Availability of Class Actions in Arbitration, Part 2
Part one of this article introduced the issues, analyzed the policies favoring class proceedings versus the policies favoring arbitration, and found that arbitration agreements are generally enforceable where a class claim can be brought. Part one also summarized rulings that hold that class proceedings may be held in arbitration, and that waivers of rights to proceed as class arbitration agreements are generally enforceable. However, the particular issue of cases involving de minimus recoveries has given the courts pause, and many courts have refused to send a case to arbitration, or have stricken a class proceeding waiver, where the de minimus nature of the individual recoveries makes arbitration unfeasible.
Part two will examine some additional cases and circumstances in which waivers have been enforced; analyze how courts determine the availability of class proceedings where not specifically addressed in the agreement; and provide some practice pointers regarding class issues in arbitration agreements generally.
Cases in Which Class Action Waivers Were Enforced
The cases enforcing class action waivers in arbitration agreements have largely rejected the various arguments relied on by the courts denying enforcement. The Seventh Circuit found an arbitration agreement enforceable in the plaintiff’s action alleging violation of The Truth in Lending Act (TILA),1 in Livingston v. Johnson, 339 F.3d 553, 559 (7th Cir. 2003).It disagreed with the plaintiff’s contention that they would not get the full relief afforded by TILA. Upholding the bar against class actions, the court stated that “[t]he arbitration agreement here explicitly precludes the Livingstons from bringing class claims or pursuing ‘class action arbitration,’ so we are therefore ‘obliged to enforce the type of arbitration to which these parties agreed which does not include arbitration on a class basis.’”2
In Fonte v. AT&T Wireless Services, Inc., 903 So. 2d 1019 (Fla. 4th DCA 2005), Florida’s Fourth District Court of Appeal differed with the First District Court of Appeal’s ruling in Powertell, Inc. v. Bexley, 743 So. 2d 570 (Fla. 1st DCA 1999),on the enforcement of a class action waiver in a FDUTPA action. In the view of the Fourth District, the unavailability of class actions “does not defeat any of the remedial purposes of FDUTPA.”3
The Fonte court found nothing in the language or history of FDUTPA demonstrating that the act was conceived to confer a right to a class action that could not be waived.4 There was no diminishment of the plaintiff’s rights or remedies. They remained the same as they would be in a class action. Additionally, some claims may be brought in small claims court. Summarizing that an agreement is unenforceable as unconscionable only if it is both procedurally and substantively unconscionable, the court found the arbitration clause enforceable as it was not procedurally unconscionable.5 The facts showed that the plaintiff was a sophisticated consumer who had shopped alternative providers before selecting AT&T. It distinguished Powertell factuallybecause, in that case, the consumer was notified of the arbitration clause by a slip in a mailing containing the monthly bill. In the Fonte case the customer was given obvious notice at the inception of the contractual relationship and repeated notification thereafter.6
The Fourth Circuit found in Snowden v. Check Point Check Cashing, 290 F.3d 631 (4th Cir. 2002), that a clause in an arbitration contract barring class arbitration was not unconscionable. Snowden was an action under TILA and RICO7 challenging a charge made by a check cashing service. The service paid the customer the amount of the check less a charge for holding it a given time before submitting the check for clearance. The court found that the waiver was not unconscionable as the statutory action allowed for the recovery of attorneys’ fees by the plaintiff.8
The 11th Circuit has considered class action waivers in several cases. Randolph v. Green Tree Financial Corp., 244 F.3d 814 (11th Cir. 2001), held that a TILA arbitration could not proceed as a class action in the absence of a provision in the arbitration agreement allowing for class arbitration. The court concluded TILA did not provide a right to proceed as a class that could not be waived in an arbitration agreement.9
The 11th Circuit also found class action waivers in arbitration agreements to be valid and enforceable in Jenkins v. First American Cash Advance of Georgia, Inc., 400 F.3d 868 (11th Cir. 2005), and Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359 (11th Cir. 2005). Jenkins was an action claiming violations of Georgia’s usury law10 and the Georgia Racketeer Influenced and Corrupt Organizations Act.11 The court reversed the district court’s decision, rejecting the lower court’s view that barring class actions would make it difficult for plaintiffs to obtain representation due to the small amount of potential recovery.12 The court reasoned that the ability of plaintiffs to recover attorneys’ fees under the statutes in question would provide adequate incentive for attorneys to represent them.13
The 11th Circuit again found an arbitration agreement waiver of the right to bring a class action to be enforceable in Caley, an action under Title VII, the FLSA, the ADEA, and ERISA, by current and former employees of Gulfstream. The fact that the type of claims likely to be brought by employees were subject to mandatory arbitration, and those likely to be brought by the employer were not, was not sufficient in the view of the court to render the waiver substantively unconscionable.14
Class Action Arbitration When Not Authorized by the Arbitration Agreement
Discover Bank v. Superior Court of Los Angeles, 36 Cal. 4th 148 (Cal. 2005),15 pointed out that “judicially authorized class-wide arbitration in a case in which the arbitration agreement is silent on the issue” is permissible under California law.16 However, a number of courts have declined to allow arbitrations to proceed as class actions in the absence of a provision in the arbitration agreement authorizing class arbitration.
