Class Arbitration: Business Kryptonite or ADR Unicorn?

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By Perry Cooper

Most consumer and employment contracts now have arbitration clauses that require any dispute to be resolved in binding arbitration. But, as seen in the high-profile Sterling Jewelers case, not all such clauses explicitly ban arbitration on a classwide basis—at least not yet.

Until they do, there are a number of significant points every practitioner should know about how class arbitration compares to class actions litigated in court.

First, the very basics.

Defendants hope that the very specter of arbitration will be enough to make plaintiffs drop their suits altogether. But many consumers and employees push back against arbitration clauses, arguing they should be able to bring their class actions before a judge.

When that doesn’t work, they’ll seek to arbitrate as a class.

“The worst nightmare for the defendants is a class arbitration,” Professor and consumer advocate Brian Wolfman told Bloomberg BNA. “They get all the aggregated power of a class action but they can’t have a judge come and rescue them.” Wolfman runs the Georgetown University Law Center appellate courts immersion clinic in Washington.

Meanwhile, defense attorneys continue to hammer away at the viability of class arbitration altogether, asking how class action procedures fit into the bilateral, party-specific world of arbitration.

“It’s not obvious to me how a class arbitration award could be within the authority/jurisdiction/power of an arbitrator,” because it applies to parties who aren’t present at the arbitration, defense attorney Gilbert A. Samberg told Bloomberg BNA.

Beyond that, here are six other aspects of class arbitration to be aware of.

1. Initial Step Required

Class arbitration proceedings begin with a step not necessary in class litigation—the clause construction phase. The arbitrator must first determine whether the case can be arbitrated as a class based on the language of the contract’s arbitration provision.

“That process of clause construction and interpretation can add time to these cases in a way that you wouldn’t have if you went to court,” Joseph M. Sellers, a partner at plaintiffs’ firm Cohen Milstein Sellers & Toll in Washington, told Bloomberg BNA.

And he ought to know—Sellers represents a class of 69,000 female jewelry store employees in the long-running class arbitration against Sterling Jewelers Inc. involving sexual harassment and gender discrimination allegations. The arbitrator’s ruling that Sterling’s contract allowed for class arbitration set off a series of appeals that alone lasted two and a half years, Sellers said.

But in most cases, the arbitrator’s clause construction ruling is the last word. If class arbitration is ruled out, plaintiffs may agree to drop the case because of the financial burdens of proceeding individually. Or companies may agree to settle when facing the prospect of classwide liability.

The American Arbitration Association maintains a database of the 463 class arbitrations conducted under the organization’s rules since 2003.

“Frankly the vast majority of these arbitration cases likely settled after the clause construction phase,” defense attorney Mark J. Levin told Bloomberg BNA.

“For many years, almost all the clause construction phases resulted in findings that it could go forward to the actual class certification proceedings,” he said. Levin is a partner at Ballard Spahr LLP in Philadelphia who specializes in class litigation and the structuring and enforcement of consumer arbitration clauses.

But that number of pro-class arbitration findings has dropped since 2010, he said. That’s when the U.S. Supreme Court held in Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp. that class arbitration is so different from individual arbitration that the arbitrator can’t presume that the parties agreed to it by simply agreeing to arbitrate.

2. Rule 23-Like Procedure

Once an arbitrator has established class arbitration is appropriate, the specific procedural rules that apply to the case depend on what the parties agreed to in the contract, defense attorney Samberg said. He is a member in the New York office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo P.C. who specializes in arbitration.

The very first class arbitrations in the early 1980s were judicially created and were not subject to any specialized rules, S.I. Strong said. Strong is a professor at the University of Missouri School of Law in Columbia, Mo., and an active arbitrator.

But that changed in 2003 after the U.S. Supreme Court’s decision in Green Tree Financial Corp. v. Bazzle, which implicitly authorized class arbitration.

Today, although there can be variations based on the contract at issue, the rules that apply to most class arbitrations look very much like those that apply to a class action moving through federal court.

AAA and JAMS, the two primary providers of class arbitration services in the U.S., impose rules based on Rule 23, Strong said.

Class certification, notice and settlement under AAA and JAMS class arbitration rules follow the same procedures as in court.

3. Limited Judicial Review

One major difference between class arbitrations and class actions in court is that judicial review of arbitrator decisions is extremely limited.

