In July 2011, the Second Circuit issued an opinion supporting an arbitrator's interim Clause Construction Award finding that an arbitration agreement permitted class arbitration of employment disputes. The opinion is surprising because of its efforts to distinguish, and apparently clash with, Stolt-Nielsen, S.A., v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). Practitioners who believe that Stolt-Nielsen precludes class arbitration when the arbitration agreement is silent on the topic may be dismayed with the Second Circuit’s rationale. Before turning to the Second Circuit’s opinion in Jock v. Sterling Jewelers, Inc., 2011 U.S. App. LEXIS 13633 (2d Cir. July 1, 2011), we should review Stolt-Nielsen.
Stolt-Nielsen: Class Arbitration Requires That The Parties Agree To Class Treatment.
In April 2010, the Supreme Court addressed whether an arbitration panel could conclude that antitrust claims were subject to class treatment when the arbitration agreement was silent on that topic. Stolt-Nielsen, the parties agreed that, when a contract is silent on an issue, the parties have not reached agreement on that issue. 130 S. Ct. at 1766. Because that claimant sought to bring its claims as a class action, the arbitrators had to determine whether the Federal Arbitration Act, federal maritime law, or New York law established an intent to permit class treatment even though the arbitration agreement was silent on the issue. Id. at 1768. Rather than pointing to a specific legal principle of those bodies of law that would imply such intent, however, the arbitration panel reached its own public policy determination to create a rule permitting class treatment in such situations. Id. at 1769.
The Supreme Court rejected the arbitration panel’s approach because "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." Id. at 1775. The arbitration panel erred by evaluating whether the parties intended to preclude class arbitration; rather, the proper inquiry is whether the parties intended to permit class arbitration. "An implicit agreement to authorize class-action arbitration, however, is not a term that an arbitrator may infer solely from the fact of the parties' agreement to arbitrate." Id. at 1775. The Court discussed several of the significant differences between bilateral arbitration and class action arbitration to emphasize that agreeing to arbitrate claims with one opponent is not a basis to infer an agreement to arbitrate claims of perhaps dozens or hundreds of opponents advancing similar theories. Id. at 1776. “[W]e see the question as being whether the parties agreed to authorize class arbitration. Here, where the parties stipulated that there was 'no agreement' on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration." Id.
Thus, Stolt-Nielsen made clear that parties cannot be compelled to arbitrate disputes classwide unless they intended to do so, and an arbitrator or court cannot infer such intent merely because an arbitration agreement exists.
Jock: The Second Circuit Grants Unprecedented Latitude For An Arbitrator To Infer An “Intent” To Agree To Classwide Arbitration.
In Jock, a divided panel of the Second Circuit ruled that an arbitrator correctly concluded that the parties' silence on the issue of class arbitration amounted to an agreement to permit such proceeding. Jock is a Title VII discrimination suit brought by 12 employees of Sterling Jewelers. Each of the employees signed an employment agreement with an arbitration clause. Each acknowledged waiving her rights to commence any court action, though the agreement specified that the arbitrator "shall have the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction..." 2011 U.S. App. LEXIS 13633, *7.
The arbitration agreements did not expressly prohibit class claims and, indeed, did not mention class claims at all. Id. at *7-8. The arbitrator concluded that the agreements "cannot be construed to prohibit class arbitration," so she moved to determining whether class treatment was appropriate. Id. at *7 (internal quotations omitted). Applying a Ohio law, "the arbitrator determined she would not read into the agreement an intent to prohibit class claims because [t]he law will not insert by construction for the benefit of one of the parties an exception or condition which the parties either by design or neglect have omitted from their own contract." Id. at *8 (internal quotations omitted). Because the employer drafted the arbitration agreement, the employer had the burden of clearly expressing all material terms, particularly those adverse to the employee. Interpreting the agreement to prohibit class claims would impermissibly infer a term benefiting the employer even though the employer omitted it. Id. at *9.
The majority of this panel of the Second Circuit went to great pains to distinguish Stolt-Nielsen and to conclude that the district court could not properly vacate the arbitrator’s clause construction award. Rather, the district court’s review was circumscribed to two issues: "first, whether the parties had submitted to the arbitrator the question of whether the arbitration agreement permitted class arbitration and, second, whether the agreement or the law categorically prohibited the arbitrator from reaching that issue." Id. at *27. The lack of an explicit agreement to permit class arbitration was not the same as stipulating (as done in Stolt-Nielsen) that parties had not reached agreement on the issue. Instead, "the arbitrator was acting within her authority when she concluded that the arbitration agreement between Sterling and the plaintiffs manifested an intent to allow for class arbitration because the issue was properly before her having been placed there by the parties. In addition, she had a colorable justification under Ohio law to reach the decision she did, to wit, Ohio law does not bar class arbitration." Id. at *30-31. Denying plaintiffs the ability to seek classwide relief "would deny them access to at least one type of legal or equitable relief available to them in court—namely, certification to pursue classwide relief." Id. at *37. Because the arbitration agreement guaranteed all remedies and rights that would be available in court, the arbitrator could conclude the parties intended to permit class arbitration. Id. at *38-39.
