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"Class Arbitration": Second Circuit Declines to Pull the Plug on Mechanism that SCOTUS Largely Scorns

“Class arbitration” signifies the utilization of the Fed.R.Civ.P. 23 protocol in an arbitration proceeding.  A fundamental question among many concerning the legal viability of “class arbitration” is whether an arbitrator can issue an award that binds a person who is not a party to or otherwise deemed by law bound by the bilateral arbitration agreement upon which the arbitral proceeding and the arbitrator’s authority are founded -- e.g., a non-appearing non-party putative class member.  SCOTUS has signaled, but not held, that that is a dubious proposition.  The Second Circuit recently identified circumstances in which, it opined, the courts may not vacate an arbitral award permitting “class arbitration,” and that award may bind all putative members of a class, including non-appearing non-parties to the controlling arbitration agreement.  See Jock v. Sterling Jewelers, 2019 U.S. App. LEXIS 34205 (2d Cir. Nov. 18, 2019) (“Jock”).  That decision is open to criticism.

Arbitration is, seemingly uncontroversially, a creature of contract, binding those who agree to resolve their inter partes disputes by their own privately-created mechanism.  The parties to that typically bilateral agreement appoint a particular arbitrator in accordance with it, and that arbitrator derives his/her power to adjudicate from it.  The wishes of one party with respect to the subject matter or procedures of an arbitral proceeding are arguably irrelevant without the consent of its counterparty in the controlling agreement.  Or so one thought.

But what if Party A has entered into essentially the same bilateral arbitration agreement with many different counterparties?  Does that circumstance give an arbitrator in a proceeding based on one bilateral agreement the power to bind other persons -- e.g., a person (i) that is not a party to the bilateral agreement that governs in the pending proceeding, but (ii) that is a party to a separate arbitration agreement with Party A having essentially the same terms?  That is the Jock case.

In Jock, the Second Circuit reversed the District Court’s vacatur of an arbitrator’s “Class Determination Award” where the appellate court determined (i) that the arbitrator was authorized to adjudicate the class arbitrability question in the first instance; and therefore (ii) that the District Court’s review of that award was limited by the narrow grounds for vacatur -- in this case, as set out in FAA § 10(a)(4) -- and a highly deferential standard.  And most significantly, the Second Circuit in effect decided that, in the circumstances, it was not beyond the power of an arbitrator to bind non-signatory “absent class members” to its determination that class arbitration was permitted.[1]

This decision arguably is as much about the limited judicial review of an arbitral award as about the arbitrability of a purported class action.  The former is a narrow path indeed, limited by the few permitted statutory grounds for vacatur and a highly deferential standard of judicial review.  (If an award has a colorable basis, it need not be consistent with applicable law.)  Indeed, it is possible that if the arbitrability decision had been by a District Court in the first instance, rather than by an arbitrator in the first instance, the Court of Appeals might have reversed the substantive class arbitrability ruling.

This decision is significant to any company that uses a form arbitration clause in multiple contracts regarding the same or similar subject matter.  (Employment, consumer, financial, and insurance contracts, etc., of many enterprises indeed are affected.)  It arguably lends urgency to getting one’s form(s) of arbitration agreement in order.  For those seeking to assure that their arbitrations will be conducted exclusively as bilateral proceedings, this decision at least illustrates the importance of using a form of arbitration agreement that (i) keeps the class arbitrability determination in the courts in the first instance, and (ii) includes an express prohibition of class and collective arbitration.

Some Jock Case History

The Jock case has been bouncing back and forth between the U.S. District Court for the Southern District of New York (Rakoff, J.) and the Second Circuit for a number of years, addressing several issues concerning “class arbitration” along the way.  The arbitrator had made a class certification determination, under applicable rules of the American Arbitration Association, that identified a class of approximately 44,000 employee-claimants “comprising the then 250 plaintiffs as well as other individuals who had neither submitted claims nor opted into the arbitration proceeding (‘the absent class members’).”  Id. at *5-*6.  The District Court first denied respondent Sterling’s motion to vacate that class determination, 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.”  Id. at *6.

