Samuel Estreicher and Holly H. Weiss

The U.S. Supreme Court recently rejected a challenge under Section 7 of the National Labor Relations Act, 29 U.S.C. §§151, 157, to the enforceability of class and collective action waivers in arbitration agreements in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018). A case pending in the Second Circuit, Jock v. Sterling Jewelers, 284 F. Supp. 3d 566 (S.D.N.Y. 2018), appeal docketed, No. 18-153 (2d Cir. Jan. 18, 2018), will address a related question: the validity of an arbitrator's certification of a class including members who did not affirmatively opt in to the class.

In Jock, employees of Sterling Jewelers had signed virtually identical arbitration agreements (called the “RESOLVE” agreement or program) as a condition of employment. The agreements granted the arbitrator a number of substantive and procedural powers to oversee the resolution of employees' claims against the company. After a number of female employees attempted to sue Sterling in a sex discrimination pay and promotion class action in district court (S.D.N.Y.), Sterling successfully moved to compel arbitration. Subsequently, the arbitrator issued a Class Determination Award that included more than 70,000 absent class members. Sterling challenged this determination by filing a motion to vacate the Class Determination Award in district court before Judge Rakoff.

The proceedings are complicated, but Sterling essentially made two principal arguments: (1) the arbitrator lacked the authority to convene a class arbitration proceeding under Stolt-Nielsen v. AnimalFeeds Int'l, 559 U.S. 662 (2010), in which the Supreme Court held that silence on the issue was not sufficient and that the parties must specifically contract for class arbitration; and (2) in any event, absent class members had never submitted to the arbitrator's authority or presented the question of whether the arbitration agreement allowed class arbitration (as opposed to individual arbitration). In its Jan. 15, 2018, decision, the district court ruled for Sterling on both grounds. On the first ground, relying on a prior ruling, Judge Rakoff determined “it is the law of the case that the Arbitrator does not have the authority based on the agreement to certify a 70,000 person class,” and “[t]hus, those individuals who did not affirmatively opt in to the class proceeding here did not agree to permit class procedures by virtue of having signed RESOLVE agreements, which were identical to the one signed by all class members.” (Emphasis in original.)

On the second ground, the court held that “the Arbitrator here had no authority to decide whether the RESOLVE agreement permitted class action procedures for anyone other than the named parties who chose to present her with that question and those other individuals who chose to opt in to the proceeding before her.” Judge Rakoff reasoned that because the arbitrator lacked authority to permit opt-in class arbitration, “it is hard to see how courts could bind individuals who did not opt out, but who have not otherwise opted in, to her decisions. After all, arbitrators are not judges. Nowhere in the Federal Arbitration Act does Congress confer upon these private citizens the power to bind individuals and businesses except in so far as the relevant individuals and businesses have bound themselves.”

The plaintiffs-appellants in Jock argue the district court failed to address the arbitrator's central reason for finding the inclusion of absent class members appropriate here—namely, her conclusion that “all members of the RESOLVE Program had consented in advance to her deciding class-arbitrability and related issues under the precise circumstances presented in this case.” (Br. for Plaintiffs-Counter-Defendants-Appellants 18.) Moreover, the district court failed to address the fact that “Sterling's express and repeated submission of the class-certification question and related issues to the arbitrator at least bound Sterling, regardless of any question about the effect of the arbitrator's judgment on hypothetical objecting class members.” (Id.; emphasis in original). In essence, plaintiffs-appellants contend that Sterling is attempting to relitigate the arbitrator's determination that she had the authority to certify a class including absent class members in the arbitration proceedings. The plaintiffs point to the procedural history of the arbitration  proceeding to show that Sterling, in the first stages of arbitration with the plaintiffs, had explicitly requested that the arbitrator resolve the question of whether a class arbitration would be permissible under the RESOLVE agreement, and did not prevail.

Sterling as appellee bases its arguments on the absent parties' lack of consent to the arbitration. It urges that the arbitrator exceeded her authority in certifying the absent class members because those absent members never consented to the arbitrator's authority, nor had the opportunity to present to her the question of whether the dispute resolution agreement they signed allows class arbitration. In sum, Sterling argues that the absent class members did not consent to the arbitrator's determinations; because of this lack of consent, the arbitrator lacked the authority to make a determination of their ability to bring claims as a class that would be binding on them.

In Epic Systems Corp., the Supreme Court did not address the extent of an arbitrator's authority in connection with class arbitration. The Supreme Court in Stolt-Nielsen held that arbitrators lack authority under the FAA to engage in class arbitration proceedings unless the parties have so agreed. Following this reasoning, the Second Circuit may find that the fact that the Jock plaintiffs agreed to arbitration does not necessarily open the door to class arbitration by absent class members, leading Sterling to prevail.

Samuel Estreicher is the Dwight D. Opperman Professor and Director of the Center for Labor and Employment Law at New York University School of Law. Holly H. Weiss is a partner at Schulte Roth & Zabel.