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Article Excerpt
INTRODUCTION
I. THE TAXONOMY OF GATEWAYS A. Who Decides Who Decides? B. Availability of Class Arbitration as a "Gateway" Issue 1. Class arbitration explicitly permitted 2. Class arbitration explicitly prohibited 3. Arbitration agreement is silent on class arbitration 4. Arbitration agreement is ambiguous about class arbitration II. WHERE THE COURT'S IMPLICIT ROADMAP LEADS III. THE ROADMAP IN PRACTICE A. Allowing Class Arbitration to Proceed Where the Agreement Is Silent 1. Treating arbitration agreements like any other contract 2. Ambiguities in contracts are construed against the drafter 3. Arbitral organizations have adopted class arbitration procedures B. Enforcing Class Action Waiver Clauses in Arbitration Agreements 1. Class arbitration is costly, eliminating many benefits of arbitration 2. Arbitration agreements are bilateral contracts, even when "adhesive" 3. Arbitration is not court: other procedural tools are given up, too 4. Due process concerns make class arbitration undesirable 5. Congress needs to confront these issues CONCLUSION
INTRODUCTION
In the 1980s, the U.S. Supreme Court changed its outlook on arbitration agreements, ushering in a new era in which arbitration agreements between companies and consumers would be not only allowed but "favored." (1) Prior to this reversal of course, arbitration proceedings had been primarily limited to transactions between two or more companies, and there had been a presumptive public policy disfavoring alternative dispute resolution mechanisms for certain types of cases, especially predispute agreements signed between companies and individuals mandating arbitration should a dispute arise. (2)
Today, mandatory arbitration agreements between companies and their consumers are commonplace (3) and enforceable. (4) Consumers are routinely faced with the prospect that disputes they have with their credit card companies, mobile telephone service providers, and health care professionals will be settled in arbitration rather than in court. (5) Predispute arbitration agreements are enforceable bilateral contracts binding the parties as any other contract would, and the Federal Arbitration Act (FAA) ensures that courts will treat such contracts on an equal footing with all other contracts. (6) In other words, no state can claim to have a public policy exception to its ordinary body of contract law that singles out arbitration agreements for disfavored treatment or presumes the invalidity or oppressive nature of agreements to arbitrate. Indeed, even when such contracts are deemed "adhesive" by courts, meaning that the consumer was essentially forced to either accept the contract along with the product or service he was purchasing or reject both together, mandatory arbitration agreements have been deemed to be enforceable. (7)
In response to critics who argue that mandatory arbitration agreements are inherently unfair, (8) the Court has responded that a decision to arbitrate merely reflects the type of procedure that companies and consumers have chosen to invoke should they need a dispute resolved, rather than reflecting any decision regarding the substantive law to be applied or the substantive remedies to be available. (9) Under this theory, consumers who have submitted to arbitration have no cause for grievance because they have given up no substantive rights or remedies. Since nothing has been lost, complaints about mandatory arbitration agreements being unfair or oppressive really boil down to a distrust of arbitration itself, a position which is preempted by the FAA. (10) In fact, although empirical research cuts both ways, some studies have shown that consumers fare equally well, if not better, in arbitration than they do in judicial proceedings. (11)
It is generally settled law that mandatory predispute arbitration agreements will be enforced by courts despite being contained in contracts of adhesion, (12) subject only to being voided on traditional contract grounds. (13) Added complexity emerges, however, when consumers (or, perhaps more accurately, their lawyers (14)) decide to raise an arbitrable dispute as a class. The compatibility between class action lawsuits and mandatory arbitration agreements is far from settled. (15) Companies, which generally oppose class certification, argue that, by agreeing to resolve all disputes in arbitration, consumers have waived their right to proceed on a classwide basis just as they have waived other rights normally obtained under the rules of civil procedure, including the right to a jury trial, a presiding judge, and certain discovery proceedings. (16) Other opponents of class actions in arbitration, including some consumer advocates, argue that the due process rights of absent class members, so delicately preserved by courts in class action litigation, are lost in arbitration. (17) On the other hand, other consumer advocates, and consumers themselves, argue that if consumers are not allowed to proceed on a classwide basis, then the arbitration agreement has effectively stripped them of substantive rights because some claims are simply too small to be worth pursuing individually, even in arbitration. (18)
