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Jock et al. v. Sterling Jewelers Inc.

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by Michele L. Jacobson, Esq., Royce F. Cohen, Esq.

Date Promulgated: July 1, 2011

Issues Decided: Whether a district court has the authority to vacate an arbitration award where it believes that the arbitrator improperly interpreted the terms of the arbitration agreement?

In Jock v. Sterling Jewelers Inc., the Second Circuit reversed the judgment of the district court vacating an arbitration award, and remanded the decision with instructions to confirm the award. The Plaintiffs, a group of employees of defendant Sterling Jewelers, Inc. (“Sterling”) appealed from an order of the United States District Court for the Southern District of New York (Rakoff, U.S.D.J.) vacating an arbitration award on the ground that the arbitrator had exceeded her authority in light of the United States Supreme Court’s decision in Stolt–Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). The Second Circuit Court of Appeals held that: (1) the district court did not have authority to vacate an arbitration award where it believed that the arbitrator had improperly interpreted terms of arbitration agreement; and (2) the arbitrator did not exceed her authority in determining that an arbitration agreement permitted employees to proceed with their effort to certify a class in arbitration proceedings against the employer. Jock, 646 F.3d at 127. Sterling filed a petition for rehearing en banc, which was denied on September 6, 2011.

In May 2005, plaintiff Laryssa Jock filed an action with the Equal Opportunity Employment Commission (“EEOC”) under Title VII, the Equal Pay Act (“EPA”), and the Age Discrimination in Employment Act (“ADEA”) alleging that Sterling’s discriminatory promotion and compensation policies denied promotional opportunities to qualified female employees and paid female employees less than male employees performing the same work. Id. at 115. Eighteen other female employees filed similar charges against Sterling before the EEOC. Id.

Jock and the other employees simultaneously initiated dispute resolution procedures pursuant to their employment contracts, which mandated a three-step alternative dispute resolution program known as RESOLVE. Id. The RESOLVE dispute resolution process lacked an explicit authorization permitting class arbitration. Id. at 116.

In March 2008, Jock and other female employees (the “Plaintiffs”) filed a class arbitration complaint with the AAA, asserting the same allegations and challenging the same practices. Id. The parties submitted to the arbitrator the question of whether the RESOLVE agreement permitted or prohibited class arbitration. Id. In its brief, Sterling asked the arbitrator to “find … [t]hat RESOLVE does not allow for class arbitration.” Id. The Plaintiffs conversely asked the arbitrator to “find that the RESOLVE Arbitration Agreements at issue permit class arbitration.” Id. The arbitrator found in favor of the Plaintiffs, holding that the RESOLVE arbitration agreements “cannot be construed to prohibit class arbitration.” Id.

The arbitrator construed the absence of an express prohibition on class claims against the contract’s drafter, Sterling. Id. at 117. The arbitrator noted that the issue of intent was “problematic in the context of a contract of adhesion.” Id. “Because this contract was drafted by Sterling and was not the product of negotiation, it was incumbent on Sterling to ensure that all material terms, especially those adverse to the employee, were clearly expressed.” Id. She also found that merely agreeing to the RESOLVE process could not constitute a waiver of the employee’s right to participate in a collective action. Id. Finally, the arbitrator concluded that “[t]he RESOLVE arbitration agreements cannot be construed to prohibit class arbitration,” which thus permitted the Plaintiffs to proceed and pursue their claims on a class-wide basis. Id. The arbitrator allowed the parties to move in the district court to confirm or vacate that determination. Id.

Sterling moved to vacate the arbitration award. Id. The district court initially denied the motion to vacate the award. Id. Sterling appealed the district court’s order denying its motion to vacate the award or, in the alternative, stay the arbitration. Id. at 118. Three months later, the United States Supreme Court issued its decision in Stolt–Nielsen prompting Sterling to move in the district court for relief from its earlier order. Id.

The district court concluded that, in light of the Supreme Court’s decision in Stolt–Nielsen, “the arbitrator’s construction of the RESOLVE agreements as permitting class certification was in excess of her powers and therefore cannot be upheld.” Id. citing Jock v. Sterling Jewelers, Inc., 725 F. Supp. 2d 444, 448 (S.D.N.Y. 2010). The district court first held that the arbitrator’s approach — determining whether there was any indication of an intent to preclude class arbitration — “was plainly incompatible with the Supreme Court’s subsequent pronouncements in Stolt–Nielsen.” Id. Then, addressing the issue whether the record “evince[d] the parties’ shared intent to permit class arbitration,” the court found the record devoid of any such indication. Id. The district court granted Sterling’s motion to vacate the arbitrator’s award permitting class arbitration. Id. Plaintiffs appealed that ruling.