The plaintiff in Johnson v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000),sought to bring a judicial class action under TILA and the Electronic Fund Transfer Act (EFTA).17 The arbitration agreement involved made no specific mention of the use of class actions. Since class actions were neither barred nor authorized on the face of the arbitration agreement, the court seems to have proceeded on the basis that class arbitrations are unavailable in the absence of specific contract language allowing them.18 The decision did not focus on the lack of authorization, but addressed policy reasons for not compelling class arbitration.
The Third Circuit rejected the plaintiff’s argument that mandatory arbitration thwarted the purpose of TILA, holding that the same relief was available to enforce statutory rights in an arbitral forum. It found that the availability of attorneys’ fees will give attorneys ample incentive to take TILA cases.19
In sum, though pursuing individual claims in arbitration may well be less attractive than pursuing a class action in the courts, we do not agree that compelling arbitration of the claim of a potential class action plaintiff irreconcilably conflicts with TILA’s goal of encouraging private actions to deter violations of the [a]ct.20
Consideration was also given to the fact that violations will be deterred by the possibility of administrative enforcement by the Federal Trade Commission as well as the Office of the Comptroller of the Currency, the Federal Reserve Board, and the FDIC.21 The opinion concurs with the widely held view that “when the right made available by a statute is capable of vindication in the arbitral forum, the public policy goals of that statute do not justify refusing to arbitrate.”22 The same reasoning was applied to the plaintiff’s claim under the EFTA in view of identical language in the statutes.23
Several appellate decisions that have been confronted by this issue have found that class arbitration may not proceed in the absence of language that can be interpreted as authorizing it. That was the decision of the Seventh Circuit in Champ v. Siegel, 244 F.3d 814 (7th Cir. 2001). The court concluded that the reasoning of the multiple circuit decisions declining to consolidate arbitrations pursuant to Federal Rule of Civil Procedure 42(a) in the absence of the parties’ agreement to do so applied to class arbitrations as well.
“The parties’ arbitration agreement makes no mention of class arbitration. For a federal court to read such a term into the parties’ agreement would ‘disrupt the negotiated risk/benefit and direct [the parties] to proceed with a different sort of arbitration.’”24 The Seventh Circuit also took into account language in §4 of the FAA which requires district courts, when enforcing arbitration agreements, to “order the parties to proceed in accordance with the terms of the agreement.”25
Denial of Consolidation of Arbitration Proceedings
Consolidation of actions with significant common questions can often expedite and streamline the resolution of controversies. However, if parties do not want arbitrations with common questions, in most instances, they do not need to have a waiver of the right to consolidated proceedings in their arbitration agreement. The prevailing rule is that an arbitration may not be consolidated unless the agreement specifically permits it.
