25 Rev. Litig. 293

Class Actions in Arbitration

Fred Hagans & Jennifer B. Rustay

In this article, the authors demonstrate that though arbitration clauses may be silent as to whether or not a disputed matter may be brought as a class action, the Supreme Court has, in Green Tree Financial Corp. v. Bazzle, spoken. Tracing the history of prior cases in which no arbitration clause was present in the contract, the authors reveal the split that had occurred among earlier decisions. On one hand, courts had maintained that Section 4 of the Federal Arbitration Act prohibited courts from mandating class arbitration absent an express agreement allowing for that remedy. Other courts, however, chose to interpret the silence of the (typically adhesion) contracts against the drafters, and therefore allowed class arbitration to proceed. The authors then proceed to show how Green Tree, “changed the legal landscape to clearly permit class actions to proceed even when arbitration clauses are silent on the issue.” The rest of the article is devoted to how both courts and arbitration bodies alike have responded to the Green Tree ruling, so that practitioners might better understand the practical ramifications of this decision.


   I. Introduction In recent years, arbitration has become increasingly favored by courts. Arbitration has been described as "sweeping across the American legal landscape ... fundamentally reshaping the manner in which disputes are resolved in our legal system." n1 Arbitrators are authorized to resolve disputes by the terms of the contractual arbitration agreements between or among the parties to a dispute, and in many cases, the only other boundaries to their authority are the applicable federal and/or state arbitration statutes. In enforcing arbitration agreements, courts have usually given deference to the terms of the arbitration agreements, granting arbitrators authority that is coextensive with, and sometimes greater than, that of comparable judicial bodies. Consequently, one might assume that all types of cases, including class actions, would be permitted in arbitration. However, courts have grappled with whether contractual arbitration provisions permit class arbitrations under the various state and federal arbitration statutes.    Certainly, when arbitration provisions expressly grant the right to proceed as a class arbitration, courts, in keeping with the state and federal precedent favoring enforcement of arbitration provisions, honor the express right to class arbitration. When arbitration clauses are silent on the issue of class arbitration containing neither an express authorization nor an express prohibition courts have historically been less uniform in their approaches. On the one hand, courts encourage arbitrators to exercise any procedural tool available to courts; n2 on the other, arbitration as a forum has emerged as a tool of business in which consumer remedies are discouraged through prohibitive costs and administrative obstacles. n3 Given these conflicting pressures, courts addressing the propriety of class arbitrations in the context of arbitration clauses that are silent on the issue of class arbitration have issued opinions ranging from outright prohibition to wholesale acceptance. n4 In Green Tree Financial Corp. v. Bazzle, n5 the United States Supreme Court laid the issue to rest as far as the Federal Arbitration Act (FAA) was concerned, accepting "the quite remarkable proposition that class arbitration was not merely permissible but should be largely conducted without judicial supervision." n6    This article provides a historical and legal overview of the history of class arbitration, examines some of the questions raised in the wake of Green Tree, and offers pragmatic guidance for the practitioner seeking to make use of this new procedural tool in arbitration agreements that are silent as to class arbitrations. n7        II. The Legal Landscape in which the Bazzle Decision Arose    A. Courts Were Split on the Permissibility of Class Arbitrations with "Silent " Arbitration Clauses Prior to Green Tree, there was no clear consensus among state and federal courts on whether class arbitrations were permissible where the arbitration clause was silent on the issue of class arbitration. Some courts rejected class arbitrations, n8 some courts rejected allowing arbitrators to certify classes but would allow arbitrators to administer classes certified by courts, n9 and still others allowed courts to certify arbitrations. n10    1. The Naysayers In Champ v. Siegel Trading Co., the Seventh Circuit prohibited class arbitration in the absence of an express grant of authority to conduct class arbitrations in the arbitration clause. n11 The Champ court held that "Section 4 of the FAA forbids federal judges from ordering class arbitration where the parties' arbitration agreement is silent on the matter." n12 Similarly, the Alabama Supreme Court held that class arbitration was improper in Med Center Cars, Inc. v. Smith, stating:    Although there are benefits to class wide arbitration, such as efficient resolution of common claims and judicial economy, no persuasive authority permitting class wide arbitration exists at this time. ... To require class wide arbitration would alter the agreements of the parties, whose arbitration agreements do not provide for class wide arbitration. ... Class wide arbitration should not be permitted in this case. n13 While few other courts had addressed the specific issue of whether class arbitrations could proceed when arbitration agreements were silent on the issue of class arbitration, a number of courts had displayed displeasure at multi plaintiff arbitration, holding that arbitration proceedings arising from separate agreements