Although the Supreme Court has not yet ruled on the issue, (19) federal courts have generally agreed that classwide arbitration cannot proceed if the arbitration agreement between the parties does not explicitly allow for such a procedure. (20) State courts, on the other hand, are split on whether or not to allow class action-type suits to proceed when the arbitration agreement is silent. (21) In response to this uncertainty, drafters of arbitration agreements have begun attempting to disallow classwide arbitration explicitly by incorporating "no class action clauses" into mandatory arbitration agreements. (22) This explicit prohibition, however, has not eliminated the uncertainty, because courts are also split on whether such class action waiver clauses are enforceable. (23) Some courts, especially in California, (24) routinely declare such clauses to be unconscionable and void, severing them from the remainder of the arbitration agreement. The end result is that there are some states in which there is no way for parties to agree to mandatory arbitration agreements in which the right to bring a class action suit is waived, despite the parties' presumed mutual assent to such terms. (25) Although scholars and practitioners were hoping that these issues would be resolved during the Supreme Court's 2002 Term, there is a general consensus that the cases during that Term resolved nothing because the Court found various artful ways of dodging these thorny questions. (26)
Some scholarly literature has addressed the merits of both sides of the debate on the intersection of class action suits and mandatory arbitration agreements, (27) and I will not attempt to restate all of the points that have been made. Instead, I will point out that, despite the collective sigh of disappointment at the Court's failure to explicitly resolve these issues during its 2002 Term, the way in which they will eventually be resolved can be discerned. In light of the Court's holdings thus far, there is only one outcome that logically follows: lower federal courts and state courts will have to leave the decision on whether to allow class arbitration up to the contracting parties, allowing class arbitration to proceed where the agreement is silent on the subject, but enforcing a class action waiver agreed to by the parties.
Part I of this Note provides a taxonomy of the case law surrounding the intersection of class action suits and arbitration proceedings. First, I will explain how the Court has dealt generally with "gateway" issues leading up to arbitration, as distinct from the resolution of the merits themselves by the arbitrator. Then, I will illustrate how the availability of class arbitration is treated as one such "gateway" issue and how the outcome differs depending on whether the arbitration agreement explicitly allows class arbitration, explicitly prohibits it, or is silent or ambiguous on the subject. Part II will argue that the Court's decisions to date, especially its decision in Green Tree Financial Corp. v. Bazzle, (28) have left the courts with only one possible option: to leave the decision on class arbitration up to the contracting parties, allowing class arbitration to proceed where the arbitration agreement is silent, but enforcing "no class action" clauses where they are explicitly included in the agreement. Any other outcome would essentially nullify the Court's decision in Bazzle, wasting the time and resources of both the parties to the suit and the arbitrator.
Finally, Part III will evaluate the outcome reached in Part II from a normative perspective, given the current state of the jurisprudence surrounding arbitration agreements, class action litigation, contracts, and procedural due process. I conclude that allowing class arbitration to proceed when the agreement is silent but enforcing class action waivers where they are explicitly included is the proper outcome, even if it means that drafters of arbitration agreements will begin routinely including "no class action" clauses in their agreements. Such a result may help convince legislators to confront the difficulties of hosting class action proceedings in arbitration and may encourage them to devise a solution that balances the costs and benefits of both class action suits and arbitration.
I. THE TAXONOMY OF GATEWAYS
Understanding the interactions that take place between courts and arbitrators in deciding the issues surrounding arbitration agreements is essential to an understanding of how the availability of class arbitration fits in. Whereas a court's authority to settle disputes is derived from the federal or state constitution, an arbitrator's authority to settle disputes is only established through private contractual arrangements between the parties themselves. (29) Therefore, courts retain jurisdiction to decide all issues not relegated to the arbitrator by the arbitration agreement. (30) This may include issues such as whether there is a valid arbitration agreement giving the arbitrator any authority in the first place, and if so, whether the instant dispute falls within the scope of the agreement. (31) The availability of class arbitration as a procedure for resolving multiple disputes concurrently is another issue in which the distribution of authority between courts and arbitrators remains unclear. (32)
