Universes colliding: the constitutional implications of arbitral class actions.

• Author: Weston, Maureen A.

TABLE OF CONTENTS INTRODUCTION I. REPRESENTATIVE LITIGATION: JUDICIAL AND ARBITRAL CLASS ACTIONS A. Judicial Class Actions and Rule 23 1. Certification "Death Knell" and Adequacy of Representation 2. Notice 3. Judicial Oversight, Management, and "Fairness" Decisions B. Arbitral Class Actions 1. Assumptions that Class Arbitration Should Mirror Judicial Class Actions 2. Approaches to Administering Arbitral Class Actions a. The California Hybrid Judicial-Administration Model b. The AAA Option for Judicial Confirmation Approach c. Lackey Style: Arbitrator Does It All/No Judicial Involvement 3. Analysis of the Various Approaches II. CONSTITUTIONAL IMPLICATIONS OF ARBITRAL CLASS ACTIONS A. Due Process and Arbitration: Are Class Arbitrants Entitled to Due Process? B. The State Action Requirement: Is Arbitration State Action? 1. Defining State Action 2. The Two-Part Test C. Application of State Action Test to Private Contractual (Participatory) Arbitration 1. Does Private Contractual Arbitration Constitute State Action? 2. Arguments in Favor of Finding Arbitration as State Action a. Arbitration's Source in State Authority b. The Arbitrator as a State Actor and State Nexus with Arbitration i. Arbitration's Reliance on Governmental Assistance ii. Arbitration Performs a Traditional Public Function iii. Aggravation of Injury by Incidents of Government Authority 3. Most Courts Reject State Action Theory for Participatory Arbitration a. Governmental Authorization Is Not Entanglement b. Dispute Resolution Is Not an Exclusive Public Function 4. The Status of Constitutional Rights in Arbitration D. Application of State Action Analysis to Class Arbitration: A Case for Finding State Action 1. A Hypothetical Primer 2. Significant State-Private Nexus Under the Hybrid Approache 3. Permitting Escape From Any Court Involvement: Practical Absurdity 4. Minimal Fair Process: A Political and Practical Necessity III. WHAT PROCESS IS DUE IN CLASS ARBITRATION: BY LAW OR NECESSITY?. A. Procedural Fairness in Class Arbitration B. Defining Due Process for Class Arbitration 1. Constitutionally Protected Interests Are Invoked in Class Arbitration 2. What Procedure Is "Due" to Class Arbitrants? a. Notice in Class Action Arbitration b. An Opportunity for Class Members To Be Heard and To Opt Out C. Unique Aspects of Class Arbitration Mandate Process Protections 1. The Right To Select the Arbitrator 2. The Right to an Unbiased Decision Maker 3. Class Certification 4. The Right to Adequate Representation 5. Other Process Issues Unique to Class Arbitration CONCLUSION INTRODUCTION

Despite perceived shortcomings and criticisms of misuse, class actions are an important procedural joinder device in our public justice system for bringing claims on behalf of a large number of individuals when it may be economically unfeasible to assert claims individually. (1) In the employment context for example, judicial class actions have served as an essential procedural vehicle to address a pattern of civil rights violations. Class actions are also vital in the consumer arena to address relatively small yet widespread illegal and unfair business practices that would "go unremedied if each litigant had to fight alone." (2) In a litigated class action, the court plays a critical role in administering and presiding over the proceeding to ensure fairness and to protect the due process rights of those class members not participating in the case. (3) The elaborate procedural steps in such representative litigation--fairness oversight, notice, adequacy of representation, and judicial involvement in class certification--reflect important constitutional due process protections. (4) Increasingly, however, recourse to the public judicial system is being displaced by a trend in corporate America to require the submission of disputes to private arbitration rather than to courts of law via predispute arbitration provisions in a range of contracts involving consumer, employment, health care, and business transactions. (5) Arbitration is a private form of dispute resolution whereby contracting parties have presumably consented to a binding resolution of their disputes by a private arbitrator. Under a typically broad arbitration clause, arbitrators are empowered to decide all disputes between (or among) the parties, including contractual and statutory claims. Arbitral awards are subject to extremely limited review. (6)

