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A Legislated Solution to the Class Actions Conundrum?

While the arbitration community awaits the Supreme Court’s decision in the Stolt-Nielsen case, US courts and commercial arbitrators continue to wrestle with the suitability of the arbitral forum for class action litigation.

In a recent case, the district judge who decided Stolt-Nielsen in the first instance upheld an arbitrator’s clause construction award in a proposed Title VII class action. The award held that the relevant arbitration clause did not prohibit class actions, and, as this was an adhesion contract between an employer and employees, the employer’s failure to include an express prohibition was dispositive in construing the clause to allow class actions. The court rejected arguments that this decision by the arbitrator either exceeded her powers or constituted manifest disregard of the law. Jock v. Sterling Jewelers, Inc., 2009 U.S. Dist. LEXIS 120782 (S.D.N.Y. Dec. 28, 2009).

Consider how the Court’s initial decision to permit an arbitrator to construe the arbitration clause impacts the outcome. The clause says nothing about class arbitration, but if the arbitrator’s decision is viewed as a construction of the clause, even a “barely colorable justification” will be enough to sustain the decision.

But this characterization of the arbitrator’s decision is not particularly appropriate — even though, under the AAA’s special rules concerning class actions, it is denominated a “clause construction award.” An arbitrator’s decision that the contract is one of adhesion, and that this results in a default rule favoring the plaintiff’s position (e.g. to proceed by class action) unless the defendant, normally a corporation, has excluded that position by specific language, is in reality a policy judgment about access to justice, effective enforcement of the federal statutes (like Title VII) under which class claims typically are brought, and the ability of arbitrators to manage large complex cases.

It is inevitable that the law will evolve to permit class actions to enforce federal statutory rights and to prevent corporations from drafting arbitration clauses to prevent even a judicial class action by forcing all potential plaintiffs into individual arbitrations. Solution of the problem should not continue to be a burden for courts and arbitrators on a case by case basis.

A simple amendment to the Federal Arbitration Act could usefully provide: “Where the claim in arbitration can meet the requirements of Rule 23 of the Federal Rules of Civil Procedure to proceed as a class action, as determined by the arbitrator(s), the arbitration clause upon which the claim is based shall not be construed to prohibit such an action.”

Following such an amendment, one would expect arbitral instutions to develop specific rules governing arbitral class actions. And one would expect that corporations that have hoped to use arbitration as a vehicle avoid class actions, whether arbitral or juidicial, to opt into or out of arbitral class actions based on the efficicacy of the competing judicial and arbitral class dispute procedures.

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