The litigation-arbitration dichotomy meets the class action.

Author:Nagareda, Richard A.


Observers typically cast litigation and arbitration in contrast to one another. Litigation takes place under off-the-rack rules prescribed by public law--for the federal courts, the Federal Rules of Civil Procedure. By contrast, arbitration is a creature of the private law of contracts and part of the larger realm of alternative dispute resolution (ADR). The term "alternative" highlights the contrast with litigation. One prominent concern in recent years posits that ADR mechanisms have given rise to a troubling body of "contract procedure" (1) that shunts off to an opaque, privatized forum many kinds of civil disputes that previously would have formed the grist for the open, public process of litigation. On this account, litigation and arbitration comprise dichotomous, even rivalrous, regimes for the resolution of civil claims.

Two decisions from the October 2009 Term of the Supreme Court--Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co. (2) in the context of litigation and Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (3) in the setting of arbitration--frame a need for more systematic dialogue across the two domains. The engine behind the need for dialogue stems from one of the most distinctive and controversial features of the U.S. civil justice landscape: the possibility of procedural aggregation through the mechanism of a class action or its ADR counterpart, class arbitration. Indeed, the atypical nature of many features of U.S. civil litigation from a comparative standpoint--the U.S.-style class action included--sheds light on the Court's arbitration jurisprudence in ways not yet fully appreciated.

At their cores, both Shady Grove and Stolt-Nielsen turn crucially upon characterization of the essential nature of the class mechanism. Is it merely a super-sized form of joinder (which permits multiple plaintiffs to combine in a single lawsuit) (4) or is it more transformative in nature? (5) At first glance, one might have expected the Court to arrive at a similar view of class treatment across the two decisions. That, however, is not so. The affinity between the questions in the two cases and the divergent answers that the Court provides accentuate the pressure on the litigation-arbitration dichotomy.

In Shady Grove, the Court confronted a question that first-year Civil Procedure students would find familiar. In section 901 (b) of its Civil Practice Law and Rules, the New York state legislature specifies that an action to recover statutory damages--in Shady Grove, "statutory interest penalties" for overdue payments of insurance benefits (6)--"may not be maintained as a class action" unless the law that provides for such damages "specifically authorizes" the class format. (7) Insofar as legislative materials reveal, the notion behind section 901(b) is to avoid remedial "overkill" (8)--the addition of class treatment to a remedy already designed to "provide[] an aggrieved party with a sufficient economic incentive to pursue a claim," so as to generate a whopping level of potential liability in the aggregate. (9) By the terms of section 901 (b), the proposed class action in Shady Grove clearly could not have been maintained in New York state court. The question for the Court, however, was whether section 901 (b) categorically bars the maintenance of a class action in federal court on the basis of diversity of citizenship. (10) By a 5-4 vote, the Court answered "no." (11)

The Court holds that Rule 23 of the Federal Rules of Civil Procedure exclusively governs the conditions under which a class action "may be maintained" (12) in federal court. Specifically, Rule 23 displaces New York section 901 (b) to the contrary by the terms of the federal Rules Enabling Act, as long as Rule 23 itself is proper under that statute. (13) The Rules Enabling Act famously authorizes the Supreme Court "to prescribe general rules of practice and procedure" for the federal courts, subject to the caveat that "[s]uch rules shall not abridge, enlarge or modify any substantive right." (14)

The prospect of a class action in a case like Shady Grove is far from a mere technical matter. The Court's holding positions class counsel to "attempt to transform a $500 [individual] case into a $5,000,000 award" on a class basis. (15) The Court acknowledges this dramatic real-world effect, but the Court nonetheless concludes that Rule 23 does not "enlarge" substantive rights in contravention of the Rules Enabling Act. (16)