The private arbitration process has been lauded as efficient, flexible, and cost-effective, yet criticized as "an inferior system of justice, structured without due process, rules of evidence, accountability of judgment and rules of law." (7) Despite an initial judicial hostility to arbitration, (8) the United States Supreme Court has, since the 1980s, consistently recognized a "national policy favoring arbitration" and relied on the Federal Arbitration Act (FAA) to uphold enforcement of these contracts. (9) Individuals subject to such mandatory arbitration provisions have frequently challenged these provisions as contracts of adhesion, procured by unequal bargaining power and inconsistent with statutory intent and public policy. (10) These individuals are, however, generally deemed to have waived their right to a judicial forum. (11) In upholding compulsory arbitration, the Supreme Court has stated that only the forum is changed, from judicial to arbitral, but the ability to vindicate substantive rights cannot be impaired. (12) Yet, considering the arbitral forum's insulation from the public judicial purview, proving that one's substantive rights are unlawfully impaired in arbitration is difficult. (13) Consequently, employees or consumers asserting claims against corporate entities arising under not only contract law but also state or federal statutory law must submit adjudication of these rights to arbitration.

An essential characteristic of arbitration is the parties' perceived freedom to agree to resolve their dispute outside of the constraints of the public judicial system. (14) Notably, however, the public judicial system has become significantly involved in arbitral disputes, and federal and state statutes provide substantial support for enforcing arbitration contracts. The FAA authorizes judicial involvement in arbitration by requiring a court to enforce agreements to arbitrate. (15) The FAA also authorizes a court to stay litigation pending arbitration, to appoint an arbitrator, and to confirm an arbitration award. (16) Although the FAA provides for extensive judicial support for private arbitration, and the law typically accords arbitrators immunity comparable to public judges, an arbitrator is not considered a state actor within the meaning of constitutional jurisprudence, and arbitration typically need not afford parties the due process otherwise guaranteed in a court of law. (17)

Important questions arise, however, when the seemingly distinct processes of class actions and arbitration intersect or merge, or perhaps become altogether subsumed by each other. For example, do the boilerplate contractual arbitration provisions constitute a waiver of rights to proceed collectively, or to constitutional due process, in a class arbitration setting? Both courts and arbitrators are increasingly asked to determine the impact of predispute arbitration contracts on the ability of individuals subject to these contracts to sue, not only on their own behalf, but on behalf of an entire class of similarly situated individuals--that is, to pursue a class action lawsuit--either in court or in arbitration. Cases involving mandatory arbitration contract provisions and class actions generally raise one of three issues: First, do arbitration agreements that are silent on the issue of class actions bar the filing of a class action in court or in arbitration? Second, are arbitration agreements that expressly bar class actions illegal under state unconscionability law, inconsistent with other federal protective statutes, or outright permissible under the FAA? (18) The third issue involves the class arbitration process itself: what can or must the process entail--particularly the effect on absent, nonparticipatory class members--and what are the respective roles of the court and the arbitrator?

For example, the case before the U.S. Supreme Court in Green Tree Financial Corp v. Bazzle (19) raised but failed to adequately address these concerns about class actions and arbitration. The Bazzle decision was a consolidation of two separate lawsuits--the Bazzle case, which involved home-improvement loans, and Lackey v. Green Tree Financial Corp., (20) which involved mobile home refinancing--filed in state court by individuals seeking class action status and statutory damages on the basis that Green Tree had failed to make certain required disclosures in loan agreements as mandated by South Carolina law. (21) In both cases, Green Tree sought to compel arbitration of individual claims because the loan agreements required the parties to submit all disputes to mandatory arbitration. (22) Prior to granting the motion to compel arbitration in Bazzle, the trial court had certified the class of plaintiffs and then ordered the parties to class arbitration. (23) The arbitrator, in turn, administered the class action and awarded the class more than $10.9 million in statutory damages, plus attorneys' fees. (24) In Lackey, the trial court simply granted the motion to compel arbitration and the same arbitrator conducted all aspects of the class action within the arbitration, including class certification, notice, and a hearing on the merits, and awarded the class $9.2 million in statutory damages in addition to attorneys' fees. (25) The trial court subsequently confirmed both class arbitral awards. (26) On appeal to the South Carolina Supreme Court, Green Tree argued that because the contract was silent as to the availability of proceeding as a class action either in court or in...