The Future of Class Arbitration Part I

The second paper in our student blog series is written by Mr. Adam Prom and discusses the Future of Class Arbitration.  Here’s part I!

The Future of Class Arbitration Part I

Part II | Part III

By: Adam Prom

In recent years, the Supreme Court has frequently granted certiorari in class arbitration cases.  In the wake of AT&T v. Concepcion[i] and Stolt-Nielsen v. AnimalFeeds,[ii] commentary addressed the possibility that class arbitration was dead.[iii]  Yet, following the Court’s most recently decided cases—Oxford Health Plans LLC v. Sutter[iv] and Am. Exp. Co. v. Italian Colors Rest.[v]—it appears class arbitration is still alive.  What, then, is the future of class arbitration?

 The current state of class arbitration proceedings and jurisprudence

Right now, class arbitration is occurring.  In fact, according to the AAA’s class arbitration case docket, there are 49 active class arbitrations.[vi]  Class arbitrations are also allowed under JAMS proceedings.[vii]  Although JAMS does not publicize ongoing proceedings, it is fair to assume class arbitrations are also being conducted under its rules.  Despite the Supreme Court’s recent attention to class arbitration, these cases have been ongoing for a while.  Since December 2002, there have been 352 class arbitrations under the AAA alone.[viii]  With class arbitration currently being conducted, it is necessary to understand the Supreme Court’s jurisprudence in this area in order to shed light on the future of class arbitration.

A. Concepcion

In 2011, the Supreme Court decided Concepcion, which “stands for the proposition that courts may not strike down arbitration agreements based on facially neutral rules that disproportionately impact arbitration.”[ix]  The majority opinion, authored by Justice Scalia, is framed by the “fundamental principle that arbitration is a matter of contract.”[x]  This principle is based on the idea that defendants would not have willingly agreed to arbitrate if they knew they could be subject to the disadvantages of class proceedings.[xi]

The majority opinion’s opposition to class arbitration is also based on the premise “that if the Court were to allow states to condition the enforceability of arbitration agreements on the availability of class proceedings, then it would be obliged to allow states to demand other procedures in arbitration, such as judicially monitored discovery.”[xii]  The majority sees the shift from individual to class proceedings as one that introduces changes that are “fundamental,” including the introduction of absent parties, different procedures, and higher stakes.[xiii]  These fundamental changes, according to the majority, would “greatly increase risks to defendants” and force them to accept “in terrorem” settlements of questionable claims.[xiv]  Consequently, the majority concludes that judicial decisions that interfere “with [the] fundamental attributes of arbitration,” are inconsistent with the purposes of the FAA and should be preempted.[xv]

B. Stolt-Nielsen

In 2010, the Supreme Court decided Stolt-Nielsen and held that “arbitrators may not order class arbitration based on an agreement that is silent with respect to class arbitration.”[xvi]  The majority concludes that the arbitrators’ decision to order class action arbitration, based on their view that public policy favors class action arbitration, exceeded the scope of their powers under Section 10(a)(4) of the FAA and should be disregarded.[xvii]  At arbitration, the parties stated that they never agreed to participate in class arbitration.[xviii]  As such, the Court specifies that “[a]n implicit agreement to authorize class action arbitration is not a term that the arbitrator may infer solely from the fact of the parties’ agreement to arbitrate.”[xix]  What the arbitral panel did wrong in the eyes of the majority has been stated well:

“[I]nstead of relying on their view of public policy, the arbitrators should have identified a rule of law…that governs the issue of class arbitration. Their failure to do so, combined with their choice to act as a common law court to develop what they viewed as the best rule for the situation, exceeded the scope of the panel’s powers under the agreement and, therefore, had to be reversed.”[xx]

C. Oxford Health

In Oxford Health, the Supreme Court held that that an arbitrator can allow a class arbitration proceeding.  Here, Oxford Health agreed that an arbitrator should determine what the contract at issue meant, including whether its terms allowed class arbitration.[xxi]  Therefore, the Court says “Oxford [Health] chose arbitration, and it must now live with that choice” because the arbitrator did what the parties requested.[xxii]  Importantly, the Court distinguishes this case from Stolt–Nielsen by emphasizing that in the latter the arbitrators did not construe the parties’ contract and did not identify any agreement authorizing class proceedings.[xxiii]

 D. Italian Colors

During the same term as Oxford Health, the Supreme Court decided Italian Colors.  Here, the Court held that the FAA does not allow courts to invalidate a class arbitration waiver through the effective vindication exception.  In other words, the Court discusses how a class arbitration waiver may be invalidated if a plaintiff is not able to vindicate his or her statutory remedies due to arbitration filing and administrative fees; yet, no invalidation will occur due to a plaintiff’s expenses in proving a statutory remedy, which was at issue here.[xxiv]  The importance of this distinction was highlighted even before the Court’s decision by a commentator who writes that the vindication of rights doctrine “might not apply where the ‘prohibitively expensive’ costs are imposed, not by arbitration-specific expenses, but by the claim itself.”[xxv]  The Court also references its Concepcion decision to emphasize how the switch from bilateral to class arbitration sacrifices the principal advantages of arbitration by making the process slower, more costly, and more likely to create a procedural mess.[xxvi]

In the next post, Mr. Prom considers ways that class arbitration may be able to survive in limited circumstances under the Court’s jurisprudence.  Stay tuned!