In the last few years, the legitimacy and reach of arbitration and arbitration clauses have been considerably expanded by the U.S. Supreme Court. Three in particular interest me because they related to my own practice emphasis: 14 Penn Plaza, Rent-a-Center, and Stolt-Nielsen. This blog will discuss their basic holdings and why they are significant in the larger scheme of arbitration.
In 14 Penn Plaza, the Court held that provisions in a CBA that clearly and unmistakably require union members to arbitrate age discrimination claims are enforceable as a matter of federal law. Id. at 1463-1474. In so concluding, the Court reviewed and considered earlier law, including Gilmer v. Interstate/Johnson Lane Corp., 500 US 20 (1991), and Alexander v. Gardner-Denver Co., 415 US 36 (1974). Gilmer was decided in the non-union context, and there the Court enforced the applicability of an employment contract arbitration clause to a claim for age discrimination. In contrast, Alexander was decided in the union context, and in it the Court noted that the arbitration forum was “ill suited” to address ADEA claims. However, as the Court pointed out in 14 Penn Plaza, the Alexander decision merely concluded an employee was not a priori prohibited from subsequently pursuing ADEA claims in federal court after arbitration.
The 14 Penn Plaza Court rejected arguments that the arbitration clause was “outside the permissible scope of the collective bargaining process because it affects the “employees’ individual, non-economic statutory rights.” Id. at 1464. Instead, the Court reasoned, the CBA’s arbitration provision must be honored unless the ADEA itself removes this particular class of grievances from the NLRA’s broad sweep.” Id. at 1465. Additionally, the Court pointed out that Alexander’s “broad dicta” that was “highly critical of the use of arbitration for the vindication of statutory antidiscrimination rights[,] … rested on a misconceived view of arbitration that this Court has since abandoned.” 14 Penn Plaza at 1469.
This refutation or denial of Alexander was highly criticized by a close minority, and widely signaled a dramatic shift in the Court’s thinking regarding arbitration. Thereafter, in Rent-a-Center, West, Inc. v. Jackson, 130 S.Ct. 2772 (2010), the Court rejected claims that the courts should decide whether an arbitration agreement, which applied to “claims for discrimination” and “claims for violation of any federal … law,” was unenforceable as unconscionable. Id. at 2774. Specifically, the Court rejected the Ninths Circuit’s reasoning, made without oral arguments no less, that the arbitrator was not permitted to decide the enforceability of the contract as provided in the unchallenged “delegation” or gateway clause, because claims that an agreement is unconscionable should be decided in the first instance by the courts. Recall that the general rule at this time was, and continues to be, that if an agreement to arbitrate includes an agreement that the arbitrator will determine the enforceability of the agreement in the first instance, the district court only hears challenges to the enforceability of that “gateway” or “delegation” clause, and the arbitrator will hear challenges to the enforceability of the overall agreement. Id. at 2776-81.
This ruling may seem innocuous and uninteresting to some, in that it merely reminds us of the High Court’s disinclination to allow the parties to derail the arbitration process by piecemeal litigation. However, to me it represents a stern rebuke to the Circuit Courts for permitting the principal of arbitration efficiency to be undermined for an innovative but inapposite legal theory.
Finally, in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010)—actually issued the day after Rent-a-Center was argued—the Court issued several rulings that at first blush may seem counter-intuitive to the emergent trends already discussed. The Court concluded as a threshold issue that the arbitration award was ripe for judicial review; it also concluded that the arbitrators exceeded their authority by imposing class arbitration on the parties. The former ruling may seem inconsistent with the proposition that arbitration matters should not be lightly or too quickly taken to court. However, if a party was correct that the arbitrators had no authority to require class arbitration under the circumstances, and that party did not consent to proceed with arbitration, the arbitration would essentially be ultra vires. Stolt-Nielsen at n. 2. The second ruling may also seem curious to some—after all, if a little arbitration is good, would not a lot be that much preferable? However, it doesn’t work quite that way.
Another touchstone of arbitration is that it is the product of the parties’ agreement. As the Court noted, it “is a matter of consent, not coercion.” Id. at 1773. As such, the arbitrators’ authority is limited to interpreting the contract and the parties intent and expectations at the time of making that contract, and they are not authorized to make public policy.* Id. at 1767. Similarly, “a party may not be compelled … to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Id. at 1775 (emphasis added). Here, the parties agreed the contract was silent on the issue of class arbitration; therefore, nonetheless imposing it was inconsistent with the Federal Arbitration Act.**
Moreover, “class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.” While parties gain efficiency and lower costs in bi-lateral arbitration, in class arbitration without clear consent there is an exponential increase in the risk of increasing costs and ancillary litigation.
All in all, a rich mine of arbitration related decisions from the Supreme Court for future guidance and/or challenges…
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Notes.
* The Court also made the observation that it is for this reason that it is suspect when an arbitrator relies too heavily on arbitral awards. Specifically, the Court states that such reliance in this case “confirms that the panel’s decision was not based on a determination regarding the parties’ intent,” since the cases were decided based on rules that were not available when the parties entered into the existing contract. Id. at n. 4.
** The Court also concluded the arbitration panel erroneously relied on Green Tree Financial Corp. v. Bazzle, 539 US 444, 123 S.Ct. 2402 (2003), believing to stand for the holding that an arbitrator, not the courts were required to decide the threshold matter of whether the arbitration clause permits class arbitration. However, Bazzle, like many more liberal Supreme Court majorities today, was actually fractured, and the portion relied on was in fact a mere plurality. Id. at 177
