Lessons From Above: SCOTUS Declines to Review a Class Arbitrability Case (the Issue Had Been Delegated to an Arbitrator)
In its restraint, SCOTUS has shown us the mischief that arbitrators may do if parties are lax in setting boundaries in their agreement to arbitrate. By declining to grant certiorari regarding the Second Circuit’s most recent decision in Jock v. Sterling Jewelers, Inc., 2019 U.S. App. LEXIS 34205 (2d Cir. Nov. 18, 2019), cert. den., No. 19-1382, 2020 U.S. LEXIS 4133 (Oct. 5, 2020), SCOTUS reminds us of the significance of the doctrine of judicial deference to the authorized decisions of an arbitrator.
In Jock, the ultimate issue was formidable -- class arbitrability. And the subsidiary issues were and are daunting. For example,
(1) parties to an arbitration agreement can delegate the class arbitrability issue (is class arbitration permitted?) to an arbitrator in the first instance, but would that delegation bind non-appearing putative class members, who are of course not parties to the operative arbitration agreement?
(2) who decides that delegation issue?
(3) would an arbitrator’s determination that class arbitration is permitted bind (a) non-appearing putative class members or (b) an unwilling respondent vis-à-vis those non-appearing putative class members?
The Second Circuit held that an arbitrator had acted within her authority in “purporting to bind the absent class members to class procedures,” 2019 U.S. App. LEXIS 34205 at *14, and that that determination therefore would stand “regardless of whether [it] is, as the District Court believes, ‘wrong as a matter of law.’” Id. Indeed, the Second Circuit had framed its inquiry as “whether the arbitrator had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue” and “not whether the arbitrator correctly decided that issue.” Id. at *8-*9, citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013).
Thus, the Court of Appeals did not review the merits of the arbitrator’s Class Determination Award (“CDA”), but rather defended it from scrutiny on the merits. Instead, the Second Circuit focused on the delegation question -- did the parties clearly and unmistakably delegate the class arbitrability issue to the arbitrator for determination in the first instance?
The first lesson: if the issue of class arbitrability is delegated to an arbitrator for determination in the first instance, the resulting award becomes a hardened target with respect to its legal merits. It may be challenged on the narrow grounds for vacatur set out in Section 10(a) of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 10(a), and it then benefits from the deference accorded to all arbitral awards. Consequently, a decision concerning class arbitrability that might be reversed on de novo review if issued by a court will likely be left undisturbed if issued by an arbitrator.
That lesson alone is important to any company that uses a form arbitration clause in many substantially similar contracts – e.g, employment, consumer, financial, or insurance agreements. It highlights the urgency of getting one’s form(s) of arbitration agreement in order, including the advisability (i) to state clearly whether arbitrability issues – and class and/or collective arbitrability issues in particular – are to be determined by a court or an arbitrator in the first instance, and (ii) to expressly prohibit class and collective arbitration if bilateral arbitration is the sole desired structure for dispute resolution.
To illustrate the point, consider that SCOTUS decided in Lamps Plus, Inc. v. Varela, 139 S.Ct. 1407, 2019 U.S. LEXIS 2943 (U.S. Apr. 24, 2019), that when a court is deciding the matter under the FAA in the first instance, neither silence nor ambiguity in an arbitration agreement regarding the permissibility of class arbitration is a sufficient basis to find that the parties agreed to permit class arbitration. And SCOTUS implied that incorporation by reference of institutional rules such as those of the American Arbitration Association ("AAA"), including its Supplementary Rules for Class Arbitration, is not a sufficient basis to infer an agreement to permit class arbitration. (The AAA’s Supplementary Rules are expressly consistent with that. See R-3.)
But, as the Second Circuit pointed out, the parties in Lamps Plus had agreed that a court, not an arbitrator, should resolve the class arbitrability question, and so the District Court’s decision in Lamps Plus was subject to de novo review on appeal, rather than the deferential review that applies concerning a motion to vacate an arbitrator’s award. See, 2019 U.S. App. LEXIS 34205 at *18.
In the Jock case, on the other hand, the class arbitrability issue had been delegated to an arbitrator for determination in the first instance: (1) the appearing arbitrating parties had “squarely presented to the arbitrator” the issue of whether the controlling arbitration agreement permitted class arbitration, id. at *6, in effect resolving the delegation issue via an ad hoc agreement; (2) the operative arbitration agreement provided that the arbitrator shall decide questions of arbitrability and procedural questions, see id. at *12-*13; and (3) the operative arbitration agreement incorporated the AAA’s arbitration rules, including the delegation provision (see R-3) of its Supplementary Rules for Class Arbitration, which “evinces agreement to have the arbitrator decide the question of class arbitrability,” id. at *12, citing Wells Fargo Advisors, LLC v. Sappington, 884 F.3d 392, 396 (2d Cir. 2018). The Second Circuit justifiably took these manifestations to be “clear and unmistakable evidence” of an intent by the appearing parties to delegate the class arbitrability issue to an arbitrator.