The Second Circuit reviewed the Supreme Court’s decision in Stolt–Nielsen v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010). In Stolt-Neilson, the parties submitted the question of the permissibility of class arbitration to the arbitration panel. In connection therewith, the parties stipulated that the arbitration clause was “silent” with respect to class arbitration. Id. at 119 citing 130 S. Ct. at 1766. The arbitration panel held that the arbitration clause allowed for class action arbitration. Id. The petitioners filed an application to vacate the award in the United States District Court for the Southern District of New York. Id. The district court vacated the award, the Second Circuit reversed, and the Supreme Court granted certiorari to decide the issue “whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the [FAA].” Id. citing 130 S. Ct. at 1764. The Supreme Court found that a “party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Id. at 121 citing 130 S. Ct. at 1775 (emphasis in original).

The Second Circuit emphasized that the Supreme Court’s “interpretation of the parties’ ‘silence’ [was] key” to its decision in Stolt-Nielson. Id. at 120. The Second Circuit highlighted the fact that the Supreme Court declined to hold that an arbitration agreement must expressly state that the parties agreed to class arbitration. Thus, the Second Circuit determined that the Supreme Court found “the question as being whether the parties agreed to authorize class arbitration” and held that “where the parties stipulated that there was ‘no agreement’ on this question, it follows that the parties cannot be compelled to submit their dispute to class arbitration.” Id. at 121 (emphasis in original). Stolt–Nielsen, therefore, did not “foreclose the possibility that parties may reach an ‘implicit’- rather than express – ‘agreement to authorize class-action arbitration.’” Id. at 123 citing Jock, 725 F. Supp. 2d at 449 (quoting Stolt–Nielsen, 130 S. Ct. at 1775).

The Second Circuit next turned to whether the arbitrator’s award was properly vacated by the district court. The Second Circuit noted that “[a]s the Supreme Court emphasized in Stolt–Nielsen/, vacating an arbitration award requires the moving party to “clear a high hurdle,” and “[i]t is not enough … to show that the panel committed an error—or even a serious error. It is only when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice that his decision may be unenforceable.” Id. at 122 citing 130 S. Ct. at 1767.

The Second Circuit held that the arbitrator was acting within her authority when she concluded – after being requested by the parties to decide the issue – that the arbitration agreement between Sterling and the Plaintiffs manifested an intent to permit for class arbitration. Id. at 124. The Court decided that by “re-examining the record to determine the question that the arbitrator had already decided—whether the parties intended to permit arbitration of class claims—the district court substituted its legal reasoning for the arbitrator’s.” Id. The Court emphasized that the record dictated that the arbitrator “operated within the bounds of her authority in reaching her decision.” Id.

Finally, the Second Circuit found that Sterling’s interpretation of Stolt–Nielsen was not persuasive. Id. at 125. Sterling had attempted to equate the lack of an express agreement with a lack of intent to agree to class arbitration. Id. The Second Circuit found that this analysis “misse[d] the mark” because it relied upon a justification that Stolt–Nielsen Court did not advance. Id. The Second Circuit reiterated that Stolt–Nielsen did not hold that the intent to agree to class action arbitration must be acknowledged explicitly in the arbitration agreement. Id. at 125-126 citing Stolt–Nielsen, 130 S. Ct. at 1776 n.10. The Second Circuit reinforced that the Supreme Court’s decision to vacate the arbitration award in Stolt–Nielsen was based on the fact that the arbitration award went beyond the terms of the agreement and governing law, and that the panel relied on public policy grounds to support its finding that the arbitration agreement permitted class arbitration, despite the parties’ stipulation that the agreement was silent on that score. Id. at 126 citingStolt–Nielsen, 130 S. Ct. at 1767–68. The Court found that none of those factors existed in this case. Id.

The Court held that “[w]hether the arbitrator was right or wrong in her analysis, she had the authority to make the decision, and the parties to the arbitration are bound by it.” Id. at 127. Accordingly, the Second Circuit reversed the judgment of the district court vacating the arbitration award, and remanded with instructions to confirm the award. Id.

Circuit Judge Winter dissented on the grounds that the issue in Stolt–Nielsen was, in the Supreme Court’s words, “‘whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the [FAA].’” Id. at 129 citing Stolt–Nielsen, 130 S. Ct. at 1764. Concluding that that was precisely the issue in this case, Judge Winter argued that the Second Circuit should have followed the Supreme Court’s precedent and affirmed the judgment of the district court vacating the arbitration award. Accordingly, Judge Winter dissented.