Government of United Kingdom v. Boeing, 998 F.2d 68 (2d Cir. 1993),involved damage to a helicopter manufactured by Boeing while it was testing a fuel system designed by Textron which also manufactured the helicopter’s engine. Both Boeing and Textron had arbitration agreements with the United Kingdom that made no mention of whether separate arbitrations could be consolidated. The United Kingdom filed separate arbitration demands with the AAA against both entities. Boeing resisted the United Kingdom’s action to compel consolidation of the arbitrations. The Second Circuit reversed the district court’s order compelling consolidation concluding that neither Boeing nor Textron had agreed to a consolidated arbitration.26 Citing §4 of the FAA, the court reasoned that that section requires courts, in a proper case, to order the parties to “proceed to arbitration in accordance with the terms of the [arbitration] agreement.”27 Rules 42(a) and 81(a)(3) of the Federal Rules of Civil Procedure were found to be inapplicable.28
In Del E. Webb Construction v. Richardson Hospital Authority, 823 F.2d 145 (5th Cir. 1987),the Fifth Circuit declined to order consolidation of arbitrations between the Hospital Authority and its construction contractor with the arbitration of a dispute between the Hospital Authority and its architect, although the controversies grew out of the same project. The contractor and the architect had separate contracts with the Hospital Authority each requiring arbitration of claims. Neither had a contract requiring them to arbitrate with the other. Quoting the Supreme Court in Dean Witter Reynolds v. Byrd, 470 U.S. 213 (1985), the court wrote:
The preeminent concern of Congress in passing the [Federal Arbitration Act] was to enforce private agreements into which parties had entered, and that concern requires that we rigorously enforce agreements to arbitrate, even if the result is “piecemeal” litigation, at least absent a countervailing policy manifested in another federal statute.29
American Centennial Insurance Company v. National Casualty Company, 951 F.2d 107 (6th Cir. 1991),involved several pending arbitrations between American Centennial and companies with which it had arbitration agreements. American Centennial’s federal district court petition to consolidate the arbitrations was denied as the parties’ arbitration agreements contained no provision requiring or permitting consolidation. The Sixth Circuit reasoned that the purpose of the FAA is to enforce parties’ arbitration agreements, “not impose its own view of speed and economy…even where the result would be the possibly inefficient maintenance of separate proceedings.”30
The First Circuit ordered consolidation of arbitrations where there was no agreement of the parties permitting consolidation in New England Energy, Ind. v. Keystone Shipping Co., 855 F.2d 1 (1st Cir. 1988). The decision was based on a provision of the Massachusetts Arbitration Act31 under which arbitrations were permitted to be consolidated on the same bases as judicial actions. The state law provision was ruled not to be preempted by the FAA.
The Third Circuit allowed a consolidation of arbitrations when a subcontractor made a claim against a contractor to be consolidated with the contractor’s third-party claim against in Gavlik Construction Co. v. H.F. Campbell Co., 526 F.2d 777 (3d Cir. 1975). The contractor’s contract with the owner had an arbitration clause and the contract between the contractor and the subcontractor adopted by reference the terms of the general contract.
Applying Some Principles from the Case Law
A contracting party that decides that its contract should have an arbitration clause should then decide if it wishes to allow or to bar class-wide arbitrations. Leaving nothing to chance, the arbitration agreement should have explicit language applicable to class actions. A choice of law provision favoring a state, which will most likely find the party’s views acceptable and that has a reasonable connection with the transaction, is also a good idea. In most cases, the contract will be drafted by a party supplying goods or services to a mass of buyers. These could be television cable companies, Internet services, telephone companies, and more varieties of companies than need to be listed here. A company that employs a large number of people may also want an arbitration agreement containing a class action bar for its employees. In most cases, the contract terms will not be negotiable. It will likely be a contract of adhesion. Thus, adequate notice of the terms of the clause should be given to the other contracting party. Consideration should be given to factors that will or will not be found to render the contract procedurally or substantively unconscionable.
1 15 U.S.C. §1601.
2 Livingston, 339 F.3dat 559, citing Champ v. Siegel Trading Co., Inc. 249 F.3d 269, 274 (7th Cir. 1995). It is interesting to consider whether the Seventh Circuit would have decided Livingston differently if it heard the case after the decision of the Illinois Supreme Court in Kinkel v. Cingular Wireless, 223 Ill. 2d 1 (Ill. 2006), on the basis of the state’s highest court’s interpretation of the state’s law of contracts.
