5 minute read | April.13.2012
The final installment of our series regarding the good, bad and ugly of recent arbitration decisions is – you guessed it – ugly. Jock v. Sterling Jewelers, Inc., 646 F. 3d 113 (2d Cir. 2011), a Second Circuit decision that the Supreme Court declined to review last month, is notable for its disappointing discussion of the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). In Stolt-Nielsen, the Supreme Court clarified that where an arbitration agreement is “silent” regarding the permissibility of class-wide arbitration, an arbitrator exceeds her authority if she imposes class arbitration on the parties. The Second Circuit’s discussion of Stolt-Nielsen, while dicta, is troublesome because of its extremely narrow view of when an arbitration agreement is “silent” on the issue of class-wide arbitration.
Sterling Jewelers, a putative class action asserting claims of gender discrimination, stemmed from an arbitrator’s determination that the defendant’s “RESOLVE” dispute resolution program did not prohibit the arbitration of plaintiffs’ claims on a class-wide basis. The arbitrator hinged her decision on the fact that the arbitration agreement (1) was drafted by the defendant and was a condition of the plaintiffs’ employment (and, therefore, was to be construed against the employer under applicable Ohio law); (2) contained no express prohibition of class-wide arbitration; and (3) gave the arbitrator “the power to award any types of legal or equitable relief that would be available in a court of competent jurisdiction.” Given these facts, the arbitrator declined to read into the contract a prohibition on class arbitration, which in turn cleared the way for plaintiffs to move for certification of a class before the arbitrator. Notably, the arbitrator rendered her decision in Sterling Jewelers before the Supreme Court decided Stolt-Nielsen.
The defendant sought to vacate the arbitrator’s decision in the Southern District of New York, but the district court affirmed and the defendant appealed to the Second Circuit. While the defendant’s appeal was pending, the Supreme Court issued its decision in Stolt-Nielsen, which prompted the Second Circuit to hold the appeal in abeyance while the district court reconsidered the issue. Relying on Stolt-Nielsen, the district court then vacated its prior opinion and issued an order vacating the arbitrator’s decision. The district court held that that the parties’ arbitration agreement contained no evidence of an agreement to permit class-wide arbitration of disputes, and that the agreement was therefore “silent” on the issue and could not be a basis for implementing class arbitration under Stolt-Nielsen.
On appeal, the Second Circuit reversed and held that the district court erred by reviewing the legal correctness of the arbitrator’s determination, rather than whether the arbitrator exceeded her authority in making her determination – the only applicable basis on which her decision could be vacated under the Federal Arbitration Act (“FAA”). In so holding, the Second Circuit emphasized that the parties acknowledged disagreeing over whether the arbitration clause allowed for class-wide arbitration, and that, for this reason, they submitted the issue to the arbitrator for determination. Given these circumstances, the court found that the arbitrator had clearly “operated within the bounds of her authority” in reaching her decision. The court further noted that “under our precedent it is not for the district court to decide whether the arbitrator ‘got it right’ when the question has been properly submitted to the arbitrator and neither the law nor the agreement categorically bar her from deciding that issue.”
In and of itself, the core holding of the Second Circuit’s decision in Sterling Jewelers is not especially notable, as it pertained exclusively to whether the arbitrator exceeded her authority in determining that the parties’ arbitration agreement did not prohibit arbitration on a class-wide basis. As the Second Circuit observed, the issue was not whether the arbitrator “got it right.”
However, the Second Circuit infused its decision in Sterling Jewelers with an extensive discussion of Stolt-Nielsen that – while dicta – is troubling for employers intending to rely on that decision as a basis for avoiding class-wide arbitration. The most notable aspect of the court’s discussion was its rejection of the district court’s reliance on Stolt-Nielsen as a basis for holding that the parties’ arbitration agreement was “silent” regarding class arbitration. Stolt-Nielsen, the court noted, involved an agreement that was “silent” regarding class arbitration in the truest sense of the word: it expressed no opinion on the issue, and the parties in that case agreed that they intended for the agreement to be silent on the issue. The Second Circuit viewed the arbitration agreement at issue in Sterling Jewelers, on the other hand, as not truly “silent” on this issue because the parties clearly disputed whether its terms authorized or prohibited class arbitration. Indeed, the court observed that while the arbitration agreement in Sterling Jewelers did not contain any language expressly addressing class arbitration, it did contain language that could be read to implicitly authorize class arbitration. The court then cited to language in Stolt-Nielsen that, it noted, suggested that an arbitration agreement may authorize or prohibit class arbitration implicitly, rather than explicitly. On this basis, the court observed that nothing in Stolt-Nielsen prohibits an arbitrator from determining that an arbitration agreement devoid of any express language regarding class arbitration – such as the agreement at issue in Sterling Jewelers – implicitly authorizes or prohibits class arbitration.
The Sterling Jewelers view of Stolt-Nielsen should give employers pause, particularly in the Second Circuit. Indeed, should this view become the law, arbitration agreements lacking any express pronouncements regarding the permissibility of class arbitration could nonetheless be read to implicitly authorize class arbitration. To many observers (including this one), this would seem to fly in the face of Stolt-Nielsen and confine the universe of arbitration agreements that are “silent” regarding class arbitration to only those that are “expressly silent.”
The good news is that the Sterling Jewelers court’s discussion of Stolt-Nielsen is dicta. The Second Circuit went out of its way to clarify that it did not express a “disposition” regarding the correct interpretation of Stolt-Nielsen, and that the “thrust” of its decision pertained to whether the district court “applied the appropriate level of deference when reviewing the arbitration award.” Perhaps for this reason, the Supreme Court declined to grant the defendant’s petition for writ of certiorari in Sterling Jewelers. In any event, Sterling Jewelers is yet another cautionary tale for employers in the ever-changing world of arbitration.
Stay tuned for further developments.