Introduction: Assignment and the Separability Doctrine
Suppose A and B enter a contract imposing mutual obligations on them. The contract contains an arbitration agreement requiring arbitration of all disputes arising out of or related to the contract. The contract does not purport to prohibit assignment, and the parties’ rights under the contract are otherwise capable of assignment.
A assigns to assignee C its rights to receive performance under the contract. B commences an action against A under the contract and A demands arbitration. B resists arbitration, arguing that A has assigned to C its right to enforce the contract (we’ll call it a “container contract” because it contains an arbitration agreement) and thus there is no longer any arbitration agreement that A can enforce against B. Judgment for whom?
In Sanders v. Svannah Highway Auto Co., No. 28168, slip op. (July 26, 2023), the Supreme Court of North Carolina said that, under the Federal Arbitration Act’s “separability” doctrine, the claim that the contract—including the arbitration agreement— could no longer be enforced was an issue that concerned the enforceability of the container contract as a whole, not the enforceability of the arbitration agreement specifically. And because the assignment concerned only the continued existence of the container contract, and not a claim that the container contract was never formed, the exception to the separability doctrine under which courts get to decide whether a contract has been concluded did not apply.
Accordingly, explained the South Carolina Supreme Court, it was for the arbitrator to decide what effect, if any, the assignment had on A’s right to enforce the container contract, including the arbitration agreement. Continue Reading »
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
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).
While federal, and many state, courts have class-action procedural rules that permit them to bind absent class members to a judgment or settlement, arbitration is different because it is based on party consent, not coercion. While the critical, threshold issues presented in class arbitration is party consent to class arbitration, class certification disputes arising out of a class arbitration proceeding can be just as challenging, especially when they involve absent class members who have not opted in to the proposed or certified class (“absent class members” or “absent members”).
Suppose Employer A requires each of its employees to sign a form arbitration agreement that clearly and unmistakably authorizes the arbitrator to decide all disputes arising out of or relating to the employment relationship as well as arbitrability and procedural issues. More than 250 employees (including putative class representatives) assert that an arbitrator (the “Arbitrator”) should determine whether Employer A consented to class arbitration. Employer A submits that issue to the Arbitrator.
The Arbitrator hears and considers the evidence and arguments and makes a Clause Construction Award, which rules that Employer A and each of the employees consented to class arbitration by signing the employment agreement. Employer A challenges the award as exceeding the arbitrator’s powers under Section 10(a)(4) of the Federal Arbitration Act, but the challenge fails because an appellate court finds that the Arbitrator was at least arguably construing the employment agreement. .
After further proceedings the Arbitrator makes another award, this one certifying a class consisting of approximately 44,000 employees, which included not only the more than 250 persons who were either class representatives or opted in to the class, but also tens of thousands of persons who were absent class members in the sense that they had been notified of the class arbitration and proposed class but had not opted in to the class and had not otherwise appeared in the arbitration proceedings.
Did the Arbitrator have the power to make that class certification award, which purports to bind each of the 44,000 class members, the vast majority of whom were never parties to the arbitration and had never submitted to the Arbitrator any of the issues that were decided by the Arbitrator’s Clause Construction and class certification awards?
On November 18, 2019, the United States Court of Appeals for the Second Circuit said the answer to that question was “yes.” But with all due respect to the Second Circuit, and understanding that reasonable minds can and do differ on this subject, we think the better answer would have been “no.”
This post briefly discusses the Second Circuit’s decision.
A subsequent post will explain why we believe the Second Circuit should have held that the arbitrator in that case did not have the authority to bind absent class members, who were not parties to the Clause Construction Award, did not opt into the class, did not otherwise agree to be bound by the Clause Construction Award or the class certification award, and did not otherwise submit to the Arbitrator the issues decided by the Clause Construction and class certification Awards.
The result would be that the class arbitration could proceed, albeit with a far smaller, certified class (which might be expanded to accommodate any absent members who might be given an additional opportunity to opt-in). But that result, we think, is consistent with the consensual nature of arbitration— a dispute resolution method that is fundamentally different from its coercive counterpart, court litigation.