to arbitrate could not be consolidated absent the parties' express agreement to allow such consolidation. n14        2. The Proponents Some courts were receptive to allowing arbitrators the authority to decide class arbitrations. California state courts were early proponents of class arbitrations. n15 More than twenty years ago, the California Supreme Court stated:    Classwide arbitration, as Sir Winston Churchill said of democracy, must be evaluated, not in relation to some ideal but in relation to its alternatives. If the alternative in a case of this sort is to force hundreds of individual [plaintiffs] each to litigate its cause with [the defendant] in a separate arbitral forum, then the prospect of classwide arbitration, for all its difficulties, may offer a better, more efficient, and fairer solution. Where that is so, and gross unfairness would result from the denial of opportunity to proceed on a classwide basis, then an order structuring arbitration on that basis would be justified. n16 Following Keating, other California courts recognized the propriety of classwide arbitration in various contexts. n17 Likewise, class arbitration was approved in Pennsylvania, although the court, rather than the arbitrator, decided certification. In Dickler v. Shearson Lehman Hutton, Inc., the Supreme Court of Pennsylvania held, "There is no policy reason so paramount in this state which would preclude class action proceedings from being imposed on an arbitration agreement." n18 The Pennsylvania and California state court decisions usually found that consumers that had been subjected to arbitration should not be stripped of the ability to bring class actions: "Compelling individual arbitration would force individuals already straitjacketed by an industry wide practice of arbitration agreements to fight alleged improprieties at an exorbitant economic cost." n19 Put another way: "If the right to a classwide proceeding could be automatically eliminated in relationships governed by adhesion contracts through the inclusion of a provision for arbitration, the potential for undercutting these class action principles, and for chilling the effective protection of interests common to a group, would be substantial." n20    B. Bazzle is Decided in South Carolina's Courts In Bazzle v. Green Tree Financial Corp., n21 the South Carolina Supreme Court addressed the propriety of class arbitration where the arbitration clause was silent. Procedurally, the case had arrived at the South Carolina Supreme Court as a consolidated appeal of two separate arbitral awards. n22 The underlying claims were the type of consumer complaints that required cost effective justice for which class actions are usually sought the claims involved a class of consumers who had purchased poorly constructed mobile homes on horrible loan terms under standard form contracts of adhesion. In the arbitration hearing, the arbitrator awarded $ 10,935,000 to a class of 1,899 individuals (the Bazzle class), along with $ 3,645,500 in attorney's fees and $ 18,242 in costs. n23 The Bazzle class had been certified as a class by the trial court before it was referred to arbitration. n24 In the second case, there was an award of $ 9,200,000 to a separate class of individuals (the Lackey class), plus $ 3,066,666 in attorney's fees and $ 18,252 in costs. n25 The Lackey class had been referred to arbitration. There, a retired judge served as an arbitrator and decided to certify the class after a class certification hearing. n26     In both Bazzle and Lackey, the arbitration agreement at issue "was silent regarding class wide arbitration." n27 If Bazzle had followed the Seventh Circuit's approach, silence regarding class arbitration would mean that a court would have to "read such a term into the parties' agreement" in order for classwide arbitration to be allowed. n28 However, the Bazzle court recognized the fallacy of this analysis under well established contract interpretation principles and held, "As a matter of pure contract interpretation it is striking, and rather odd, that so many courts have interpreted silence in arbitration agreements to foreclose rather than to permit arbitral class actions." n29 If anything, as the court in Bazzle concluded, under general principles of contract interpretation, the omission of any reference to class actions should be construed against the drafting party. n30 One of the factors that the Bazzle court found most persuasive was the situation in which the Bazzle consumers found themselves, namely being in arbitration because of contracts of adhesion:    If we enforced a mandatory, adhesive arbitration clause, but prohibited class actions in arbitration where the agreement is silent, the drafting party could effectively prevent class actions against it without having to say it was doing so in the agreement. Following the federal approach risks such a result where arbitration is mandated through an un negotiated adhesion contract. Under those circumstances, parties with nominal individual claims, but significant collective claims, would be left with no avenue for relief and the drafting party with no check on its abuses of the law. Further, hearing such claims (involving identical issues against one defendant) individually, in court or before an arbitrator, does not serve the interest of judicial economy. n31 These concerns echoed the holdings of the California and Pennsylvania cases that had preceded Bazzle. For example, the California Supreme Court had observed, "If ... an arbitration clause may be used to insulate the drafter of an adhesive contract from any form of class proceeding, effectively foreclosing many individual claims, it may well be oppressive and may defeat the expectations of the nondrafting