The court's implicit roadmap: charting the prudent course at the juncture of mandatory arbitration agreements and class action lawsuits.

• Author: Lipshutz, Joshua S.
• Position: The Civil Trial: Adaptation and Alternatives

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.

1. 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...