Absent Class Members: Background and Procedural History of Jock v. Sterling Jewelers Inc.
The Second Circuit’s recent decision was the fourth appeal in the Jock v. Sterling Jewelers Inc. case, a long-running class arbitration dispute. The first of these appeals, Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011) (“Jock I”), was decided in 2011—the most recent one, Jock v. Sterling Jewelers Inc., No. 18-153-cv, slip op. (2d Cir. November 18, 2019) (“Jock IV”), and the subject of this post, was decided November 18, 2019.
Jock and her co-plaintiffs are retail sales employees of Sterling Jewelers, Inc. (“Sterling”). Back in 2008 they sought relief on behalf of a class under Title VII of the Civil Rights Act of 1964, and under the Equal Pay Act, alleging Sterling, based on their gender, paid them less than their similarly situated male co-workers.
Sterling employees, including Jock and her co-plaintiffs were required to sign a “RESOLVE Program” agreement (the “Agreement”), which imposed mandatory arbitration. By executing the agreement employees expressly “waiv[ed] right[s] to obtain any legal or equitable relief . . . through any government agency or court, and . . . also waiv[ed] [their] right[s] to commence any court action.” The Agreement provided that they “may. . . seek and be awarded equal remedy through the RESOLVE Program.”
The Agreement provided 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.”
Class arbitration ensued, and the arbitrator construed the Agreement to permit class arbitration. The district court overturned the award on the ground that the class construction award exceeded under the arbitrator’s powers for the reasons stated in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010).
Jock I
But the Second Circuit in Jock I reversed the district court’s judgment. As the Court explained in Jock IV, the Jock I Court “reversed, holding that the District Court impermissibly substituted its own legal analysis for that of the arbitrator instead of focusing its inquiry on whether the arbitrator was permitted to reach the question of class arbitrability that had been submitted to her by the parties.” Jock IV, slip op. at 5-6. The Jock I Court also “explained. . . that the arbitrator had a colorable justification under the law to reach the decision she did.” Jock IV, slip op. at 6.
Jock I “distinguished Stolt-Nielsen on the ground that the parties in Stolt-Nielsen stipulated that their arbitration agreement contained ‘no agreement’ on the issue of class arbitration, whereas the plaintiffs in [Jock I] merely conceded that there was no explicit agreement to permit class arbitration, thus leaving open the possibility of an ‘implied agreement to permit arbitration.’” Jock IV, slip op. at 6 (citation omitted).
The Class Certification Award
After Jock I the arbitrator made a class certification award, certifying a class of “approximately 44,000 women, comprising the then-254 plaintiffs as well as other individuals who had neither submitted claims nor opted in to the arbitration proceeding (‘the absent class members’).” Jock IV, slip op. at 6 (parenthetical in original). The arbitrator’s class certification was limited to those with Title VII disparate impact claims seeking declaratory and injunctive relief.
The district court denied Sterling’s motion to vacate the certification award. As Jock IV explains, the district court reasoned “that Sterling’s argument that the arbitrator had exceeded her powers in ‘purporting to bind absent class members who did not express their consent to be bound’ was ‘foreclosed by’ this Court’s holding in Jock I that ‘there is no question that the issue of whether the agreement permitted class arbitration was squarely presented to the arbitrator.’” ” Jock IV, slip op. at 7 (citation omitted).
Jock II
The district court’s decision refusing to vacate the class certification award resulted in the second appeal, Jock v. Sterling Jewelers Inc., 703 Fed. Appx. 15 (2d Cir. 2017) (summary order). (“Jock II”). In July 2017 we wrote a short post (here) about Jock II.
Jock II vacated and remanded the district court’s decision refusing to vacate the certification award because it purported to bind absent members, who (because of their absence) could not have “squarely presented” to the arbitrator the question whether the agreement authorized class procedures, let alone the issue of whether they should be deemed part of a class in a class arbitration to which they had not consented. SeeJock II, 703 Fed. Appx. at 16, 17-18 (quotation and citation omitted).