The wild card question, however, was whether the non-appearing putative class members should be deemed bound by that delegation.
It is worth recalling that the Jock case has a lengthy history in the Southern District of New York and the Second Circuit, having bounced back and forth between those courts several times already. In an earlier go-round, after an arbitrator had "certified" a class of 44,000 employee claimants (including 250 active claimants),1 the District Court denied respondent Sterling’s motion to vacate that CDA, but the Second Circuit reversed and remanded, noting that it had not previously squarely determined “whether the arbitrator had the power to bind absent class members to class arbitration given that they…never consented to the arbitrator determining whether class arbitration was permissible under the agreement in the first place.” 2019 U.S. App. LEXIS 34205 at *6. On remand, the District Court then vacated the arbitrator’s CDA. But the Second Circuit reversed again, this time based principally on the appellate court’s determination that the arbitrator had been authorized to adjudicate class arbitrability in the first instance, and so the District Court’s review of that award was therefore limited by (a) the narrow grounds for vacatur set out in FAA § 10(a)(4) and (b) the requisite deferential standard of review of such awards.
In that decision, which SCOTUS eventually let stand, the Second Circuit arguably could have addressed a number of issues:
(1) did the parties to the operative arbitration agreement delegate the class arbitrability issue to an arbitrator?
(2) did the non-appearing members of a putative class too delegate the class arbitrability issue to the particular arbitrator in the pending arbitral proceeding?
(3) are the non-appearing putative class members, who were not parties to the operative arbitration agreement, bound by that arbitrator’s decision regarding class arbitrability?
(4) should the District Court have vacated the arbitrator’s CDA?
The Second Circuit first determined that the class arbitrability issue had been delegated to an arbitrator. It also decided that the District Court should not have vacated the CDA because the arbitrator had the authority, based on the delegation, to resolve the class arbitrability issue in the first instance, and the merits of that determination therefore were not up for review even if the District Court believed that it had been wrongly decided as a matter of law.
Finally, the Second Circuit decided-- and this was novel-- that the arbitrator had the authority to reach the class arbitrability issue even with respect to the non-appearing putative class members. 2019 U.S. App. LEXIS 34205 at *15. Thus, the appellate court decided that, in the circumstances, the non-signatory “absent class members” (a) were deemed to have delegated the class arbitrability issue to the particular arbitrator in the proceeding in question, and (b) were bound by her determination that class arbitration was permitted.
The court's rationale was: (1) each of the non-appearing putative class members respectively had made an arbitration agreement with respondent Sterling Jewelers that was substantially identical to the agreement upon which the appearing arbitration participants relied; (2) they thereby consented to, and indeed "bargained for," an arbitrator's authority to decide the class arbitrability issue, see id. at *11, *14; (3) that constituted an express contractual consent to delegation by the non-appearing putative class members, see id. at *17; and (4) even if the non-appearing class members had not expressly agreed to "this particular arbitrator's authority,” id. at *15, that did not matter because judicial class actions routinely bind absent members of mandatory or opt-out classes, id. at *15-*16. (But of course, arbitration is not litigation, and Fed. R. Civ. P. 23 does not apply in arbitrations.)
Notably, this rationale appears to be inconsistent with the skepticism in this regard expressed by Justice Alito in his concurring opinion in the Oxford Health case. Justice Alito had opined that an arbitrator’s interpretation of an arbitration agreement generally “cannot bind someone who has not authorized the arbitrator to make that determination,” and that “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 class-wide basis when arbitration procedures are to be used.” Oxford Health Plans, LLC v. Sutter, 133 S.Ct. at 2072 (Alito, J., concurring). Thus too, “an arbitrator’s ‘erroneous interpretation’ of a contract that does not authorize class procedures cannot bind absent class members who have ‘not authorized the arbitrator to make that determination.’” 2019 U.S. App. LEXIS 34205 at *10-*11, citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 574 (2013) (Alito, J., concurring).
Nevertheless, SCOTUS let the Jock decision, with all it entails, stand. And we are left to puzzle out what further lessons SCOTUS intended to convey in this regard.
1 The arbitrator “certified" an arbitration class solely for purposes of injunctive and declaratory relief, and it was an opt-out class (which is usually certified for class action litigations seeking money damages) rather than an opt-in class (which might have lent more justification to the CDA) or a mandatory class.