INSIGHT: Class Arbitration—Second Circuit Declines to Pull Plug on Mechanism SCOTUS Largely Scorns

A fundamental question among many concerning the legal viability of “class arbitration” is whether an arbitrator can issue an award that binds a person who is not a party to or otherwise deemed by law bound by the bilateral arbitration agreement upon which the arbitral proceeding and the arbitrator’s authority are founded—e.g., a non-appearing non-party putative class member.

The U.S. Supreme Court has signaled, but not held, that that is a dubious proposition. The Second Circuit recently identified circumstances in which, it opined, the courts may not vacate an arbitral award permitting “class arbitration,” and that award may bind all putative members of a class, including non-appearing non-parties to the controlling arbitration agreement. See Jock v. Sterling Jewelers. That decision is open to criticism.

Arbitration is, seemingly uncontroversially, a creature of contract, binding those who agree to resolve their inter partes disputes by their own privately-created mechanism. The parties to that typically bilateral agreement appoint a particular arbitrator in accordance with it, and that arbitrator derives his/her power to adjudicate from it.

The wishes of one party with respect to the subject matter or procedures of an arbitral proceeding are arguably irrelevant without the consent of its counterparty in the controlling agreement. Or so one thought.

Same Bilateral Agreement With Different Counterparties

But what if Party A has entered into essentially the same bilateral arbitration agreement with many different counterparties? Does that circumstance give an arbitrator in a proceeding based on one bilateral agreement the power to bind other persons—e.g., a person (i) that is not a party to the bilateral agreement that governs in the pending proceeding, but (ii) that is a party to a separate arbitration agreement with Party A having essentially the same terms? That is the Jock case.

In Jock, the Second Circuit reversed the district court’s vacatur of an arbitrator’s “Class Determination Award” where the appellate court determined (i) that the arbitrator was authorized to adjudicate the class arbitrability question in the first instance; and therefore (ii) that the district court’s review of that award was limited by the narrow grounds for vacatur—in this case, as set out in FAA § 10(a)(4)—and a highly deferential standard.

And most significantly, the Second Circuit in effect decided that, in the circumstances, it was not beyond the power of an arbitrator to bind non-signatory “absent class members” to its determination that class arbitration was permitted.

Limited Judicial Review

This decision arguably is as much about the limited judicial review of an arbitral award as about the arbitrability of a purported class action. The former is a narrow path indeed, limited by the few permitted statutory grounds for vacatur and a highly deferential standard of judicial review. (If an award has a colorable basis, it need not be consistent with applicable law.)

Indeed, it is possible that if the arbitrability decision had been by a district court in the first instance, rather than by an arbitrator in the first instance, the court of appeals might have reversed the substantive class arbitrability ruling.

In any case, this decision is significant to any company that uses a form arbitration clause in multiple contracts regarding the same or very similar subject matter. (Employment, consumer, financial, and insurance contracts, etc., of many enterprises indeed are affected.)

It arguably lends urgency to getting one’s form(s) of arbitration agreement in order. For those seeking to assure that their arbitrations will be conducted exclusively as bilateral proceedings, this decision at least illustrates the importance of using a form of arbitration agreement that (i) keeps the class arbitrability determination in the courts in the first instance, and (ii) includes an express prohibition of class and collective arbitration.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information:

Gilbert A. Samberg is a Mintz litigator with extensive experience in complex international and domestic commercial disputes. He focuses on international litigation, arbitration and other cross-border alternative dispute resolution proceedings, and is a regular commentator on current topics in those areas. Among other things, he draws on his science background to assist companies with disputes concerning technical matters of all kinds.