SC Lawyer, March 2004, #2. Class-wide arbitration after Green Tree.

• Author: By Michael G. Sullivan and A. Camden Lewis

South Carolina Lawyer

2004.

SC Lawyer, March 2004, #2.

Class-wide arbitration after Green Tree

South Carolina LawyerMarch 2004Class-wide arbitration after Green TreeBy Michael G. Sullivan and A. Camden LewisOn a writ of certiorari, the U.S. Supreme Court recently reviewed a pair of decisions by the Supreme Court of South Carolina which had 1) affirmed a trial court's decision to allow class-wide arbitration in a case where there was no express prohibition against it in the parties' contract and 2) upheld the decision of an arbitrator to allow class-wide arbitration in a case with a similar arbitration provision. The U.S. Supreme Court vacated these decisions and remanded the consolidated cases with the instruction that, in the first instance, it was for the arbitrators, not the Court, to determine if class-wide arbitration was available.

All plurality decisions have about them a kind of suspect authenticity, rather like an unsigned Picasso. The recent Green Tree Financial Corporation, nka Conseco Finance Corp. v. Lynn W. Bazzle, 123 S.Ct. 2402 (2003), decision by the U.S. Supreme Court is no exception. It is important to note that these cases were vacated on the very narrow grounds that the wrong decision maker (the court) decided the availability of class-wide arbitration. Left undisturbed, however, was the Supreme Court of South Carolina's analysis of the interpretation of contracts, and that ultimately is what we as practitioners must look to for guidance. Given the increasing prevalence of arbitration provisions, it is important to understand the impact of these decisions on the availability of class-wide arbitration.

If the contract between the parties broadly assigns the duty of contract interpretation to the arbitrators, then they and not the courts must fulfill that duty. This is the first commandment of Green Tree.

Second, is a contract "silent" on the issue of class-wide arbitration merely because there is no express prohibition of class actions? This seems to be the view of the Supreme Court of South Carolina, yet arbitrators are sure to glean these contracts for signs of the parties' contrary intent. Such attempts at divination by arbitrators are unlikely to be upheld by the courts. The Supreme Court of South Carolina clearly does not favor agreements limiting the availability of class-wide arbitration. It would appear that, if there is no express prohibition against class-wide arbitration, the most likely outcome is that the contract will be held to be ambiguous, and those ambiguities will be resolved against the drafter. This appears to be especially true in the case of contracts of adhesion where the weaker party did not negotiate away the availability of class-wide arbitration.

Third, even if a contract contains an express prohibition against class-wide arbitration, the Supreme Court of South Carolina has signaled its intention to ignore those provisions as being against public policy. (See FN 21.) One can be confident that corporate counsel are at this moment drafting such limiting language for insertion into their arbitration agreements.

Lastly, while these cases both involved contracts of adhesion, as did the California case cited by the Supreme Court of South Carolina, it is an open question as to whether or not this fact is an essential element needed to trigger the Court's disinclination to enforce arbitration agreements that limit the availability of class-wide arbitration. The rationale that these terms were not actually "bargained for" in contracts of adhesion is, of course, not applicable in standard contract cases. However, the public policy arguments cited by the Court would seem to apply in both situations.

The Court's plurality decision presents members of the plaintiff's and defense bar with some strategic difficulties and puts an increased burden on arbitrators to exercise enormous care in interpreting contracts that are seemingly "silent" on the issue of class-wide arbitration. The authors are of the opinion that, with one exception, the Court's decision left the Supreme Court of South Carolina's analysis intact. Therefore, both decisions are worth examining.

The South Carolina cases

The Green Tree decision actually encompasses two distinct sets of state class actions. The Lackey class (Daniel B. Lackey, v. Green Tree Financial Corp., 330 S.C. 388, 498 S.E.2d 898 (1998)) included all mobile home transactions in which Green Tree Financial Corporation (Green Tree) acted as the lender. The Bazzle case (Lynn W. Bazzle, v. Green Tree Financial, Corp., 351 S.C. 244, 569 S.E.2d 349 (2002)) involved all home improvement loans provided by Green Tree. The financing contracts entered into by both classes of borrowers with the defendant were identical in all material respects. These contracts made no provision for the borrowers to select their attorney or insurance agent. The borrowers claimed this violated their rights under state consumer protection law.

The two classes took a slightly different procedural path as well. In Bazzle, the trial court certified the class and then compelled arbitration. In Lackey, the trial court compelled arbitration after the arbitrator certified the class. This procedural distinction would later cause some difficulty for the U.S. Supreme Court.

The arbitration clause found in the retail sales agreements entered into by both classes of borrowers was essentially the same. It contained no express prohibition against class-wide arbitration. The borrowers argued it was therefore silent as to whether or not this collective dispute resolution device was available. The lender argued that use of the singular throughout the arbitration clause (this dispute, you) demonstrated its intention to prohibit class actions.

At the outset, the Supreme Court of South Carolina recognized there was no controlling precedent for it to follow. It also pointed out that several federal circuits had found that class-wide arbitration was not available if the agreement was silent on that point. This was based on their reading of § 4 of the Federal Arbitration Act which requires disputes to be arbitrated in accordance with the terms of the controlling contracts. These courts further theorized that no meaningful distinction could be made between consolidated arbitration and class-wide arbitration, and they had consistently denied consolidation where it was not expressly provided for.

