Editor: Concern has been expressed among legal scholars and others that the benefits of arbitration are being undermined by recent court decisions allowing class actions to proceed in arbitrations. Do you agree?
Goldfarb: I certainly do. Ever since the U.S. Supreme Court ruled in Green Tree v. Bazzle (2003) that the arbitrator, not the courts, shall decide whether an arbitration clause permits the case to proceed as a class action, defendants have faced real uncertainty as to whether arbitration clauses will continue to offer their intended benefits - one-on-one, cost efficient and prompt adjudication of disputes. Courts are now directing arbitrators to decide whether arbitration clauses, almost all of which were intended to insure individual dispute resolution, could be construed to permit class actions. Even more damaging to the integrity of the arbitration mechanism are recent rulings that have permitted class actions to proceed in the face of contract terms that specifically prohibit them. For defendants, this is tantamount to changing the rules after the game has begun. It leaves defendants with the worst of all worlds - the threat of a class action in a forum without the procedural, evidentiary and appellate protections available through the judicial process.
Editor: How did this phenomenon develop?
Goldfarb: In the Green Tree case, the issue was whether the arbitration clause in the contract, which was silent on the issue of class actions, "clear[ly] precluded class arbitration" and whether that issue is one that should be decided by the court or the arbitrator. The lower court decided that the clause did NOT preclude class actions and proceeded to certify a class. The Supreme Court held that the class action issue is really a question of "what kind of arbitration proceeding" the contracting parties agreed to and that is a question for the arbitrator, not the courts to decide. The net effect of this ruling has been, in many cases, to supplement arbitration proceedings with a "clause construction" hearing in which the parties brief and argue the issue of whether the arbitration clause permits class actions.
Editor: What have the dispute resolution mechanisms such as the AAA and NAF done to deal with this problem?
Goldfarb: Not surprisingly, they have taken appropriate steps to carry out the intent of the drafters of the arbitration clauses. Where such clauses provide that there shall be no joinder or other consolidation of claims, including class actions, they will not even consider a request by either party to have the arbitration proceed as a class action. The greater problem arises, however, with pre-2003 arbitration clauses that do not contain a "no class action or joinder" provision. In these cases the arbitrator may have no choice but to allow the parties to litigate the question of whether class actions are permitted.
Ironically, there should really be no need to have a "no class action" provision in an arbitration clause because arbitration, by definition, arises out of an agreement between the parties to a contract and should only be able to affect the rights of those parties, not any so-called "absent class members." Section 4 of the Federal Arbitration Act in effect codifies this principle where the arbitration agreement is silent on the issue by directing the parties to proceed "in accordance with the terms of the agreement." Interestingly, some courts appear to have construed the Green Tree decision as a green light for arbitrators to allow a class action even in the absence of language specifically authorizing it.
Editor: What have the courts done with this issue since the Green Tree ruling?
Goldfarb: Unfortunately, several courts have created more uncertainty for defendants by expanding the use of class actions probably beyond what the Supreme Court intended.
A few courts have invalidated "no class action" provisions on the grounds that they are "unconscionable" under state consumer protection statutes because the underlying agreement is a contract of adhesion. Others have indicated such clauses may be disregarded if the plaintiff can demonstrate that she has no other means to enforce her rights than to proceed as a class action. And, as recently as April of this year, the U.S. Court of Appeals for the First Circuit invalidated a class action waiver in an arbitration clause on the ground that it deprived plaintiffs of the ability to exercise their statutory rights under federal antitrust law (Kristian v. Comcast Corp.). While such cases are still in the minority, they are beginning to have a disproportionate effect in the arbitration setting. This is because arbitrators are not bound by precedent the same way courts are and their rulings are not subject to appeal unless they are clearly erroneous.
Editor: If the AAA and other mechanisms are refusing to proceed with class actions when specifically prohibited in the arbitration clause, how does the issue get before the courts?