The U.S. Supreme Court said in Oxford Health Plans LLC v. Sutter that “an arbitrator can even interpret the law wrong as long as the arbitrator seems to have applied the right body of law,” plaintiffs’ attorney Sellers said.

“Obviously there’s a tremendous amount of risk for a company to actually go through an entire class arbitration,” defense attorney Levin said. The lack of judicial review means class arbitration is potentially a “bet-the-ranch situation,” he said.

“And most arbitrators also are not as experienced as judges with all the complexities of class proceedings and making sure that the rights of the defendants and the absent class members have been observed,” Levin said.

But the lack of an appeal on the merits works to the advantage of the corporate defendants, Professor Strong said.

Plaintiffs make most of the appeals of arbitration decisions in court, suggesting that corporations win more than they lose, she said.

4. Fast, Flexible

If the parties don’t litigate too much over the arbitrator’s clause construction, “class arbitrations take no longer than class actions in court and would likely take less time,” Strong said.

“Arbitrators do not have to balance large dockets like judges do and can set the hearing date as early as possible,” she said.

That has been Sellers’s experience with the Sterling case. The arbitration has dragged on for years, but he said the arbitrator is very accessible.

“We had a hearing recently on a matter that one party thought was urgent and the arbitrator scheduled it within three hours—and that’s not the first time that’s happened,” he said.

“Most courts are not as responsive,” he said. “Arbitrators can be—and ours has been—very responsive to immediate needs of the parties.”

But not everyone agrees. Defense attorney Samberg believes many of the perceived advantages of arbitration are lost when arbitrations proceed on a class basis.

“The clash of the formality of a code with the informality of an arbitration means that the arbitration is going to cease to be flexible, it’s going to cease to be rapid, it’s going to cease to be inexpensive,” he said. “You’re going to have all of the troubles of class action proceedings.”

5. Not Confidential But..

Parties in an individual arbitration usually agree to keep the proceedings confidential. But when absent class members are involved, confidentially takes a back seat to transparency.

The AAA rules say the presumption of privacy and confidentiality in arbitration proceedings doesn’t apply in class arbitrations.

“All class arbitration hearings and filings may be made public, subject to the authority of the arbitrator to provide otherwise in special circumstances,” Rule 9 says. “However, in no event shall class members, or their individual counsel, if any, be excluded from the arbitration hearings.”

But as Sellers, the plaintiffs’ attorney, points out, “it’s a presumption so it’s not a guarantee.”

“There still can be a battle over which things may be made public,” he said. Sellers recently won the release of sworn statements from Sterling employees after years of arguing that they be made public.

“The rights of our 69,000 clients are being adjudicated here and our argument was they for the most part had no idea what evidence was being submitted on their behalf,” he said.

The AAA rules require that basic documents like the pleadings and awards be available on the online docket, Professor Strong said. “There is still a certain amount of confidentiality—outsiders cannot attend hearings and cannot see interim motions—but the broad parameters of the case are made public.”

6. Going the Way of the Dodo?

These are all important aspects of class arbitration. But some say this knowledge may become less relevant in the future.

That’s because, as corporations increasingly use class waivers in their arbitration agreements, very few class arbtirations will move forward, Professor Wolfman said.

They are pretty rare as is. But so are class action trials, he said.

“There are those who would say that the situation we have in the Sterling case is somewhat of an anomaly and it was from an era when it wasn’t clear how clearly parties had to state their intention to not commit class claims to arbitration,” Sellers, the plaintiffs’ attorney, said.

He said using arbitration agreements is fueled by the hope they will preclude class claims altogether. “If arbitration agreements could not foreclose the use of class claims, I think the use of arbitration agreements would drop off dramatically.”

Professor Strong agreed.

“If corporations can get their consumer, employment and similar claims heard in arbitration rather than litigation, and then insert a waiver of class claims, they exempt themselves from virtually all liability for wrongdoing,” she said. “Thus the entire hullabaloo about class arbitration is not that the arbitral procedure itself is unfair, the fight is about eliminating the class suit altogether and thereby exempting corporations from liability.”

Defense attorney Samberg said that corporations that have really thought about it have all included class arbitration waivers in every agreement.

“States like California will try to nibble around the edges even if they can’t blast away these waivers,” he said.

But he expects eventually everyone will come around to his position that class arbitration, the “unicorn” of alternative dispute resolution, just won’t fly.

To contact the reporter on this story: Perry Cooper in Washington at pcooper@bna.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bna.com

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