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Arbitrator, Not Court, Should Determine Whether Employment Agreements Permit Collective Arbitration, Says New York Appellate Court

By Michael S. Arnold

New York’s First Department – an intermediate appeals court – recently affirmed a New York County trial court decision holding that an arbitrator, not a court, should decide whether certain employment agreements at issue allowed for collective arbitration.  In reaching its decision, the First Department left open the possibility that the arbitrator could conclude that collective (not class) arbitration was available despite the fact that the agreements at issue were silent regarding its availability.

Before we analyze this case and for purposes of this blog entry, a quick primer is needed on a major difference between collective and class proceedings (whether in court or arbitration).  Collective actions require an individual to “opt-in” to the action and an individual who does not “opt-in” is not bound by any judgment that may result.  In contrast, class actions require potential claimants to “opt-out,” meaning that all individuals within a defined class are automatically included in the class, and are bound any judgment that results, unless they affirmatively remove themselves from the class.  Further, in a collective action, all claimants who opt in become actual parties in the case; in a class proceeding, only the representative claimants are considered parties.  Also as background, generally, arbitrators decide all substantive and procedural issues surrounding the dispute, while courts generally decide “gateway” issues, including whether the arbitration agreement is valid and whether the parties agreed to arbitrate the dispute in the first instance.

Now, on to the case.  In JetBlue Airways Corp. v. Stephenson, JetBlue entered into standardized employment agreements with each of its pilots that, in relevant part, made the pilots eligible for certain salary increases and required the parties to submit any dispute regarding the agreement to arbitration by a single arbitrator in the city of the pilot’s base of operation in accordance with the rules of the American Arbitration Association (AAA).  When JetBlue allegedly failed to properly increase pilot salaries, more than 700 current and former pilots filed a single demand for a collective arbitration with the AAA, on behalf of all JetBlue pilots, alleging breach of contract.  In response, JetBlue petitioned the New York Supreme Court (a trial level court) to order the pilots to arbitrate their claims individually rather than collectively, because the employment agreements at issue were silent as to the availability of a collective arbitration proceeding.  The trial court denied JetBlue’s petition finding that the availability of a collective arbitration was a procedural issue for the AAA arbitrator to decide.

On appeal, the First Department affirmed, concluding that the issue was not whether the parties agreed to arbitrate – an issue for the court – but rather whether the parties agreed to arbitrate the dispute in a particular manner – an issue for the arbitrator to decide.  In reaching its decision however, the First Department commented on whether, in light of the United States Supreme Court’s 2010 decision in Stolt-Nielsen v. AnimalFeeds Int’l Corp., an arbitrator could authorize a collective action proceeding once presented with that issue.  In Stolt-Nielsen – the first of three landmark Supreme Court decisions from last year regarding arbitration agreements – the Supreme Court held that an arbitrator improperly construed the parties’ agreement to arbitrate disputes as permitting class arbitration where the agreement was silent on that specific issue.  The Supreme Court focused on the fact that a class arbitration “changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator,” including that any class arbitration award may bind individuals other than those subject to the arbitration agreement.

Distinguishing Stolt-Nielsen, the First Department concluded that collective action proceedings are “so fundamentally different” from class action proceedings “that the result in Stolt-Nielsen does not dictate the result [here].”  More specifically, the First Department found that collective arbitration is not so “fundamentally different” to ordinary bilateral arbitration because in collective arbitration, unlike in class arbitration, all affected pilots are actual parties and disposition of the matter would not bind those pilots who chose not to join.  Therefore, the First Department concluded that, unlike in Stolt-Nielsen, a reasonable arbitrator could potentially determine that collective arbitration was available despite the pilots’ agreements’ silence on the issue.  But again, this was for the arbitrator, and not the court, to decide.

At a minimum, JetBlue serves as an important reminder to employers operating in New York County (and likely elsewhere) that, should they decide to require mandatory arbitration (and whether they should is a matter for another day), they must carefully draft their agreements to preclude not just class arbitration, but collective arbitration as well.

Lastly, employers should also be aware that members of both houses of congress have introduced legislation entitled the Arbitration Fairness Act (Senate version here; House version here) that would effectively ban employers from including mandatory arbitration provisions in most employment agreements (and other types of agreements), like the ones at issue in JetBlue and Stolt-Nielsen.  The chance of this Act passing the House of Representatives is minimal at this point, but as reported recently in the Los Angeles Times, “supporters say the groundwork is being laid for passage down the road.”  We will keep you posted on any further legislative developments and developments in the case law.

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Martha Zackin