More than a decade ago, female employees of Sterling Jewelers, Inc. (“Sterling”), a nationwide specialty jeweler, filed a class action alleging that Sterling discriminated against them in pay and promotion. Since that time, the dispute has been tied up with endless procedural fights about their arbitration agreements and the extent to which these agreements allow for class proceedings.
Yesterday, the Second Circuit issued its latest decision in this ongoing case, and I expect there may be more appeals down the road. Part of the problem is that the Federal Arbitration Act was never designed for class proceedings (or for employment disputes). Also, I don’t understand how a bilateral arbitration agreement between two parties, with no mention of class proceedings, can be interpreted to allow for complex, detailed class procedures potentially impacting the rights of thousands of people. For example, why does a silent arbitration clause automatically mean the parties agreed to incorporate Federal Rule of Civil Procedure 23 into their private proceedings, as opposed to a different variation of a class or collective action rule adopted by a state? Or how can one interpret a silent clause to mean that an arbitration proceeding should involve a mandatory class, an opt-in class, or an opt-out class? In my mind, a silent clause cannot bear the heavy weight of a class action, which raises deep concerns of fairness, due process, and conflicts of interest.
In a nutshell, the Second Circuit held yesterday that the arbitrator had the authority to construe the arbitration clause as permitting class proceedings, and this finding binds not just the named plaintiffs, but also the entire absent class. The arbitrator in this case construed the silent clause as permitting class actions, and this finding now binds the entire absent class under the Second Circuit’s decision. Arbitration is supposed to be a matter of consent, and the court appears to assume that all the other class members have binding, enforceable contracts giving power to this one particular arbitrator to make this determination about class proceedings.
Suppose the arbitrator would have reached the opposite conclusion (that the clause does NOT permit class proceedings). Would the Second Circuit similarly hold that this private arbitral finding now binds the entire absent class, so that every employee must now proceed in individual arbitration? If this one arbitrator finds that class proceedings are not available, it would seem to violate due process to say that this negative finding (no class proceedings) from a private arbitrator binds a class of absent parties who never had notice of the case or the opportunity to present their arguments. Due process concerns are heightened in class proceedings. Unfortunately, most appellate courts have held that due process does not apply in private arbitration proceedings.
I understand that arbitrators generally have jurisdiction to determine procedures and jurisdiction to determine their own jurisdiction. However, this power has been generally limited in application, mainly with respect to the two parties who chose the particular arbitrator. The Second Circuit, without much of an explanation, dramatically expands this arbitral power of one arbitrator to cover thousands of absent class members. The basis for this arbitral power can only be found in the thousands of arbitration agreements from the absent class members, but there has been no verification that these arbitration agreements are actually binding. Legally, after this Second Circuit decision, what stops an arbitrator in future cases from concluding, sua sponte, that other, absent customers or co-workers may have experienced somewhat varying degrees of similar harms and the case between one claimant and one respondent can now proceed as an entire class?
The Second Circuit has created a default rule by which a bilateral contract now has a group or multi-lateral dimension. Suppose that a major company has thousands of customers, and each customer enters into an arbitration agreement that is silent on class arbitration. Under this Second Circuit decision, customer #418 can initiate a private arbitration proceeding against this company and select an arbitrator, and the private arbitrator’s determination whether an agreement permits class proceedings is now purportedly binding on every other customer. It is almost as if each customer or worker is now viewed as an agent of every other customer or co-worker for purposes of these determinations regarding class availability; each individual customer’s or co-worker’s agreement is now magically interconnected or intertwined to give authority to one arbitrator to bind the entire group. When I enter into an arbitration agreement with a major company, the Second Circuit decision suggests that I am in effect agreeing that any other customer or co-worker can initiate private actions that bind me, even though my contract is completely silent as to these complex proceedings and silent regarding my relationship with other customers or co-workers.
The Second Circuit’s decision is troubling because of the expansive powers given to an arbitrator and the court’s assumption that consent exists with every other absent class member. On a daily basis, I see flawed arbitration clauses that are not enforceable for a variety of reasons. For example, an agreement may have not been formed or entered into properly for a particular customer or employee. Also, I have seen companies claim that every customer or employee is bound by an arbitration clause, but the company cannot produce a copy or record or meaningful evidence of the agreement for that particular customer or employee. Even though everyone in a purported class may have the same form contract, with the same language, it is not necessarily true that everyone has a binding, enforceable contract in place. Even though an online and/or hardcopy form contract may look the same for everyone, each employee or consumer may have entered into the contract under different circumstances or methods, with a varying impact on each individual contract’s enforceability. Whether binding agreements exist are determinations reserved for resolution in a court proceeding; section 4 of the FAA guarantees a jury trial if the making of the arbitration agreement is at issue. I have a new article that is about to be published in the Harvard Negotiation Law Review addressing these issues. In this forthcoming article, I propose that whether particular language in a contract allows for class procedures is a determination for an arbitrator to make. However, the issue of whether a particular customer or employee has an enforceable agreement is a different determination reserved for a court if the individual challenges the enforceability of the agreement. If an arbitrator will have the power to bind absent class members, there needs to be some system or mechanism to ensure that valid agreements exist because the agreement is the source of the arbitrator’s power.
The Second Circuit’s decision in this case, Jock v. Sterling Jewelers, No. 18-153 (2d Cir. Nov. 18, 2019), can be found here.