3 Fonte, 903 So. 2dat 1024.
4 Id. at 1025.
5 Id. at 1025-26.
6 Id. at 1026-27.
7 18 U.S.C. §1962(c).
8 Snowden, 290 F.3dat 638.
9 Randolph, 244 F.3dat 819.
10 Ga. Code Ann. §§7-4-2, 7-4-18 (2004).
11 Ga. Code Ann. §16-14-4 (2003).
12 Jenkins, 400 F.3d at 878.
13 The court cited with approval the reasoning of the courts in Snowden, 290 F.3d 631, and Livingston v. Associates Fin., Inc., 339 F.3d 553, 559 (7th Cir. 2003).
14 The 11th Circuit took a different turn in Dale v. Comcast Corporation, 498 F.3d 1216 (11th Cir. 2007). There it held invalid a waiver of a right to bring a class arbitration by cable television subscribers under the Cable Communication Policy Act of 1984, 47 U.S.C. §521 et seq. (the Cable Act). The court distinguished its holding from its previous rulings on class action waivers because the section of the Cable Act under which the action was brought does not allow the recovery of attorneys’ fees. Therefore, it was not feasible to bring an individual action to enforce rights under that statute. The court concluded that the enforceability of a class action waiver should be determined on a case-by-case basis.
15 See part one of this article for further discussion.
16 Discover, 36 Cal. 4that 158, citing Southland Corp. v. Keating, 465 U.S. 1.
17 16 U.S.C. §1693 et seq.
18 Johnson, 225 F.3d.at 377 n. 4, observing that the agreement required arbitration under the rules of the National Arbitration Forum, which preclude multiple-party arbitrations in the absence of the express consent of the parties.
19 Id. at 374.
20 Id. at 374-75.
21 Id. at 375.
22 Id. at 374.
23 The decision preceded Green Tree Financial Corp. v. Bazzle, 519 U.S. 444, 451-52 (2003), in which the Supreme Court held the arbitrator rather than a court should decide if arbitration is permitted under the parties’ agreement.
24 Champ v. Siegel Trading Co., Inc., 55 F.3d 269, 275 (C.A.7 (Ill.), 1995), citing New England Energy, Inc. v. Keystone Shipping Co., 855 F.2d 1, 10 (Selya, J. dissenting).
25 Id. at 274. See also Gammorow v. Thorp Consumer Disc. Inc., 828 F. Supp. 673, 674 (D. Minn. 1993), declining to allow an arbitration to proceed on a class basis where the arbitration agreement was silent on the subject.
26 Boeing, 998 F.2d at 71 (2d Cir. 1993).
28 Rule 42(a) allows consolidation of actions with common question of law or fact. Rule 81(a)(3) allows courts in FAA proceedings to make rulings on matters of procedure not otherwise covered by the statute.
29 Del E. Webb Construction, 823 F.2d at 148.
30 American Centennial Insurance Company, 951 F.2d at 108 (6th Cir. 1991). See also Baesler v. Continental Grain Company, 900 F2d 1193,1194 (8th Cir. 1990), where the Eighth Circuit noted that “we read the Federal Arbitration Act as requiring federal courts to enforce arbitration agreements as they are written. Accordingly, we hold that absent a provision in an arbitration agreement authorizing consolidation, a district court is without power to consolidate arbitration proceedings.” Accord Weyerhaueser v. Western Seas Shipping, 743 F.2d 635 (9th Cir. 1984); Protective Life Insurance Corp. v. Lincoln National Life Insurance Corporation Company, 873 F.2d 148 (11th Cir. 1989).
31 Mass. Gen. Laws Ann. ch. 251 §2A.
Donald J. Spero is a graduate of the University of Michigan Law School who has practiced labor and employment law for over 30 years in both private practice and as in-house counsel for Sears, Roebuck and Co., from which he retired as senior employment counsel. He now devotes his time to serving as a mediator and an arbitrator. He is on the labor and employment arbitration panels of the American Arbitration Association and The Federal Mediation and Conciliation Service. He is board certified in labor and employment law.
This column is submitted on behalf of the Labor and Employment Law Section, Alan O. Forst, chair, and Frank E. Brown, editor.