On that remand, the District Court vacated the arbitrator’s class determination ruling.  Id. at *7.  In the instant appeal of that decision, the Court of Appeals reviewed the District Court’s legal decision de novo and its finding of facts for clear error, consistent with the treatment of any such vacatur order.

The District Court Decision on Appeal

In the decision on appeal, the District Court had found that the non-appearing non-party putative class members (a) had not submitted themselves to the particular arbitrator’s authority and (b) had not agreed to permit class procedures.  It opined that even if each such non-party had signed her own virtually identical arbitration agreement with Sterling, and even if the arbitration petitioners and Sterling had affirmatively submitted and thus delegated the class arbitrability question to the arbitrator, the arbitrator’s interpretation of the arbitration provision in question had been wrong as a matter of law.

This related to SCOTUS Justice Alito’s concurrence in the Oxford Health case to the effect that “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.’”  Id. at *10-*11, citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 574 (2013) (Alito, J., concurring).  Generally, Justice Alito was skeptical about whether non-participating non-parties could authorize a presiding arbitrator to bind them to a class arbitrability award, and could do so unilaterally (i.e., without the consent of the respondent in that regard).  He also opined, among other things, 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, 133 S.Ct. at 2072 (Alito, J., concurring).

The Second Circuit’s Decision

In Jock, the Second Circuit had to address three principal issues:  (1) did all of the members of a putative class -- both the parties in the pending arbitration and the non-party non-participants -- delegate authority to the particular arbitrator in the pending arbitral proceeding to determine the “class arbitrability” question; and if so, (2) should the arbitrator’s determination (in her Class Determination Award) that class arbitration was permitted have been vacated by the District Court; and if not vacated, (3) are the non-participating non-parties (to the operative arbitration agreement in the pending arbitral proceeding) bound by that arbitrator’s class arbitrability determination?[2]

a.         The Delegation Issue (“who decides” the class arbitrability question)

The permissibility of class arbitration procedures is a gateway question that is presumptively for a court to decide unless the parties to the controlling arbitration agreement have clearly and unmistakably delegated that issue to the arbitrator.  The Court of Appeals first determined that the class arbitrability issue in this case indeed was for the arbitrator, rather than for a court, to decide in the first instance.

First, the parties to the underlying arbitration had “squarely presented to the arbitrator” the issue of whether the operative arbitration agreement permitted class arbitration.  2019 U.S. App. LEXIS 34205 at *6.  Thus, the delegation issue was arguably resolved vis-à-vis the parties by ad hoc agreement in this instance.

Second, the operative arbitration agreement provided that the arbitrator shall decide (i) questions of arbitrability and (ii) procedural questions.  See id. at *12-*13.  The Court indicated that it assumed without deciding that the availability of class arbitration is a question of arbitrability, as the Supreme Court had previously suggested but also not decided.  See id. at *13, citing Oxford Health, 133 S.Ct. at 2068n.2.  But, whether the availability of class procedures is a question of arbitrability or “merely a procedural question,” the Court concluded that it is a matter for the arbitrator to decide under the terms of the relevant arbitration agreement.[3]

Third, the Court of Appeals agreed with the arbitrator that the arbitration agreement’s incorporation of the rules of the American Arbitration Association, effectively including the class arbitrability delegation provision in its Supplementary Rules for Class Arbitration, “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 Court took that to be “clear and unmistakable evidence” of an intent to delegate such issue to an arbitrator.[4]

But did these manifestations of the parties’ agreement to delegate the class arbitrability issue to the arbitrator bind the non-participant non-parties?  Or did the non-party putative class members otherwise consent to the delegation of the class arbitrability issue to the arbitrator selected in the active proceeding?

The apparent sentiment of Justice Alito in his concurring opinion in Oxford Health was that an arbitrator’s interpretation of an arbitral agreement “cannot bind someone who has not authorized the arbitrator to make that determination,” such as a non-party to the governing arbitral agreement.