A. Who Decides Who Decides?
With the passage of the FAA in 1925, (33) and its more recent application to the states, (34) predispute arbitration agreements between companies and their consumers are routinely enforced, (35) allowing companies and consumers to settle their disputes in arbitration rather than in court. But what if the parties disagree on whether they agreed to arbitrate their disputes in the first place? Who decides the "arbitrability" of their dispute? The U.S. Supreme Court says that the answer to this question is "fairly simple": all courts have to do is look to the arbitration agreement. (36) If the parties agreed that the arbitrator would decide issues of arbitrability, then the arbitrator decides; if the parties agreed that the court would decide, then the court decides. (37) The problem is that often there is just as much ambiguity surrounding whom the parties selected to decide issues of arbitrability as there is about whom they selected to decide the merits of the case. (38) In these instances, the Court has provided a little more guidance, dividing questions of arbitrability into two general categories of "gateway" issues: do the parties have a valid arbitration agreement at all and, if so, does the instant dispute fall within the scope of the valid arbitration agreement? (39)
In attempting to clarify who decides the first gateway issue, whether or not the parties have assented to a valid arbitration agreement, the Court has relied on the expectations of the parties. "[W]here contracting parties would likely have expected a court to have decided the gateway matter" of contract validity, the court should be the decisionmaker, so as to "avoid[] the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate." (40) Conversely, for contract validity issues that the parties expected an arbitrator to decide, the arbitrator should be the decisionmaker. Some critics believe this reliance on the expectations of the parties is too "loose[]" and "elusive," (41) and the Court apparently agrees: in the same case in which it announced the "party expectations" test, the Court also endorsed a somewhat more concrete approach for determining the parties' intentions, based on the Revised Uniform Arbitration Act of 2000. (42) This approach divides contract validity issues into slightly different groupings: when deciding matters of contract validity, issues of substantive arbitrability will be decided by courts, and issues of procedural arbitrability will be decided by arbitrators. (43) While the Court did not provide examples of substantive arbitrability issues, it did elaborate on the definition of procedural arbitrability issues, stating that these include "waiver, delay, or a like defense" and "prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate." (44)
The second type of gateway arbitrability issue involves whether the dispute falls within the scope of a valid arbitration agreement. On this question, the Court has provided significantly greater clarity, holding that the court is presumed to be the decisionmaker. (45) However, this is only a presumption; it can be waived by the parties. (46)
It is important to remember that the entire purpose of the Court's decisions with regard to both "validity" and "scope" gateway matters is to enforce the parties' intentions, (47) thereby accomplishing the goal of the FAA to treat an arbitration contract like any other contract, in which the intentions of the parties are paramount. (48) Therefore, to the extent that the parties themselves provided answers concerning who should decide either type of arbitrability question in their arbitration agreement, the contract controls. (49)
Once the gateway matters and other questions of arbitrability are resolved, assuming the arbitration agreement is valid and the instant dispute falls within its scope, the arbitrator will decide the merits of the case. (See Figure 1.)
[FIGURE 1 OMITTED]
B. Availability of Class Arbitration as a "Gateway" Issue
Arbitration supporters often point out that the purpose of arbitration is to avoid the inefficiencies of litigation, allowing companies and their consumers to resolve disputes more quickly and efficiently, (50) creating cost savings that can then be passed along to consumers. (51) Supporters of class action suits believe that the class action device also serves efficiency-related goals--the ability to resolve many disputes in one trial makes the litigation quicker and less expensive than litigating each claim individually. (52) But supporters of arbitration and supporters of class action suits are rarely sitting on the same side of the table, (53) and arbitration supporters do not generally believe that the efficiencies of the two procedures are cumulative. (54) To the contrary, arbitration supporters see class action suits and arbitration as incompatible, and view class arbitration as a hindrance, removing many of the efficiencies obtained through simple one-on-one arbitration. (55)
While litigation surrounding the enforceability of mandatory arbitration agreements hag subsided, (56) the availability of class-based arbitration has become an increasingly pressing and contentious gateway matter. Plaintiffs (and their lawyers) who have attempted to bring classwide claims in arbitration have found the law to be in a state of confusion: (57) the availability of classwide arbitration varies significantly depending on the language of the arbitration agreement--whether the agreement is explicit about permitting or prohibiting class arbitration, or whether it is silent or ambiguous--and on the court making the decision. (58)
1. Class arbitration explicitly permitted
Few mandatory arbitration agreements explicitly allow for class arbitration, because the drafters of most such agreements are companies who would rather face the claims against them on an individual basis. Presumably, however, if the predispute contract explicitly allows for class arbitration, no court would deny the parties the right to proceed as they had intended. (59) Should a party want to avoid class arbitration in such a scenario, they would have to argue that the contract is invalid because class arbitration is inherently unworkable.
