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Case Allocates Responsibility Between Court and Arbitrator

Case Allocates Responsibility Between Court and Arbitrator

Source: Daily Journal
Date: August 13, 2003

California law permits the consolidation of separate arbitrations between the same parties or where one party is a party to two or more such proceedings if the dispute arises from the same transaction or series of related transactions and common issues of law or fact create the possibility of conflicting rulings. Code of Civil Procedure Section 1281.3.

The Revised Uniform Arbitration Act has adopted the California approach, and the several states that have adopted the uniform act now permit consolidation of claims in arbitration in the same manner. No counterpart provision exists in the Federal Arbitration Act.

California courts have interpreted Section 1281.3 to give courts discretion to allow classwide arbitration and have concluded that the Federal Arbitration Act would not pre-empt such an order. Blue Cross of Cal. v. Superior Court (Farquhar), 67 Cal.App.4th 42 (2nd Dist. 1998); see also Keating v. Superior Court, 31 Cal.3d 584 (1982), rev'd on other grounds, Southland Corp. v. Keating, 465 U.S. 1 (1984) (trial court "not without authority," on consideration of certain factors, to order classwide arbitration).

The Keating court likened classwide arbitration to the consolidation of many similar claims: "An order for classwide arbitration in an adhesion context would call for considerably less intrusion upon the contractual aspects of the relationship. The members of a class subject to classwide arbitration would all be parties to an agreement with the party against whom the claims are asserted; each of those agreements would contain substantially the same arbitration provision; and if any of the members of the class were dissatisfied with the class representative, or with the choice of arbitrator, or for any other reason would prefer to arbitrate on their own, they would be free to opt out and do so. Moreover the interests of justice that would be served by ordering classwide arbitration are likely to be even more substantial in some cases than the interests that are thought to justify consolidation."

Because the Federal Arbitration Act is silent on the right of a court to order a classwide arbitration, courts have held that a federal court may not order classwide arbitration unless the arbitration agreement specifically confers such power (Champ v. Siegel Trading Co., 55 F.3d 269 (7th Cir. 1995)) or unless applicable state law allows such a procedure and the arbitration agreement is silent on the issue (New England Energy Inc. v. Keystone Shipping Co., 855 F.2d 1 (1st Cir. 1988)). See also Dickler v. Shearson Lehman Hutton Inc., 586 A.2d 860 (Pa. Super. Ct. 1991).

In Blue Cross, the Superior Court granted the insurer's petition to compel arbitration of the named plaintiffs' claims but declined to stay the litigation. Rather, the court permitted the litigation to continue for the purpose of conducting class discovery with the understanding that the court eventually would hear the class-certification motion and, if it was granted, then would send the class action to arbitration for resolution on the merits.

The Blue Cross court determined that the trial court, not the arbitrator, would decide in the first instance whether to proceed with a classwide arbitration.

"Whether classwide arbitration is appropriate in this matter is a question left to the trial court's discretion upon consideration of a variety of factors," the court said.

Allocating to the court the determination of whether to consolidate multiple claims into a class action is consistent with Section 1281.3 because a court must order the consolidation of claims in arbitration.

In Green Tree Financial Corp. v. Bazzle, 2003 WL 21433403 (U.S. June 23, 2003) (plurality decision), the U.S. Supreme Court reversed a South Carolina decision affirming judgments confirming awards in two separate consumer arbitrations, each adjudicating classwide claims. Because South Carolina does not have a statutory provision authorizing a court to consolidate claims in arbitration, the basis on which those matters proceeded as a class action was on an interpretation of the parties' arbitration agreement.

The South Carolina court, applying state case law, noted that, when an arbitration agreement is silent as to the permissibility of an arbitration taking the form of a class action, then class-action adjudication is permitted. The state court further held that the arbitration agreements were "silent as to the issue of class adjudication of arbitrable claims."

The U.S. Supreme Court held that the determination of whether these arbitration agreements authorized proceeding as a class action (in the absence of a provision forbidding class actions) was a question for the arbitrator, not the court, because resolution of the issue turns on a disputed issue of contract interpretation.

The Green Tree court held that this allocation of responsibility between court and arbitrator is controlled by the parties' arbitration agreement, which here gave to the arbitrator the responsibility to resolve "all disputes, claims or controversies arising from or relating to this contract or the relationships which result from this contract."