party." n32 In a similar vein, the Pennsylvania court in Dickler concluded, "Fairness mandates ... that the [plaintiffs], bound by adhesion form contracts to arbitration agreements, be able to protect their interests by proceeding as a class through arbitration." n33    Faced with the issue of "whether class wide arbitration is permissible when the arbitration agreement between the parties is silent regarding class actions, " n34 the South Carolina Supreme Court answered the question in the affirmative. n35 The Bazzle court confronted head on the Seventh Circuit's approach precluding classwide arbitration as embodied in Champ:    [Defendant] urges the Court to adopt the reasoning employed by the Seventh Circuit, holding courts lack authority to order class wide arbitration under section 4 of the FAA. Section 4 requires arbitration in "accordance with the terms" of the agreement. If the arbitration agreement in question is silent on the issue, these courts reason that authorizing class wide arbitration would not be in "accordance with the terms" of the agreement. n36 Against the backdrop of the various views held by different jurisdictions, the Bazzle decision, that class arbitrations could proceed when arbitration clauses were silent on the issue of class arbitrations, framed the question for ultimate resolution by the United States Supreme Court.    C. The United States Supreme Court Weighs In With the divergent lines of authority concerning the permissibility of class arbitration brought to a head in Bazzle, the case was ripe for a grant of certiorari by the United States Supreme Court. Given that one line of federal court decisions held that the FAA disallowed class arbitration altogether when the parties' agreement was silent on the matter n37 and another line of state court authorities supported class arbitration, n38 a resolution was needed. n39    The uncertainty was resolved by the United States Supreme Court's decision in Green Tree Financial Corp. v. Bazzle, issued on June 23, 2003, which followed the line of authorities permitting class arbitration. n40 Here, the Court concluded that, even in cases falling under the FAA, state law governs whether the parties' agreement permits or forbids class arbitration. n41 Unlike the Seventh Circuit in Champ, the Court did not hold that the FAA forbids class arbitration altogether when the arbitration agreement is silent on the issue. n42 To the contrary, the Court accepted the proposition that, under the controlling South Carolina contract interpretation principles, if the arbitration provision is silent on the question, then class arbitration is permissible. n43    The Court was unwilling to accept as a settled matter that the arbitration provision in question was, in fact, silent on the question of class arbitration: "We are faced at the outset with a problem concerning the contracts' silence. Are the contracts in fact silent, or do they forbid class arbitration as petitioner Green Tree Financial Corp. contends?" n44 The Court held that resolution of this threshold question of contract interpretation "should be for the arbitrator, not the courts, to decide." n45 Similarly, the Court expressed no concern that, in one of the two class arbitration proceedings before it, the arbitrator not the trial court decided the issue of class certification. n46    The United States Supreme Court had spoken. Class arbitrations would be permitted when arbitration clauses were silent. Granted this new authority, consumers and lawyers looked for ways to implement it.    III. Response to Green Tree    A. The American Arbitration Association Responds Just a few weeks after the Supreme Court's decision in Green Tree, the American Arbitration Association (AAA) issued a new policy on class arbitration:    In [Green Tree Financial Corp. v. Bazzle], the Court held that, where an arbitration agreement was silent regarding the availability of class wide relief, an arbitrator, and not a court, must decide whether class relief is permitted. Accordingly, the American Arbitration Association will administer demands for class arbitration pursuant to its Supplementary Rules for Class Arbitrations if (1) the underlying agreement specifies that disputes arising out of the parties' agreement shall be resolved by arbitration in accordance with any of the Association's rules, and (2) the agreement is silent with respect to class claims, consolidation or joinder of claims. n47 Disputes over the availability of such relief and arbitrators' jurisdiction will be forwarded to the appointed arbitrators for determination. n48 The AAA's various rules are silent on the issue of class arbitration, and the AAA has taken no position on the availability of class arbitrations. To accommodate these types of cases, the AAA has commenced drafting supplementary rules to govern the AAA's administration of class arbitrations. The AAA's supplementary rules for class actions are very similar to Federal Rule of Civil Procedure 23. n49    B. JAMS Responds JAMS, another of the commercial arbitration bodies, also responded by publishing rules for class actions n50 that are similar to Federal Rules of Civil Procedure 23. In November, 2004, JAMS issued a statement that it:    Unequivocally takes the position that it is inappropriate for a company to restrict the right of a consumer to be a member of a class action arbitration or to initiate a class action arbitration. The implementation of this policy means that JAMS will not enforce these clauses in class action arbitrations and require that they be waived in individual cases. n51 After the JAMS policy was announced, a JAMS arbitrator held that an arbitration clause that prohibited class arbitration was unenforceable, and thus that the