with the employee having the right to make the first strike from the list: 

The first list of available. eligible, and neutral arbitrators shall contain nine (9) names. Each eligible arbitrator must be licensed to practice law in the applicable state of dispute. Each party strikes alternately a name until the arbitrator is chosen. The employee shall strike first. A second list may be requested.

(JA 131; see also JA 130 (“employee” refers to the particular employee that signed the Agreement).)  

Once the selected Arbitrator resolves the dispute submitted to him or her, then the Arbitrator’s authority is exhausted. If another dispute arises at a later date, then a new arbitrator will, pursuant to the Arbitrator Selection provision, be selected to resolve the new dispute and the new dispute will be submitted to that arbitrator, not the arbitrator who resolved the first dispute (unless the parties otherwise agree or the arbitrator selection procedure results in the selection once again of the first arbitrator). 

The absent class members did not demand arbitration or submit any disputes to an arbitrator relating to the class arbitration. The absent class members did not participate in the selection of the arbitrator who made the Clause Construction award.  They did not consent to become parties to the Clause Construction Award, did not delegate authority to another person to submit to arbitration any of the issues decided by the Clause Construction Award, and did not opt into the class arbitration once they were notified of it. They were not parties to the confirmation and vacatur proceedings for the Clause Construction Award, or parties to the Jock IV confirmation and vacatur proceedings.

As the Jock II and IV Courts acknowledged, Associate Justice Samuel A. Alito Jr.’s concurring opinion in Oxford Health Plans LLC v. Sutter, 569 U.S. 564 (2013), explained that it was “far from clear” that a Clause Construction or class certification award can bind absent class members who have not submitted that particular dispute to the particular arbitrator who made the Clause Construction or class certification award:

[U]nlike petitioner, absent members of the plaintiff class never conceded that the contract authorizes the arbitrator to decide whether to conduct class arbitration. It doesn’t. If we were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred ‘[a]n implicit agreement to authorize class-action arbitration . . . from the fact of the parties’ agreement to arbitrate.’ Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 685, 130 S. Ct. 1758, 176 L. Ed. 2d 605 (2010).

With no reason to think that the absent class members ever agreed to class arbitration, it is far from clear that they will be bound by the arbitrator’s ultimate resolution of this dispute. Arbitration is a matter of consent, not coercion, and the absent members of the plaintiff class have not submitted themselves to this arbitrator’s authority in any way. It is true that they signed contracts with arbitration clauses materially identical to those signed by the plaintiff who brought this suit. But an arbitrator’s erroneous interpretation of contracts that do not authorize class arbitration cannot bind someone who has not authorized the arbitrator to make that determination. As the Court explains, an arbitrator may employ class procedures only if the parties have authorized them.

Oxford, 569 U.S. at 574 (Alito, J., concurring) (some citations and quotations omitted) (emphasis added).

Justice Alito’s concurring opinion also explains that the problem is not “cure[d]” “by the distribution of opt-out notices[:]”

The distribution of opt-out notices does not cure this fundamental flaw in the class arbitration proceeding in this case. ‘[A]rbitration is simply a matter of contract between the parties,’ and an offeree’s silence does not normally modify the terms of a contract, Restatement (Second) of Contracts §69(1) (1979). Accordingly, at least where absent class members have not been required to opt in, it is difficult to see how an arbitrator’s decision to conduct class proceedings could bind absent class members who have not authorized the arbitrator to decide on a classwide basis which arbitration procedures are to be used.

Oxford, 569 U.S. at 574-75 (Alito, J., concurring) (some citations and quotations omitted) (emphasis added).

Justice Alito’s Oxford concurring opinion quite presciently identified a major flaw in class arbitration in situations where the parties’ arbitration agreements are, at most, ambiguous on class arbitration consent: Without the parties’ express, unambiguous, and self-executing consent to be bound to Clause Construction, class certification, and other class-arbitration awards that a class representative may obtain on behalf of a class or putative class, class arbitration can work only to the extent that class members affirmatively “opt in” to a class.