Goldfarb: Clever plaintiffs' counsel are filing their class action claims in federal court in the first instance, notwithstanding the mandatory arbitration clause in the underlying contract. When defendants move to compel arbitration under the clause, plaintiffs try to substantiate their claim that the class action waiver is illegal or unconscionable. The courts will typically grant defendant's motion to compel arbitration; however, they will also order the arbitrator to conduct a clause construction proceeding on the class action issue. Under these circumstances, the arbitrator has no choice but to review the arbitration clause and issue a ruling.
Editor: Does the recently enacted Class Action Fairness Act (CAFA) provide any relief from this problem?
Goldfarb: No, CAFA only applies to class actions filed in federal court or removed to federal court. Moreover, many of the reforms included in the statute are lost when a class action proceeds in arbitration. For example, one of the primary abuses targeted by the statute involved the filing by plaintiffs of multiple class actions in state courts against the same defendant for the same issue for the purpose of coercing settlement. CAFA has solved this problem. The statute makes it easier for defendants to remove such cases to federal court and have them consolidated.
The problem of multiple, repetitive class actions has been compounded in the arbitration setting. Since most arbitration clauses preclude the joinder of claims in a single arbitration, creative plaintiffs' counsel have begun filing numerous separate arbitration proceedings against the same defendant hoping to find one or more arbitrators who will allow the case to proceed as a class action. Defendants' efforts to consolidate the clause construction proceedings before a single arbitrator are often denied on the basis of the "no joinder" language of its own arbitration clause. Thus, plaintiffs in arbitration are now able to secure multiple "bites of the apple" on the class certification issue that CAFA successfully eliminated in judicial proceedings.
Editor: What is the likelihood that the appellate courts or the Supreme Court will remedy this situation?
Goldfarb: Unfortunately, the grounds for appealing an adverse ruling of an arbitrator are very limited and will make it difficult for these issues to be fully aired and reviewed at the appellate level. For example, an arbitrator's ruling may be overturned only if it is clearly erroneous or the defendant can demonstrate bias or prejudice on the part of the arbitrator. Since an arbitrator is not bound by the same principles of stare decicis that the courts are, the difficulty of making a "clearly erroneous" showing is apparent.
Further, there is an apparent conflict between the Federal Arbitration Act and the Class Action Rules of at least one of the ADR mechanisms. The Supplementary Rules for Class Arbitrations of the American Arbitration Association provides for judicial review of a "clause construction award," referring to such a ruling as a "partial final award." The Federal Arbitration Act only allows judicial review of final awards. At least one federal court construed the FAA mandate as prohibiting the court from reviewing the clause construction determination until a final award was issued, obviously too late to be of any value to the defendant.
Editor: Are there any other means of getting a court, rather than an arbitrator, to rule on the merits of a class certification motion?
Goldfarb: Since many plaintiffs' lawyers are now ignoring the arbitration clause and going directly into court with their class action claims, defendants may be better served by foregoing the motion to compel arbitration and allowing the case to proceed to court. Again, given the limited grounds for appeal and arbitrators' general lack of experience with class action jurisprudence, defendants would be better positioned to defeat class certification before a judge than an arbitrator.
Editor: You specialize in resolving class actions and other complex litigation, usually on behalf of the defendant. Have you had any involvement in settling class actions in an arbitration setting?
Goldfarb: I recently settled a batch of class actions for a client that had been pending in various arbitrations for over a year. It was pretty clear that the company would have been better off having these claims resolved through individual arbitrations as intended by the language of their agreement - were it not for the threat of a possible class certification. This company faced many of the problems referred to above and chose to settle rather than take the risks inherent in such proceedings.
Editor: What do you believe is the ultimate solution to this problem?
Goldfarb: The solution can come in one of two forms: either the Supreme Court will revisit this issue and uphold the original intent of the Federal Arbitration Act - that there shall be no class actions in arbitrations unless an arbitration clause specifically authorizes it; or Congress must amend the Act to ensure the same outcome.
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