case could potentially proceed on a class action basis in arbitration. When the issue was appealed to the trial court that had ordered the matter to arbitration, the court ordered JAMS to enforce the class action ban in the arbitration clause. n52 JAMS subsequently rescinded its policy of not enforcing class action preclusion agreement. n53    C. State Courts Respond Two days after the United States Supreme Court's decision in Green Tree, one of the Texas intermediate courts of appeals issued an opinion concerning whether class arbitrations could proceed when arbitration clauses were silent. n54 Although the Green Tree opinion had been issued two days earlier, the court dropped a footnote and dismissed Green Tree as being "inapplicable." n55 The Supreme Court of Texas decided the question of "whether an arbitrator or a court should rule on class certification issues when the contracts at issue committed all disputes arising out of the agreement to the arbitrator" arises, "such authority resides in the arbitrator," holding that the Green Tree opinion was "directly on point." n56 Green Tree became the law of the State of Texas. Other courts followed suit. n57        D. Federal Courts Respond Following the decision in Green Tree, the Fifth Circuit held that "arbitrators should decide whether class arbitration is available or forbidden ... ." n58 The Pedcor court specifically rejected the "now flawed premise that a district court maintains the initial authority to order class arbitrations." n59 Instead, the Pedcor court held that Green Tree effectively overruled Fifth Circuit precedent that placed the threshold decision whether arbitrations could be consolidated in the hands of the trial court. n60 Pedcor is the Fifth Circuit's recognition of the significance of the new AAA policy adopted as a result of Green Tree. n61 In Pedcor, the Fifth Circuit addressed an arbitration provision in which "there is no express provision in the clause regarding consolidation or class treatment of claims in arbitration." n62 The court vacated the trial court's order because the trial court had certified the class before the matter proceeded to arbitration. n63 Other federal courts have reached similar decisions applying Green Tree. n64    IV. Practice in the Wake of Green Tree When faced with an arbitration clause that is silent as to class arbitration, practitioners should expect that courts will allow the arbitrator to decide whether the matter can proceed as a class action. After Green Tree, courts cannot conclude that an arbitration clause that is silent as to class arbitrations means that class arbitrations are prohibited or are beyond the scope of the parties' agreement.    Courts in other jurisdictions have found that silence in an arbitration clause should be interpreted to permit class actions. For example, the arbitration agreement before the South Carolina court in Bazzle "was silent regarding class wide arbitration." n65 The state court in Bazzle concluded, "under general principles of contract interpretation, ... [the] omission of any reference to class actions [should be construed] against [the drafting party]." n66 The South Carolina Supreme Court further observed that "no case law or statute in South Carolina prohibits class wide arbitration." n67 Unless state case law or statute prohibits classwide arbitration, there is no support for the notion that mere silence regarding class actions in an arbitration clause somehow precludes an otherwise available claim from being pursued in the context of an arbitration proceeding. The conclusion of the South Carolina Supreme Court is instructive: "Class wide arbitration may be ordered when the arbitration agreement is silent if it would serve efficiency and equity, and would not result in prejudice." n68 Thus, the better reasoned authority finds that silence regarding class actions does not preclude class arbitration, but rather permits it. n69    V. Conclusion The Green Tree decision changed the legal landscape to clearly permit class actions to proceed in arbitration even when arbitration clauses are silent on the issue. Now, arbitrators have the authority to decide class arbitrations. As such, arbitrators will come into contact with the same issues and concerns raised by class actions filed in the court system, but with a difference arbitrators address class actions with a duty to act with equity and fairness. n70    Still unaddressed by the judicial system is the question of when and how judicial review of class arbitrations will take place will the conclusions of arbitrators be reviewed at certification, at the merits, or at both? While legislatures and courts have put a variety of procedures in place to review trial court decisions, arbitration decisions have generally been subject to far less scrutiny and far more deference than comparable trial court decisions. Traditionally, "the role of the courts ends with the sending of a dispute to arbitration ... ." n71 Whether that role will change in the specialized arena of class arbitrations is an open question. Judicial review of arbitration awards is "extremely narrow, much more so than for appeal of an adverse court judgment." n72 Despite the traditionally limited role of courts in arbitral decisions, rules regarding class actions that have been promulgated by AAA and by JAMS both suggest some involvement by the trial court with respect to pre certification and certification issues. This judicial involvement in arbitration appears to be inconsistent with the principle of limited involvement by the courts during the arbitration process, but only time will tell if courts will allow the involvement the arbitral bodies seem to invite. n73
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