However, the California Supreme Court found class-wide arbitration was available even when there was no express provision for it. Keating v. Superior Court, 31 Cal.3d 584, 183 Cal.Rptr. 360, 645 P.2d 1192 (1982). The Court reasoned that, in contracts of adhesion where the parties had not actually "bargained for" a limitation on the class remedy, to eliminate class actions would "chill the effective protection of interests common to the group" and violate the principle of judicial economy.

The California Supreme Court distinguished consolidated arbitration where parties to the dispute have a contractual relationship with a third party, but not with each other, from class-wide arbitration in which all plaintiffs have contracted with the defendant. Thus, class-wide arbitration did not coerce a non-contracting party into arbitration. The Supreme Court of South Carolina found the reasoning of the California Court persuasive.

The Supreme Court of South Carolina disposed of the § 4 argument by holding that the U.S. Supreme Court has never applied §§ 3 and 4 of the Federal Arbitration Act to state courts. While the Court conceded the Federal Arbitration Act would trump state procedure if the two were in conflict, it simply found that allowing class-wide arbitration advanced the Federal Arbitration Act's goal of enforcing arbitration agreements.

The lender's most powerful argument, that the use of the singular throughout the arbitration clause demonstrated an intention to limit class actions also found little favor with the Court. The Supreme Court of South Carolina found that, where there was no express prohibition of class actions, the use of the singular merely created an ambiguity that must be resolved against the drafting lender. The Court had telegraphed its decision when, in an earlier case, it upheld consolidation in a case where the contract had made no express provision to do so. Episcopal Housing Corporation v. Federal Insurance Co., 273 S.C. 181, 255 S.E.2d 451 (1979).

In an intriguing footnote, the Court opined that even if class-wide arbitration or consolidation were expressly prohibited, it would undermine the principle of judicial economy and the burden would be on the drafter to demonstrate prejudice if the provision were not enforced. (See Footnote 21). FN21. Although this present case does not raise this question, we note that preclusion of class-wide or consolidated arbitration in an adhesion contract, even if explicit, undermines principles favoring expeditious and equitable case disposition absent demonstrated prejudice to the drafter of the adhesive contract.

The U.S. Supreme Court decision

In a plurality decision, the U.S. Supreme Court vacated the judgment of the Supreme Court of South Carolina and remanded the cases with the instruction that the arbitrator, not the court, must in the first instance determine if class-wide arbitration is available.

Four justices (Breyer, Scalia, Souter and Ginsburg) held that the contract between the parties had expressly relegated "all disputes relating to this contract" to the arbitrator for his decision. Since in the Bazzle case the trial court had certified the class, the parties were denied a decision by the arbitrator on this issue. The Court then held that, while the arbitrator in the Lackey case had certified the class, he did so after Bazzle had been decided and therefore his decision was somehow impermissibly tainted by the court's decision in Bazzle. One can reasonably object at this point that an arbitrator is bound to inform himself of the law and equally bound to follow that law as it is interpreted by the courts. Even if the Bazzle court had intruded too early into that case, presumably it gave the Lackey arbitrator a correct interpretation of state contract law.

The plurality rejected the argument that the use of the singular throughout the arbitration clause demonstrated an unambiguous intention to preclude class-wide arbitration. The Court held it was for the arbitrator to determine what the consequences of that language were for the contracting parties. The Court did, however, recognize that whether or not the contracts were silent on the issue of class-wide arbitration "is a matter of state law-"

Chief Justice Rehnquist, joined by Justices O'Connor and Kennedy, dissented from the plurality opinion. In his dissent, the Chief Justice found that the lender would be deprived of the right to select an arbitrator for each claim against it by allowing one arbitrator to hear a class-wide arbitration. This would prejudice the lender by concentrating all the risk of an adverse result in the hands of a single arbitrator. The dissent opined that how arbitrators are selected is akin to the issue of what issues can be arbitrated and is therefore a subject for the courts to decide. The Chief Justice recognized that interpretation of contracts is generally a question of state law which the Supreme Court does not review. However, when state law conflicts with federal law, state law must give way. The dissenters found persuasive the argument that the use of the singular throughout the arbitration clause (even while conceding that there was no express prohibition of class-wide arbitration) demonstrated an intention to preclude class-wide arbitration. Further, they felt § 4 of the Federal Arbitration Act would preclude class-wide arbitration even if the contract was "silent."

Justice Thomas dissented on the grounds that the Federal Arbitration Act does not apply to state court proceedings, and he would therefore have simply affirmed the decision of the Supreme Court of South Carolina.

Justice Stevens dissented to the extent that he believed the parties' contract called for the arbitrator to interpret the contract in the first instance. However, he concurred to insure the case established controlling precedent.

The decision whether or not to enforce an arbitration clause is now much more difficult to make as it brings with it the possibility of class-wide arbitration. While corporate counsel may be drafting language expressly prohibiting class-wide arbitration in future contracts, Footnote 21 leaves in doubt the success of those efforts. Additionally, arbitrators will be faced with the difficult task of interpreting pre-Green Tree contracts that are seemingly "silent" on the issue of class-wide arbitration. Further appeals seem inevitable.

Michael G. Sullivan, P.C. is a sole practitioner in Michael G. Sullivan, P.C. whose area of concentration is in commercial litigation. A. Camden Lewis is a partner in the law firm of Lewis Babcock & Hawkins, L.L.P. His area of concentration is commercial litigation with an emphasis on consumer class actions.

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