Can ‘class arbitration’ even be legally mandated?

For all of the wage and hour class action cases in recent years which have addressed whether certain claims can be arbitrated on a class-wide basis, one overriding question has not been directly addressed in any reported case: that is, whether a "class action arbitration" can even be legally maintained to begin with. A July 24 decision of the 2nd U.S. Circuit Court of Appeals, Jock v. Sterling Jewelers, pointedly suggests that it cannot, unless class members choose to opt in to the arbitral proceeding.

Jock has run a tortuous course through the courts, having been commenced in 2008 by a group of female employees who claimed discrimination in their employer's compensation and promotional practices. The federal district court in New York referred the case to an arbitrator to determine whether the parties' arbitration agreement provided for class arbitration, and the arbitrator found that it did. The district court vacated that award, but the 2nd Circuit reversed its decision and ordered the court to confirm the award. Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2nd Cir. 2011). The appellate court's most recent ruling followed another ruling of the district court, reported at 143 F.Supp.3d 127 (S.D. N.Y. 2015), in which the court vacated the arbitrator's award certifying an opt-out class for class-wide injunctive relief.

In a summary order, the 2nd Circuit stated that the issue was whether the arbitrator had the authority to certify a class which included absent class members. It stated that its initial decision "did not squarely address the issue of whether the arbitrator had the power to bind absent class members given that they, unlike the parties ... never consented to the arbitrator determining whether class arbitration was permissible under the agreement in the first place." The court therefore vacated and remanded the case to the district court for further consideration of whether the arbitrator "exceeded her authority in certifying a class that contained absent class members who did not opt in."

The foundation for this approach can be found in Justice Samuel Alito's concurring opinion in Oxford Health Plans, LLC v. Sutter, 133 S. Ct. 2064, 2070 (2013), wherein he stated that it was uncertain whether absent class members would be bound by a class arbitration award if "they have not submitted themselves to the arbitrator's authority in any way." Alito based this conclusion on the U.S. Supreme Court's prior acknowledgement that arbitration "is a matter of consent, not coercion," and that an arbitrator "may employ class procedures only if the parties have authorized them," citing Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989).

Not stopping there, Alito squarely rejected the contention that the distribution of opt-out notices would cure this "fundamental flaw in the class arbitration proceeding." He stated that: "'[A]rbitration is simply a matter of contract between the parties,' First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995), and an offeree's silence does not normally modify the terms of a contract, 1 Restatement (Second) of Contracts § 69(1) (1979). Accordingly, at least where absent class members have not been required to opt in, it is difficult to see how an arbitrator's decision to conduct class proceedings could bind absent class members who have not authorized the arbitrator to decide on a classwide basis which arbitration procedures are to be used."

This theory of non-arbitrability of class claims has gained traction in at least two federal appeals courts, and has not been rejected by any. In enumerating an expansive list of reasons why class arbitration should be viewed with skepticism, the 6th Circuit referred to the fact that there are due-process concerns once an arbitration is expanded class-wide, because the arbitrator's award then no longer purports to bind just the parties to a single arbitration agreement but "adjudicates the rights of absent parties as well." Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, 734 F3d 594, 598 (6th Cir. 2013). Similarly, in Opalinski v. Robert Half Inter., Inc., 761 F.3d 326, 333 (3rd Cir. 2014) the 3rd Circuit followed Alito's reasoning in stating that absent class members "similarly have a right to determine with whom they arbitrate, and might not be bound absent an opt-in procedure evincing consent to have an arbitrator resolve their claims in a class proceeding."

The 2nd Circuit's most recent decision in Jock is consistent with these authorities and may signify the beginning of the end of top-down, opt-out class arbitrations in employment cases. Opt-out procedures are largely a product of the California Rules of Court, which are not binding on arbitrators, and there can be no basis for concluding that someone who never received an opt-out notice could be bound to a class arbitration award of which they were never even aware. To this end, two parties can agree that their class arbitration award can be binding on all of a company's former employees or the king of England, but that would obviously not legally bind either of those parties without their knowledge or consent. Quite simply, the consensual nature of bilateral arbitration is simply too problematic to justify anything other than an opt-in class procedure in this situation, and the failure to recognize this will likely lead to more decisions like Jock which threaten the viability of an arbitral opt-out class.