Writing for a four-member plurality, Justice Scalia remarks that Rule 23, "no less than traditional joinder (of which it is a species), merely enables a federal court to adjudicate claims of multiple parties at once." (17) On this view, "[t]he likelihood that some (even many) plaintiffs will be induced to sue by the availability of a class action is just the sort of 'incidental effec[t]' we have long held does not violate [the Rules Enabling Act]." (18) Even while diverging from the plurality at points, the concurring opinion of Justice Stevens takes the same view of the class action. For Justice Stevens, "the class vehicle may have a greater practical effect on who brings lawsuits than do low filing fees, but that does not transform" the class action into something like a state law cap on damages available in any civil action--something that might present a closer case under the Rules Enabling Act caveat. (19)

With Shady Grove on the books, one might have expected the same view of class treatment to obtain less than a month later in Stolt-Nielsen. Yet the enabling of claiming that the Shady Grove Court deems a nontransformative, incidental effect with no bearing on substantive rights suddenly becomes something different in kind for the Stolt-Nielsen Court. Writing there in the context of the Federal Arbitration Act (FAA), (20) the Court invokes the enabling of claiming occasioned by class treatment as the decisive ground to explain why arbitrators may not infer from contractual silence in an arbitration clause that a classwide format is permissible. (21)

Writing for a five-Justice majority in Stolt-Nielsen, Justice Alito acknowledges that "procedural questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide." (22) But the Stolt-Nielsen Court then proceeds to explain that the choice to employ class arbitration is not a mere "procedural" matter within the gap-filling authority of the arbitrator. (23) Rather, "class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator." (24)

Rhetoric is revealing here. The Court repeatedly describes a shift from one-on-one arbitration to class arbitration as transformative in nature--as a "crucial difference[]," a "fundamental change[ ]," and hence something "too great" to be presumed to lie within the gap-filling power of the arbitrator absent more specific contractual language. (25) The fundamental difference consists of the capacity of class arbitration to resolve not just a bilateral dispute but, rather, "many disputes between hundreds or perhaps even thousands" that implicate "the rights of absent parties." (26) For the Stolt-Nielsen Court, the distinctive reach of class arbitration to absent parties means that one may not cast the question of its use "as being merely [about] what 'procedural mode' is available." (27)

Shady Grove makes a fleeting appearance in Stolt-Nielsen, but only in the way that director Alfred Hitchcock was apt to appear inconspicuously in the background of scenes within his suspense films. (28) The Stolt-Nielsen majority does not mention Shady Grove at all. That precedent appears in Justice Ginsburg's Stolt-Nielsen dissent and, even then, merely as a "cf." citation for her view that the arbitrators there simply decided "the procedural mode available for presentation of [the] antitrust claims" on the merits. (29) This view itself contrasts with Justice Ginsburg's own dissent in Shady Grove, in which she characterizes the New York bar on class actions for statutory damages as having a substantive dimension and therefore as binding in a federal diversity action. (30) Thus, although the majorities and the dissents across the two cases have overlapping membership, (31) each camp appears to adopt diametrically opposing views about the nature of class treatment.

If litigation and arbitration really are dichotomous modes for civil dispute resolution, then that dichotomy would seem to be doing considerable work. What Shady Grove deems an incidental effect that poses no categorical bar to class litigation morphs, in Stolt-Nielsen, into the fundamental difference that bars class arbitration in the face of contractual silence on the question. Across the two cases, the Court maintains an almost studied avoidance of any explanation for the difference of view as to class treatment. Based simply on what the Court says, one seemingly could transpose the remarks about the nature of class treatment from one decision into the other and flip the outcomes.

This Article takes the contrast between Shady Grove and Stolt-Nielsen as a point of departure for a broader engagement of the relationship between litigation and arbitration. In our modern world of globalized commerce, arbitration is less an "alternative" dispute resolution mode and more commonplace, such that its relationship to litigation is apt to exhibit less dichotomy and more doctrinal convergence. In urging a more synthetic understanding of litigation and arbitration, this Article advances three main claims.

First, for all their salient differences, the Court's accounts of class treatment under the Rules Enabling Act and the FAA evidence a deep, underlying convergence between litigation and arbitration doctrine. This convergence remains unnoticed--certainly...

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