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Classwide Arbitrations Face Conflicting Governing Rules

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Classwide Arbitrations Face Conflicting Governing Rules

Source: Daily Journal
Date: June 9, 2004
California law permits the consolidation of separate arbitrations between the same parties or between any two parties of whom one is a party to two or more proceedings, - if the dispute arises from the same transaction or series of related transactions and if a common issue of law or fact creates the possibility of conflicting rulings by more than one arbitrator. Code of Civil Procedure Section 1281.3.

This approach to consolidation was followed in the Revised Uniform Arbitration Act, approved in 2000 and adopted by eight states as their state arbitration law: North Carolina, Oregon, Utah, New Jersey, New Mexico, Hawaii, North Dakota and Nevada. The Federal Arbitration Act has no counterpart provision for consolidation.

California courts have authority, in their discretion, to allow classwide arbitrations. Blue Cross of California v. Superior Court (Farquhar), 67 Cal.App.4th 42 (1998), certiorari denied 527 U.S. 1003 (1999). Such an order is not pre-empted by the Federal Arbitration Act. Blue Cross. See also Keating v. Superior Court, 31 Cal.3d 584 (1982) (trial court "not without authority" on consideration of certain factors, to order classwide arbitration), reversed on other grounds, Southland Corp. v. Keating, 465 U.S. 1 (1984).

Thus, where the parties' agreement does not expressly forbid it and where the law of the jurisdiction permits classwide arbitration, a court may properly order it. See Izzy v. Mesquite Country Club, 186 Cal.App.3d 1309 (1986); Lewis v. Prudential Bache-Securities Inc., 179 Cal.App.3d 935 (1986).

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, it has been 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 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).

The issue of classwide arbitration is particularly timely because of two recent cases. Last year, the U.S. Supreme Court determined that the arbitrator rather than a court must decide the threshold issue of whether an arbitration agreement would permit claims brought under it to proceed on behalf of or against a class. Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).

The court did not determine any other issue of class-action procedure, such as by what means and against what standards class certification issues would be addressed or who (court or arbitrator) would make that determination.

The second, related case development is exemplified by Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003), certiorari denied, 124 S.Ct. 53 (2003). There, the court found AT&T's arbitration agreement with consumers prohibiting consolidation of claims (and hence any classwide treatment of similar issues among multiple customers) to be unconscionable, and the arbitration agreement therefore was held to be unenforceable. Accord, Szetela v. Discover Bank, 97 Cal.App.4th 1094 (2002).

Two cases pending in the state Supreme Court are raising the same issue. Discover Bank v. Superior Court, 105 Cal.App.4th 326 (2003) and Mandel v. Household Bank (Nevada) Nat. Assn., 105 Cal.App.4th 75 (2003).

This interest in classwide arbitration prompted the American Arbitration Association to adopt supplementary rules for class arbitrations, effective Oct. 8, 2003.

They are intended to supplement whichever of the group's rules otherwise would be applicable (for example, construction, employment, international or commercial). The group contemplates a three-step process, each step of which would result in a partial final award (except the last step, which would be reflected in a final award) and the opportunity for any party to seek immediate review of the award reflecting the decision for each step.

The steps are 1) clause construction, 2) class certification and determination, and 3) final award (this phase might be segmented further into a hearing on the merits and a later hearing on remedies, including the allocation of fees and costs to the parties and counsel and therefore might include the issuance of one or more interim awards as distinguished from a partial final award).

JAMS does not have separate class-action procedures; it would apply its comprehensive arbitration rules and procedures to a case in which classwide claims are asserted, and local law would guide the assessment of the suitability of the claim for class treatment as well as who (court or arbitrator) would make that determination.

The use of a partial final award as a vehicle for interlocutory review by a court of an arbitrator's nonfinal award is somewhat novel, although that procedure is permissible under the group's commercial rules (Rule R-43(b)). See Hightower v. Superior Court (O'Dowd), 86 Cal.App.4th 1415 (2001).

The allocation of authority to the arbitrator to determine "clause construction" (Step 1 in the group's procedure) is consistent with existing law. Green Tree.

The authority of the arbitrator to hear and determine class certification issues (Step 2 in the group's procedure), however, is at variance with state case law.

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 Superior Court eventually would hear the class certification motion and, if it were granted, would send the class action to arbitration for resolution on the merits.

Thus, 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 principle that a court is the appropriate body to determine issues such as certification of a class is reflected in decisions holding that arbitrators have power only to act in individual disputes between parties who have agreed to arbitrate, not to determine broad issues of public policy. See Cruz v. PacifiCare, 30 Cal.4th 303 (2003) (Business and Professions Code Section 17200 injunctions affecting other than the parties to the arbitration are inarbitrable); Broughton v. CIGNA HealthPlans of California, 21 Cal.4th 1066 (1999) (Consumer Legal Remedies Act injunctive relief for the public not subject to arbitration).

Whether California procedure or American Arbitration Association procedure would be appropriately followed in a classwide arbitration pending in California and administered by the group is unclear.

The group's Rule 1(c) says that, where a court has, by order, addressed and resolved any matter that otherwise would be decided by an arbitrator under these supplementary rules, the arbitrator shall follow the order of the court.

This seems to suggest that a party objecting to the arbitrator's authority to decide class certification issues in the first instance must apply to a court for an order before the arbitrator undertakes to decide that issue.

Alternately, the review of the arbitrator's class determination issue, embodied in a partial final award, is expressly subject to court review. Given the state authorities suggesting that this is the proper role of the court, at the least the review of the arbitrator's Step 2 determination should be de novo.

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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