Thus, the parties agreed that the arbitrator, not a court, would resolve issues of contract interpretation. See First Options of Chicago Inc. v. Kaplan, 514 U.S. 938 (1995).

This determination is consistent with recent Supreme Court jurisprudence allocating issues to arbitrators for decision unless the issues are of the sort that contracting parties likely would have expected a court to decide. Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79 (2002) (statute of limitations under NASD arbitration rules); see also PacifiCare Health Systems Inc. v. Book, 123 S.Ct. 1531 (2003) (arbitrator must determine whether arbitration clause prohibiting award of punitive damages affects arbitrator's ability to accord full remedies under the Racketeering Influenced and Corrupt Organizations Act).

Statutes and arbitration jurisprudence concerning the enforceability of contracts of adhesion requiring pre-dispute mandatory arbitration by employees, health care patients and consumers also affect these principles. See, e.g., Armendariz v. Foundation Health Psychcare Services Inc., 24 Cal.4th 83 (2000).

Individual consumers and employees frequently challenge the enforceability of such provisions and try to preserve their judicial remedies, including the right to a jury trial; however, the prevailing legal standard is that, if the agreement is mutual and meets substantive and procedural due-process standards, then it will be enforced.

Consumers will, on occasion, seek adjudication of such claims on a class-action basis. Anticipating such efforts, some drafters might include in their arbitration agreement an express "no consolidation" or "no class action" provision. Whether such a limitation in an imposed arbitration agreement will meet the test of substantive and procedural fairness is unclear. See Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003) (class-action ban contained in consumer telecommunications contract was unconscionable, making arbitration agreement unenforceable), pet. cert. pending, 71 USLW 3680 (April 16, 2003); Szetela v. Discover Bank, 97 Cal.App.4th 1094 (4th Dist. 2002) (accord); Discover Bank v. Superior Court, 105 Cal.App.4th 326 (2nd Dist. 2003) (contra).

The effect of these principles on cases brought in California is as follows:

  • California state courts would apply Section 1281.3 to determine whether consolidation and class-action treatment is warranted.
  • Part of this analysis, in the case of contracts of adhesion, is whether any provision limiting class actions (such as an express anti-consolidation provision) would make the arbitration agreement unenforceable. According to Green Tree, the arbitrator must decide any issue of contract interpretation (such as whether the parties' agreement actually bars classwide arbitration).
  • If the court finds the anti-classwide arbitration provision unconscionable, then it would not enforce the arbitration agreement or would sever the offending provision.
  • Even if the Federal Arbitration Act applies to such a case (for example, if it involved a transaction in interstate commerce), a state court would be free to certify a class and order class arbitration under Blue Cross.
  • In such a case pending in a federal court sitting in California, a party could seek consolidation into a classwide arbitration based on the holdings of Champ or New England Energy.
  • In all cases, therefore, although the arbitrator determines contract interpretation, courts properly should determine whether consolidation or classwide arbitration is warranted and whether the standard for class treatment has been met. Blue Cross.

In Blue Cross, both sides agreed that the Federal Arbitration Act governed the arbitration clause because the arbitration agreements at issue were contained in a contract evidencing a transaction involving commerce. E.g., Allied Bruce-Terminix Cos. Inc. v. Dobson, 513 U.S. 265 (1995).

Blue Cross argued that the trial court's order violated the Federal Arbitration Act, particularly the act's provision that the court, being satisfied that the making of the arbitration agreement is not in issue, "shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement" to arbitrate. 9 U.S.C. Section 4.

That argument was unsuccessful in Blue Cross, and the implicit holding of Green Tree is that, if a class action is proper under a state's arbitration law, then the Federal Arbitration Act does not preclude it, even where the federal act is applicable. In Green Tree, the consumer agreements were loan transactions that were governed, in part, by federal law. The parties agreed that the Federal Arbitration Act was applicable.

Green Tree should not alter the number or kinds of cases that are adjudicated as class actions in arbitration; it should, however, help to define the proper allocation of decision making between courts and arbitrators.

Richard Chernick is an arbitrator and mediator and is managing director of the JAMS arbitration practice. He is a co-author of the Rutter Group's "California Practice Guide - Alternative Dispute Resolution."

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