Is Jock Ignoring Stolt-Nielsen?
The majority’s opinion seems to contradict Stolt-Nielsen in important respects. While the Supreme Court’s opinion emphasized the need to determine whether the parties intended to permit class arbitrations, the Second Circuit stands that rationale on its head. Under Jock, if the arbitration agreement does not prohibit class treatment, an arbitrator may infer an intent to permit class treatment. After all, the party that prepared the arbitration agreement could have precluded class treatment if it had intended to do so. Of course, this ignores the significant differences between class treatment and bilateral arbitrations that Supreme Court noted in Stolt-Nielsen.
Moreover, the notion that Ohio law implies that right to class arbitration reaches too far. Neither the arbitrator nor the majority of the Second Circuit pointed to any particular provision of Ohio law endorsing, authorizing, or requiring class treatment in arbitration agreements or employment disputes. Again, to interpret general principles of Ohio contract law to amount to an intent to permit class arbitrations effectively means that silence on the topic evidences that intent. If any state’s law is interpreted to permit an aggrieved party to seek class treatment no matter what the claims, then an arbitrator may conclude that the parties intended to permit class arbitrations if the agreement does not prohibit such proceedings.
A particularly notable flaw of the majority’s opinion is the idea that class treatment is a type of legal or equitable relief. This arbitration agreement guaranteed that the arbitrator could issue any type of legal or equitable relief that would be available in court; thus, the majority reasoned that the arbitrator correctly interpreted an intent to permit class treatment. That is, class treatment is a type of legal or equitable relief that would be available in court, so it also must be available in arbitration. Of course, this ignores that class treatment is a procedural tool and not a substantive right or remedy. "Relief" is synonymous with "remedy", with the former generally referring to court of equity and the latter to courts of law. E.g., Bryan A. Garner, A DICTIONARY OF MODERN LEGAL USAGE 752 (2d ed. 1995). Relief or a remedy is the device to make a party whole or to prevent further injury. This could be damages, an injunction, declaratory judgment, etc. Class treatment, however, provides no "relief" by itself. It is merely a procedural tool that allows the aggregation of a large number of separate plaintiffs' claims to be adjudicated in a more convenient and efficient manner. Like all rules, Rule 23 cannot "abridge, enlarge, or modify any substantive right" (28 U.S.C. § 2072(b)), but Jock treats it as a remedy that is a substantive right. Equating class treatment to "relief" or a "remedy" is error. It is akin to concluding that arbitration must allow motions for relief from awards because Rule 60 allows parties to move for relief from judgments.
Practice In Light Of Jock.
The Second Circuit often has seemed to be at odds with the Supreme Court when it comes to arbitration issues. The Ninth Circuit also has a similar reputation. Practitioners cannot rely on Stolt-Nielsen to ensure that claims will not proceed on a class basis in arbitration when the arbitration agreement is silent on the topic. It seems that some courts and arbitrators disagree with the Supreme Court’s recent opinions regarding arbitration and class actions, so plaintiffs' counsel may find sympathetic audiences when arguing that recent Supreme Court jurisprudence does not limit their cases. Anyone drafting an arbitration provision should continue specifying that claims cannot be brought on a class or representative basis. This is particularly true considering that Stolt-Nielsen addressed two commercial entities rather than individuals opposing a commercial entity. Indeed, that alignment of the parties in Stolt-Nielsen may prove to be another distinguishing factor that some courts rely on when concluding that class arbitration of consumer or employment claims is appropriate.
In addition, practitioners must be cautious when including choice of law provisions in their agreements. It may not be practical to choose law other than the jurisdiction in which the employee works, the customer receives services, or the client sells products. Indeed, choosing the law of a forum unrelated to the parties' transaction or in a manner that appears to be overreaching by the party drafting the agreement is not advisable. Nonetheless, evaluate the applicable forum's law regarding implied terms and assess whether that law affects class treatment. You may need to carve out an exception in the choice of law provision to clarify that, while the law of State X governs, that does not include any implied right to class, representative, or aggregate claims.