There are those who believe that class action suits and arbitration proceedings are inherently incompatible, primarily on due process grounds, and therefore that arbitration should not be permitted to proceed on a classwide basis. (60) "Due process critics," as I will call them, argue that the constitutional requirements of procedural due process for absent class members, addressed in the class litigation context by Rule 23 of the Federal Rules of Civil Procedure, cannot be met in arbitration. Arbitrators are not as experienced as judges in managing a class action situation, they argue, and the very nature of arbitration makes the constitutional requirements harder to achieve. (61) While courts generally have not agreed that class arbitration is simply unworkable, (62) the arguments raise some serious concerns that courts have tried to take into account when fashioning a workable, constitutional class arbitration procedure. (63)
Specifically, due process critics point to notice (64) and adequacy of representation (65) requirements as the most troublesome for class arbitration. Notice is constitutionally required whenever rights are being adjudicated, (66) and takes on heightened importance in a class proceeding--whether in litigation or arbitration--because most of the plaintiffs are absent from the hearings. Since even the absent class members will be bound by a decision for or against them, they are required to be notified of the pending litigation so that they have an opportunity to appear on their own behalf, protect their own interests, or, in some cases, opt out of the proceedings entirely. (67) Where class arbitration has been ordered to proceed, courts have insisted that the same notice requirements apply as in class litigation. (68) Adequate notice is potentially more difficult to achieve in the arbitration context than in litigation, however, because of the confidential, nonpublic nature of arbitration as compared to a public court proceeding. (69) A mass mailing or public advertisement, for example, would destroy the confidentiality of the heating, and no public filings are available to alert potential class members to the proceeding.
Adequacy of representation is important for similar reasons--it is essential that the named plaintiff and his lawyer, who is actually arguing the case, have the interests of all absent class members at heart, and will not just agree to settle their claims for inadequate relief in exchange for an especially favorable deal for themselves. (70) Adequacy of representation is primarily a factual determination that must be made on a case-by-case basis, applying complex legal principles. Again, this is more difficult to police in an arbitration proceeding, both because arbitrators are less experienced at managing legal issues than judges, (71) and because the decision of the arbitrator will be essentially unreviewable. (72)
In the end, much of the force of the arguments raised by due process critics turns on which specific notice and adequacy of representation requirements are mandated by the Due Process Clause of the U.S. Constitution and which are simply mandated by Rule 23, a question which has not yet been fully decided by the Court. (73) Those requirements that are only mandated by Rule 23 would presumably not apply in an arbitration proceeding not governed by the Federal Rules of Civil Procedure.
Courts that have allowed class arbitration to go forward have implicitly agreed with the due process critics in suggesting that class arbitration poses particular problems not faced in individualized arbitration. These courts have recognized the need for judicial involvement and oversight in the class arbitration proceedings. (74) States such as California that allow class arbitration in certain circumstances have devised hybrid solutions in which the judge certifies the class before sending the matter to arbitration, the judge maintains vigilance over the arbitration proceedings to ensure that all class members are being adequately represented, and the judge reviews the terms of any settlement or decision by the arbitrator to ensure that it is in the best interests of the entire classy Given the need for such extensive judicial involvement to adequately address due process concerns, a straightforward provision in an arbitration agreement giving an arbitrator the authority to hear claims on a classwide basis may well violate the due process rights of the claimants simply because it would not have contemplated such judicial involvement. However, since such clauses are not likely to appear in an arbitration agreement, this argument is unlikely to be addressed by courts.
2. Class arbitration explicitly prohibited
Increasingly, due primarily to the uncertainty surrounding the availability of classwide arbitration and companies' desire to avoid class-based claims, mandatory arbitration agreements have begun explicitly prohibiting classwide arbitration proceedings. (76) Under the FAA, courts are supposed to enforce agreements to arbitrate according to their terms, as they would any other contract. (77) Therefore, it might seem that a provision explicitly prohibiting classwide arbitration would be the end of the discussion. Some courts have held, however, that...
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