The Jock IV Court, and certainly the Jock II Court, acknowledged Justice Alito’s thoughtful concurrence in Oxford, but concluded that the absent class members had “authorized the arbitrator to decide on a classwide basis which arbitration procedures are to be used.” Oxford, 569 U.S. at 575 (Alito, J., concurring)

The Court said “[t]hat [the] absent class members did not expressly submit themselves to this particular arbitrator’s authority does not alter our analysis.” Slip op. at 16. Citing AAA Supplementary Rule 4 (concerning class arbitration), Fed. R. Civ. P. 23, and Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 361-63 (2011), the Court stated “[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.” Slip op. at 16.

“Since,” said the Court, “the RESOLVE Agreement provides for the arbitrator to decide the question of class arbitrability, it must mean, as Appellants state, that if any Sterling employee initiates a putative class proceeding, the arbitrator in that proceeding will be empowered to decide class-arbitrability—and, if he or she finds it appropriate, to certify a class encompassing other employees’ claims.” Slip op. at 16-17 (record citations and quotations omitted; brackets omitted). “To hold otherwise[,]” said the Court, “would be inconsistent with the nature of class litigation and would in effect negate the power of the arbitrator to decide the question of class arbitrability.” Slip op. at 17.

The problem with the Court’s reasoning is that it trades off party consent for class-arbitration convenience. In Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985), the U.S. Supreme Court ruled that “[t]he preeminent concern of Congress in passing the Act was to enforce private agreements into which parties had entered, and that concern requires that we rigorously enforce agreements to arbitrate, even if the result is ‘piecemeal’ litigation. . . .” 470 U.S. at 221 (citation omitted).

Courts should therefore interpret the parties’ arbitration agreements according to their terms, and not adopt an interpretation designed to promote class-arbitration or class-litigation economy. That is all the more so where, as here, the FAA requires clear and unmistakable consent to class arbitration, something that is lacking, especially as respects the absent class members.  

The linchpin of the Court’s argument is that the Agreements provide that the parties agree to submit to an arbitrator questions of arbitrability (including class arbitrability), as well as questions of arbitral procedure. But as we’ve said, the Agreement, like most other pre-dispute arbitration agreements, and consistent with state and federal arbitration law, provides that, if an arbitrable dispute arises the parties will, after following a multi-step dispute resolution process, submit the dispute to an arbitrator selected by the parties according to the Arbitrator Selection provision.

The same is true for questions of arbitrability and arbitration procedure. As respects those disputes, the Agreement requires them to be submitted to the same arbitrator the parties selected to resolve the merits dispute out of which the questions of arbitrability or arbitration procedure arose:  

Questions of arbitrability (that is whether an issue is subject to arbitration under this Agreement) shall be decided by the arbitrator. Likewise, procedural questions, which grow out the dispute and bear on the final disposition, are also matters for the arbitrator.

(JA 132) (emphasis added).

If the parties had intended to allow questions of arbitrability or arbitration procedure  to be decided by an arbitrator in an arbitration to which the employee was not a party—rather than by an arbitrator appointed by the absent class member pursuant to the Arbitrator Selection provision in an arbitration to which the absent class member was a party—then the Agreement would have so provided.  

We think the Jock IV Court’s reliance on the parties’ executory promise to submit arbitrability and arbitral-procedure disputes to a duly appointed arbitrator does not adequately address the concerns Justice Alito raised in his Oxford concurring opinion. Justice Alito’s concern was that the absent class members do not, by definition, empower a particular arbitrator to decide Clause Construction or class certification disputes. The Jock IV Court’s reliance on the parties’ agreement to submit arbitrability and arbitral procedure disputes to arbitration establishes only that, if a dispute arose, then the absent class members would appoint an arbitrator pursuant to the Arbitrator Selection provision and submit that dispute to the duly selected arbitrator, along with any attendant arbitrability and arbitral procedure disputes.

But no dispute arose and none of the absent class members appointed an arbitrator to resolve any disputes, let alone any arbitrability or procedural questions growing out of any disputes. Accordingly, to paraphrase Justice Alito, the absent class members did “not authorize[] the arbitrator to make” the Clause Construction and class certification “determination[s].”

There was therefore no legitimate, contractual basis on which to bind the absent class members to the Clause Construction and class certification awards. At the very least the Jock IV Court should have determined de novo whether the absent class members consented to class arbitration under the Lamps Plus presumption against class arbitration consent.

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