The principal novel holding by the Court of Appeals in Jock was that while non-participating non-party putative class members had not even purported to opt into the underlying arbitration in question, each of them had signed an arbitration agreement with the same respondent that was identical to the agreement upon which the arbitration participants relied, and they thereby “consented to the arbitrator’s authority to decide the threshold question of whether the agreement permits class arbitration.”  See id. at *11.  (Not “an" arbitrator’s authority, but “the" arbitrator’s authority.)  Indeed, the Second Circuit opined that the non-party absent class members thus had bargained for the arbitrator’s construction of their agreement with respect to class arbitrability no less than did the parties to the proceeding before that arbitrator.  See id. at *14.  (Again, not “an" arbitrator, but “the" arbitrator.)  The Court viewed this as contractually express consent by each of the absent non-party class members, see id. at *17, such that they as well were bound by the arbitrator’s eventual determination of the class arbitrability issue.

Notably, the Second Circuit’s rationale for this relied in part on references to class litigation procedures.  See, e.g., id. at *16.  Thus, the Court opined that its analysis was not affected by the fact that absent class members had not expressly submitted themselves to “this particular arbitrator’s authority,” id. at *15, because judicial class actions can routinely bind absent class members as part of mandatory or opt-out classes, id. at *15-*16.  Therefore, the Court opined, if any person is a party to an arbitration agreement that is identical to the one that is before the active arbitrator, that arbitrator in that proceeding is empowered to decide class arbitrability, and to certify a class that includes non-appearing non-parties to the agreement that is before her.  “To hold otherwise 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.”  Id. at *16.  But, of course, arbitration is not litigation, and the Federal Rules of Civil Procedure do not apply in arbitration.  And an analysis and holding regarding arbitration that relies on the authority of litigation rules or practices is arguably vulnerable indeed.

b.         Deferential Judicial Review of Arbitral Award

The Second Circuit acknowledged that the District Court could have vacated the arbitrator’s decision if the arbitrator exceeded his/her powers or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.  See FAA § 10(a)(4), 9 U.S.C. § 10(a)(4).  Id. at *8.  However, the principle of extreme deference to the decisions of an arbitrator was critical to the Second Circuit’s analysis.

The Court followed SCOTUS’s instruction in that regard that when parties “bargain[] for [an] arbitrator’s construction of their agreement, an arbitral decision even arguably construing or applying the contract must stand, regardless of a court’s view of its (de)merits.”  Id. at *8, citing Oxford Health, 569 U.S. at 569.  Only if the arbitrator “issu[es] an award that simply reflects his own notions of economic justice rather than drawing its essence from the contract” may a court overturn that determination.  Id.

Hence, the Court of Appeals 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.  (The “certain issue” was, of course, class arbitrability.)  As noted above, the Court found that the arbitrator had acted within her authority in “purporting to bind the absent class members to class procedures.”  Id. at *14.  And that determination would stand, said the Court, “regardless of whether [it] is, as the District Court believes, ‘wrong as a matter of law.’”  Id. at *14.

c.         The Class Arbitrability Issue

The Second Circuit did not examine the merits of the arbitrator’s Class Determination Award so much as defend it from scrutiny.

For example, the Second Circuit maintained that it was not for a court to decide “whether the arbitrator’s class certification decision [in the affirmative] was correct on the merits of issues such as commonality and typicality,” id. at *14-*15 -- issues that are to be addressed under the applicable AAA rules after a determination is made that class arbitration procedures were permitted by agreement.  Rather, the Court decided -- presumably on the same questionable basis upon which it decided the delegation issue -- “that the arbitrator had the authority to reach such issues even with respect to the absent class members.”  Id. at *15.