In Jock II, the Second Circuit directed the district court to “consider[] on remand. . . ‘whether an arbitrator, who may decide. . . whether an arbitration agreement provides for class procedures because the parties “squarely presented” it for decision, may thereafter purport to bind non-parties to class procedures on this basis.’”) Jock IV, slip op. at 7-8 (citation omitted).
The Jock II Remand
The district court vacated the class determination award on remand for two reasons. First, the district court said that it had ruled in 2010 that the Agreement did not authorize class procedures and that, accordingly, the absent class members had not consented to class arbitration.
Second, the submission by the plaintiffs and defendants (not the absent members) to the arbitrator of the question whether the Agreement authorized class arbitration did not confer on the arbitrator the authority to make a ruling binding on the absent members (who did not submit the issue to the Arbitrator). “The District Court[,]” said the Second Circuit, “reasoned that, even if the arbitrator’s ‘erroneous interpretation’ of the [Agreement] could bind the 254 plaintiffs who had ‘authorized the arbitrator to make that determination by submitting the question to her or opting into the proceeding, that erroneous interpretation could not bind absent class members.” Jock IV, slip op. at 8.
The Jock IV Appeal
The district court ruling on the Jock II remand resulted in the Jock IV appeal. (The Jock III decision was the dismissal of an appeal of a district court ruling that it lacked subject matter jurisdiction to vacate an interim decision rendered by the arbitrator. Jock v. Sterling Jewelers Inc., 691 F. App’x 665 (2d Cir. 2017) (summary order).)
Since the issue before the district court on the Jock II remand was whether the arbitrator’s class certification decision should be vacated under Section 10(a)(4) of the Federal Arbitration Act, the applicable standard of review was the manifest disregard of the agreement standard set forth in Stolt-Nielsen and Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 568-69 (2013). See Jock IV, slip op. at 9-11. (For discussion of that deferential standard, see here, here, here, and here)
Sterling (the “Award Challenger”) argued, consistent with the district court’s decision, that the deferential standard should not apply to the question whether the absent members had consented to class arbitration, because they were not parties to the class construction award that was the subject of Jock I, did not submit the issue of class consent to the arbitrator, or otherwise agree to be bound by a determination of consent to class arbitration to which they were not parties.
But the Second Circuit did not agree with the district court or the Award Challenger. It agreed with the plaintiff-appellants (the “Award Defending Parties”), who “argue[d] that the absent class members have, in fact, authorized the arbitrator to determine whether the [Agreement] permits class arbitration procedures.” Jock IV, slip op. at 11. They urged “that because all Sterling employees signed the RESOLVE Agreement, all Sterling employees “agreed that, if any of them initiated a putative class proceeding, the arbitrator in that proceeding would be empowered to decide class-arbitrability—and, if he or she found it appropriate, to certify a class encompassing other employees’ claims.” Jock IV, slip op. at 11-12.
The Award Defending Parties asserted that “the District Court erred by ‘never ask[ing] what authority absent class members conferred on [the arbitrator] by joining the RESOLVE Program [i.e., signing the Agreement],’ a question that is a matter of contract interpretation.” Jock IV, slip op. at 12.
The Second Circuit determined that, by signing the Agreement, the employer and the absent class members agreed that: (a) any other employee who signed the Agreement was authorized to arbitrate on behalf of any absent member of a yet-to-be certified class the issue of consent to class arbitration, irrespective of whether the absent class member was a party to the arbitration, and irrespective of whether the absent member had notice of, and consented to, the arbitration; (b) any absent class member would be bound by the outcome of such a class-arbitration-consent arbitration proceeding, even though the absent class member did not participate in the arbitration, did not consent to the arbitration (apart from signing the Agreement), and did not play any role in the selection of the arbitrator who presided over the arbitration; and (c) the decision on class arbitration reached by the arbitrator in his or her absence would be subject to review under the exceedingly deferential Oxford/Stolt-Nielsen standard only, and the absent members would be bound by the result of that judicial review even though they were not parties to the Clause Construction Award or to the judicial proceeding in which the Clause Construction Award was reviewed.
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