Accepting the Risks of Arbitration Clauses: The Southern District of New York Upholds Arbitrator’s Decision Allowing Class-Wide Arbitration

On January 2, 2019, the Southern District of New York (SDNY) in Wells Fargo Advisors LLC v. Tucker, declined to vacate an arbitrator’s clause construction award, which construed the parties’ arbitration agreement as permitting class-wide arbitration. Importantly, prior decisions from the SDNY and Second Circuit concluded the parties’ arbitration agreement clearly and unmistakably expressed the parties’ intent that an arbitrator should decide the gateway issue of whether the agreement permitted class arbitration. Having delegated that authority to the arbitrator, the District Court found no basis in law to overturn that clause construction award. The two prior decisions in this matter, addressing the issue of who should decide whether an agreement permits class arbitration, align well with the United States Supreme Court’s January 9, 2019 holding in Henry Schein, Inc. v. Archer & White Sales, Inc. There—resolving a circuit split—the High Court held that when the parties’ contract delegates the arbitrability question to an arbitrator, a court may not override the contract, and possesses no power to decide the arbitrability issue, even if the court believes the argument that the arbitration agreement applies to a particular dispute is “wholly groundless.”

The clause construction award in Wells Fargo Advisors LLC arose out of a claim by Wells Fargo financial advisors that Wells Fargo, through policy, did not correctly calculate the hours worked by financial advisors in its training program, and accordingly, did not compensate the financial advisors for overtime, in violation of the Fair Labor Standards Act and New York state law. Wells Fargo and the financial advisors entered into employment agreements in 2011 and 2013 which included a provision requiring resolution of “any” dispute through arbitration, carving out exceptions for claims under employee benefits plans or for State unemployment insurance. Specifically, the provision read, in pertinent part:

You are agreeing to arbitrate any dispute, claim, or controversy that may arise between you and Wells Fargo advisors, or a client, or any other person . . . and are giving up the right to sue Wells Fargo Advisors, its subsidiaries or employees or any client or any other person in court concerning matters relating to or arising from your employment.

The financial advisors sought to arbitrate their claims on a class-wide basis. In response, Wells Fargo filed an action in the SDNY seeking an order staying the class action and compelling individual arbitration. The SDNY held that, under the employment agreement, the question of arbitrability was one for an arbitrator to decide, not the court. The Second Circuit affirmed, holding that the agreement “‘clearly and unmistakably expresses [the parties’] intent to let an arbitrator decide whether they agreed to authorize class arbitration.’” The arbitrator then issued the award allowing the financial advisors to pursue their claims on a class-wide basis.

In rejecting the petition to vacate the arbitrator’s award, the District Court noted that the arbitrator reviewed the principles set forth in Stolt-Nielson, S.A. v. AnimalFeeds International Corp. and Oxford Health Plans LLC v. Sutter, and determined “the decisive issue [was] whether the parties had agreed to authorize class arbitration.” She reasoned, consistent with Stolt-Nielson: (1) the language of the agreement was “sufficient to conclude that there was implicit consent to assertion of class claims in arbitration even though the word ‘class’ was not expressly used in the Agreements;” (2) “other factors,” such as the sophistication of the parties, the fact that Wells Fargo authored the Agreement, and because class arbitration claims were not novel at the time the agreement was executed, evidenced the intention for class arbitration; and (3) there was no inclusion of a “mention or warning of a waiver of class claims” in the agreement, further evidencing the intention for class arbitration.

The court ultimately held that the arbitrator “neither exceeded her powers nor manifestly disregarded the law,” but instead “anchored her approach in substantial case law.” The District Court reasoned that, although Stolt-Nielson “require[s] that class arbitration procedures only be allowed where there is a contractual basis for doing so,” there is no authority to support the argument that a contractual basis may only exist if there is an explicit statement to that effect in the agreement. Instead, the court found the arbitrator “addressed a question not squarely resolved by Stolt-Nielson: Whether assent to class arbitration, in the absence of an explicit textual command, can be inferred from implicit textual cues.” In short, the Southern District found the arbitrator did not “manifestly disregard[] the law,” but rather, “identified the relevant law, parsed it thoughtfully, and endeavored to apply it with considerable care.”

In light of Wells Fargo and Henry Schein, arbitration agreements should carefully and explicitly state the parties intentions with respect to class arbitration and class action waivers. If an arbitration clause is used in a contract, the parties accept the risk of choosing that forum – “good, bad or ugly.”