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June 06, 2018 Articles

On Remand, Second Circuit District Court Vacates Arbitrator’s Certification of an Opt-Out Class

By P. Jean Baker

It was a precedent-setting decision. On remand the District Court for the Southern District of New York became the first court to apply Justice Alito's concurrence in Oxford Health Plans to strike down an arbitrator's class certification award. Oxford Health Plans LLC v. Sutter, 569 U.S. 574 (2013) (Alito, J., concurring). The court determined that, absent an express class arbitration provision in each putative class member's arbitration agreement, an arbitrator does not have the authority to bind absent class members to a class judgement—even if the absent class members signed the same arbitration agreement as the named plaintiffs. Jock v. Sterling Jewelers Inc., No. 08 Civ. 2875 (S.D.N.Y. Jan. 15, 2018).

"Interminable Litigation"
In 2008, the plaintiffs, current and former female employees of defendant Sterling Jewelers, filed a putative class action alleging that Sterling discriminated against them in pay and promotion on the basis of their gender. The named plaintiffs had each signed a dispute resolution agreement, the "RESOLVE agreement." The RESOLVE agreement provided for arbitration in accordance with the rules of the American Arbitration Association (AAA). The court granted the plaintiffs' motion to compel arbitration (Jock v. Sterling Jewelers, Inc., 564 F. Supp. 2d 307 (S.D.N.Y. 2008), and the appearing parties in a joint ad hoc submittal granted an arbitrator the authority to decide whether class arbitration was permitted.

In 2009, the arbitrator, applying the AAA Supplementary Rules for Class Arbitrations, issued a partial final award. Although the RESOLVE agreement did not mention class proceedings, the form agreement did not expressly prohibit class arbitration. Under the governing law of Ohio, absent an express prohibition, signatories to contracts of adhesion may avail themselves of class proceedings. Finding that the RESOLVE agreement was adhesive, the arbitrator ruled that class arbitration was permitted.

Sterling moved to vacate the clause construction partial final award. The court initially denied Sterling's motion. (Jock v. Sterling Jewelers, Inc., 677 F. Supp. 2d 661 (S.D.N.Y. 2009) While the appeal was pending, the Supreme Court issued an opinion in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), reversing the Second Circuit's reversal of the undersigned's decision holding that a class action proceeding is not available unless the contracting parties so provide.

In 2010, Sterling again moved for relief against the court's decision to confirm the arbitrator's clause construction award permitting class arbitration. The court reversed its decision and granted Sterling's motion to vacate, finding the record did not identify any concrete basis for the arbitrator to conclude that the parties had manifested their intent to arbitrate class claims. Jock v. Sterling Jewelers, Inc., 725 F. Supp. 2d 444 (S.D.N.Y. 2010).

The plaintiffs appealed and a divided panel of the Second Circuit reversed, with the majority finding the parties had "squarely presented" the question of whether the RESOLVE agreement allowed for class arbitration to the arbitrator and the parties were bound by the arbitrator's decision—whether rightly or wrongly decided. Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011), cert. denied, 565 U.S. 1259 (2012).

In 2015, the arbitrator issued a class determination award, certifying a class of about 44,000 persons  for the plaintiffs' Title VII disparate impact claims. An opt-out class for injunctive and declaratory relief was among the classes certified in the award. Sterling moved to vacate the award, arguing that the arbitrator exceeded her authority (1) by purporting to bind employees other than the named plaintiffs and the 254 who had affirmatively opted in to the proceedings before the AAA and (2) by permitting opt-out rights in a mandatory Rule 23(b)(2) class. The court, having found that the arbitrator exceeded her authority and manifestly disregarded settled law (see Wal-Mart Stores, Inc. v. Dukes, 131 St. Ct. 2541 (2011)), granted Sterling's motion to vacate the arbitrator's class determination award to the extent that it permitted individuals to opt out of a class certified for the purposes of seeking class-wide injunctive and declaratory relief. In all other respects, the award was confirmed. Jock v. Sterling Jewelers, Inc., 143 F. Supp. 3d 127 (S.D.N.Y. 2015).

Sterling again appealed.

In 2017, the Second Circuit vacated the 2015 opinion and order, holding that the earlier rulings had not clearly addressed whether the arbitrator had the power to bind absent class members who had not either consented to the arbitrator determining whether class arbitration was permissible under the RESOLVE agreement or opted in to the class proceeding. Jock v Sterling Jewelers Inc., 703 F. App'x 15 (2d Cir. 2017).

Second Circuit's Analysis
The court began its analysis by stating that its review would be de novo regarding legal questions. And the court's focus would be on whether the arbitrator had the power to address a certain issue, not whether the arbitrator correctly decided a certain issue. The court quickly concluded that it is the law of the case that the arbitrator does not have the authority, based on the RESOLVE agreement, to certify a 70,000-person class. As to whether the RESOLVE agreement authorized class procedures, the court had decided, in a memorandum order dated July 27, 2010, that it does not. Thus, individuals who did not affirmatively opt in to the current class proceedings did not agree to permit class procedures by virtue of having merely signed identical RESOLVE agreements.

So the remaining question was whether the arbitrator had the authority to certify a 70,000-person class solely because the named plaintiffs and the defendant agreed to submit to an arbitrator the question of whether class arbitration was permitted. The court's answer to that question mirrored the concerns raised in Justice Alioto's concurrence in Oxford Health Plans—namely, should an arbitrator's erroneous interpretation of contracts that do not authorize class arbitration bind absent class members who have not affirmatively authorized the arbitrator to make that determination or opted in to the class proceedings? The court addressed in dicta whether the arbitrator's initial decision to permit class arbitration was "erroneous." In footnote 1, the court cites the decision of an Ohio intermediate appellate court that found, while construing the same RESOLVE agreements, that they were not adhesive or unconscionable. See W.K. v. Farrell, 167 Ohio App. 3d 14 (2006).

Explaining why courts would be unable to enforce an arbitration award against absent class members who did not opt out but who have also not otherwise opted in to being bound by an arbitrator's decision, the court found that the arbitrator had no authority to decide whether the RESOLVE agreement permitted class action procedures for anyone other than the named parties who choose to present her with that question and those other individuals who chose to opt in to the proceeding before her. The court vacated the clause construction award insofar as the award certified a class that included individuals who had not affirmatively opted in to the arbitral proceedings.

Questions Not Addressed by the Decision
In footnote 2, the court made it very clear that the court's decision did not address the question of whether—had the RESOLVE agreement, in fact, permitted class arbitration—an arbitrator would have had the authority to bind absent class members based on the fact that each absent class member had agreed to such procedures when they executed the RESOLVE agreement.

To Be Continued
The plaintiffs have filed an appeal.

Allowing an arbitrator or a court to decide whether class or collective arbitration is permissible can easily result in interminable litigation—litigation that could have easily been avoided by drafting an arbitration clause that clearly stated whether class or collective arbitration was or was not permitted. As courts continue to grapple with procedural issues surrounding class arbitration, attorneys need to remain current regarding the evolving legal landscape and quickly revise their clients' arbitration agreements as soon as changes are warranted.

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