As mandatory binding arbitration meets the class action, will the class action survive?

Author:Sternlight, Jean R.


It is no secret that banks, insurance companies, and other potential corporate defendants do not like class actions.(1) Today, such potential defendants, in a broad array of industries, hope that they have found a surreptitious way to defeat the feared class action: mandatory binding arbitration.(2) These companies and their attorneys assert that they may use contracts of adhesion(3) to compel consumers, employees, and others to arbitrate rather than litigate their claims,(4) and to require that such arbitration must proceed on an individual rather than class basis. Increasingly, potential defendants are drafting arbitration clauses that explicitly bar class actions, hoping that these will facilitate favorable court rulings(5)

Thus far, it is not clear whether such strategies will work, at least in the long term. This Article argues that it would be wrong to allow companies to use arbitration clauses to insulate themselves entirely from class action liability, and that courts and legislators should take steps to protect access to class actions.

The companies and attorneys who seek to use arbitration to eliminate class actions contend that plaintiffs, and especially their attorneys, exploit the class action remedy as a way to extort unfair settlements from innocent defendants.(6) In an article aptly entitled Excuse Me, But Who's the Predator?, attorneys Alan S. Kaplinsky and Mark J. Levin state:

All of the dangers inherent in an individual consumer lawsuit--the threats of costly and drawn-out litigation, runaway juries, gargantuan punitive damages awards and adverse publicity--are magnified exponentially when a class of hundreds or thousands of consumers is certified. Faced with these threats, companies often feel pressured to pay substantial amounts in settlement for reasons having nothing to do with the actual merits of the dispute.(7) This opposition to class actions is common to defendants in many kinds of suits, but particularly includes defendants in mass tort claims, securities fraud claims, and consumer claims.(8) While class action opponents have tried numerous legislative and other strategies to limit or eliminate class actions in various arenas,(9) these measures have still left some defendants feeling vulnerable to the class claim. As attorneys Kaplinsky and Levin put it: "Consumers have been ganging up on banks. But now [referring to binding arbitration] the institutions have found a way to defend themselves."(10)

When corporate defendants, their attorneys, arbitral organizations, and other commentators sing the praises of arbitration to the public at large, they generally do not highlight the impact of arbitration on class actions. Instead, they make claims to the effect that arbitration is quicker, cheaper, and better for all concerned, and that consumers and employees will benefit just as much as will the companies that are imposing the arbitration clauses.(11) In private, however, and in their own industry publications, defense counsel and other arbitration advocates readily observe that arbitration can be used to deter the filing of a class action suit, or secure dismissal of a class action that was nonetheless brought.(12) The potential defendants know that because many claims are not viable if brought individually, plaintiffs will often drop or fail to initiate claims once it is clear that class relief is unavailable.(13) The potential defendants also believe that, should plaintiffs choose to pursue individual claims in arbitration, defendants' exposure still will be much lower than it would have been in class action litigation.(14)

Attorney Edward Wood Dunham bluntly describes this strategy in his article, The Arbitration Clause as Class Action Shield.(15) He states:

The nine-figure jury verdict in the Meineke Discount Muffler class action is a bracing reminder that franchising is full of potentially catastrophic litigation risks. The verdict will almost certainly spawn a new generation of class action suits against franchisors, with particular emphasis on alleged mismanagement of franchisee advertising payments. Franchisors with an arbitration clause in their franchise agreements have an effective tool for managing these new class action risks.(16) He frankly goes on to explain:

Absent unusual circumstances ... the franchisor with an arbitration clause should be able to require each franchisee in the potential class to pursue individual claims in a separate arbitration. Since many (and perhaps most) of the putative class members may never do that, and because arbitrators typically do not issue runaway awards, strict enforcement of an arbitration clause should enable the franchisor to dramatically reduce its aggregate exposure.(17) If successful, the strategy urged by Dunham and others would permit any company that has an ongoing relationship with a potential plaintiff--such as an insurer, manufacturer, cruise ship or HMO--to use a contract of adhesion to require that person, typically unknowingly,(18) to arbitrate rather than litigate, and to explicitly bar that person from proceeding by way of class action.(19) One might call this the "do it yourself" approach to law reform: the company need not convince any legislature to pass revised laws, nor persuade any judicial body to change court rules, but rather merely choose to eliminate the pesky class action on its own. If companies attempted to take direct and obvious legislative or even contractual steps to eliminate class actions, they would likely encounter substantial resistance, even in this era of "tort reform," from those who credit class actions for many important achievements. By contrast, using arbitration to eliminate class actions is advantageous for class action opponents in part because it is surreptitious.

In the most extreme version of this defense, some companies seek to use arbitration to defeat class actions by issuing a mandatory arbitration provision after the filing of the class action.(20) Subsequent to the filing of the lawsuit that was designated as a class action, but prior to the court's certification of the class,(21) defendants in several cases have sought to impose binding arbitration on the putative class members and then challenged the legitimacy of the class suit on that basis.(22) Still, courts have not yet condoned this practice.(23)

As one might expect, consumer and employee advocates have vigorously opposed companies' attempts to use arbitration to foreclose class actions, either before or after the filing of the putative class action, arguing that class actions are imperative to protect essential rights, and that companies should not be permitted to use adhesion contracts to eviscerate this important procedural mechanism. They observe that class actions historically have proved critical to the protection of rights of employees, consumers, medical patients, racial or ethnic minorities, and others who lack the resources to litigate individual claims.(24) They urge that using arbitration to eliminate class actions will relegate consumers and others to a forum in which they cannot achieve a just result, and may potentially prevent such claimants from pursuing valid claims.(25) Specifically, these plaintiffs' advocates urge that many cases may not be resolved economically on an individual basis, even though the defendant has allegedly engaged in illegal conduct causing substantial economic harm to a group of persons.(26) Thus, they assert that class actions must, at a minimum, be permitted in arbitration, if not in litigation.(27)

To support the point that some claims are viable only if brought as class actions, defenders of class actions might cite numerous cases that have already arisen in the arbitration context.(28) For example, in Lopes v. Plaza Finance Co.,(29) the plaintiff filed a class action alleging violations of the Truth in Lending Act ("TILA"), the Illinois Consumer Installment Loan Act, and the Illinois Consumer Fraud Act.(30) Jeremias Lopes claimed that when he took out an installment loan for $300 to purchase a television, he was also forced to purchase nonfiling insurance for seven dollars, which was not included in the finance charge.(31) The Lopes opinion does not reflect whether the plaintiff sought return of the entire seven dollars, or only a portion thereof. Either way, certainly few rational plaintiffs or attorneys would seek individual relief on such a small claim, whether through arbitration or litigation, even given the possibility of recovering an additional $200 for statutory damages, or costs and attorney fees.(32) While recognizing that the plaintiff would be unable to bring the claim without the class action, and that this would mean plaintiffs' rights under TILA would go unenforced,(33) the federal district court nonetheless found this ground insufficient to prevent it from ordering the dispute to individual arbitration.(34) Similarly, in Med Center Cars, Inc. v. Smith,(35) named plaintiff Gregory Tapscott alleged that defendant car dealers and insurance companies "had violated the Alabama Mini-Code and had committed common law fraud by financing the sale of automobile `extended service contracts' as part of the purchase of their automobiles, without including the cost of the contracts in the `finance charge' section of the sales documents."(36) Plaintiffs sought classwide arbitration, observing that "actual damages recoverable by each individual are too small to justify the cost of commencing an arbitration proceeding."(37) Plaintiffs hoped that if class arbitration were permitted, only the named plaintiffs, and not each class member, would be required to pay the minimum $500 arbitral filing fee.(38) Nonetheless, while recognizing that plaintiffs' contentions were "practically appealing,"(39) the Alabama Supreme Court reversed the lower court and ordered plaintiffs to proceed to arbitration on an individual basis.(40)

It is rather amazing that...

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