Indeed, after making no examination of the bases, if any, of the arbitrator’s determination that class arbitration procedures were permitted by the controlling arbitral agreement (and that that determination bound non-party non-participant class members), the court sought to distinguish the Supreme Court’s decision in Lamps Plus, Inc. v. Varela, 139 S.Ct. 1407, 2019 U.S. LEXIS 2943 (U.S. April 24, 2019).  In Lamps Plus, SCOTUS ruled that, under the FAA, neither silence nor “ambiguity” in an arbitration agreement regarding the permissibility of class arbitration enables a court to find that the parties agreed to permit class arbitration.  Consent being fundamental to arbitration, an agreement to permit class arbitration must be express and unambiguous because it would so drastically alter the nature of the proceeding from the simple “bilateral” process that was envisioned in the FAA.  Moreover, SCOTUS implicitly indicated that incorporation of institutional rules such as those of the AAA, which included the AAA’s 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.)

The Second Circuit attempted to distinguish Lamps Plus on two bases: (1) the parties in Lamps Plus agreed that a court, not an arbitrator, should resolve the class arbitrability question, and so that decision was subject to de novo review on appeal, rather than the deferential review that applies concerning an arbitrator’s decision in a vacatur motion; and (2) SCOTUS did not expressly hold in Lamps Plus that an arbitration agreement may not be interpreted to include implied consent to class procedures.  See 2019 U.S. App. LEXIS 34205 at *18.  The former distinction is sustainable.


This decision seems to be a bit of a turnabout by the Second Circuit, considering its earlier opinions in the Jock saga.  The Second Circuit noted, for example, that its earlier decision “did not squarely address whether the arbitrator had the power to bind absent class members to class arbitration given that they, unlike the parties [to the underlying arbitration], never consented to the arbitrator determining whether class arbitration was permissible under the agreement in the first place.”  See id. at * 15 (emphasis added).

This decision also seems inconsistent with the recent trending of SCOTUS jurisprudence with respect to the notion of a “class arbitration” proceeding, which the Supreme Court has characterized as inherently inconsistent with the traditional notion of arbitration -- i.e., a private bilateral proceeding.

In any case, the Jock saga continues.  It has seemingly always been on a track headed to the United States Supreme Court, the only uncertainties being how many issues would it be freighted with and how long would it be before it was finally ripe for that review.  The Second Circuit’s most recent decision in the Jock case adds to the issues that the Supreme Court may eventually get to address, but works to delay the eventual reception of the case in Washington, D.C.

A version of this article was published by Bloomberg Law on 1/2/20.



[1]  The Court of Appeals furthermore identified an issue that the parties had not raised or briefed, and remanded the matter to the District Court for a decision regarding “whether the arbitrator exceeded her authority in certifying an opt-out, as opposed to a mandatory, class for injunctive and declaratory relief. . . .”  Id. at *3.  This clean-up remand was due to the fact that the arbitrator had certified a class solely for injunctive and declaratory relief.  In class action litigation, such a class is typically certified as mandatory, while the class is typically certified as opt-out when plaintiffs seek money damages by class action.

   Perhaps most notably in this regard, the Court did not indicate that, or question whether, an opt-in class should have been certified in the circumstances.

[2]  Among the questions that were not expressly addressed by the Court, however:  is the respondent in the pending arbitration (Sterling) bound by an award in that proceeding vis-à-vis the non-participating non-parties?

[3]  The Second Circuit furthermore opined that its conclusion was consistent with Ohio law, which, by agreement, governed the interpretation of the arbitration agreement.  See id. at *13-*14.

[4]  True, the AAA Supplementary Rules provide that “the arbitrator should not consider the existence of these Supplementary Rules, or any other AAA Rules, to be a factor either in favor of or against permitting the arbitration to proceed on a class basis.”  Id. at *12n.4, citing AAA Supplementary Rule 3.  However, the Court pointed out that it was not then reviewing the arbitrator’s determination that the arbitration may proceed on a class basis, but only addressing whether the absent class members had delegated to the arbitrator the threshold question of class arbitrability.  Id. at *12n.4.  The Court maintained that the caveat in the AAA’s Supplementary Rules was irrelevant to that determination.

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