The Current State Of 'Class Arbitration' Law

Law360, New York (June 12, 2017, 12:02 PM EDT) -- We recently began a series of articles in which we ask whether "class arbitration" - meaning the utilization of a Federal Rule of Civil Procedure 23 class action protocol in an arbitration proceeding - is ultimately viable, considering arbitration's essential nature, or is it an oxymoron? Here, we examine several elements of the current law, muddled as it is, regarding class arbitration.

Thus far the U.S. Supreme Court has addressed a few issues concerning "class arbitration," including (1) the fundamental significance of the arbitration agreement; (2) the enforceability of a purported contractual waiver of class arbitration; and (3) the extent of and criteria for judicial review of an arbitrator's award concerning the permissibility of class arbitration.

On the other hand, the Supreme Court has not yet focused on the ultimate viability and enforceability, or the res judicata effects, of a class arbitration award (a) vis-a-vis a noncontracting, nonparticipating "class" member, or (b) vis-a-vis a party to an arbitration agreement who made no bilateral agreement with such a class member to arbitrate. Thus, the ultimate viability of class arbitration has not been addressed squarely by the Supreme Court.

  1. FAA Neither Authorizes Nor Prohibits Class Arbitration

    The Federal Arbitration Act (FAA), 9 U.S.C. §§1, et seq., says nothing about class arbitration. It does not permit or prohibit such a procedure, nor does any other statute expressly prohibit or create a right to employ such a procedure.

  2. The Arbitration Agreement is King

    Contracting parties are "generally free to structure their arbitration agreements as they see fit," and to "specify with whom they choose to arbitrate their disputes." Stolt- Nielsen S. v. AnimalFeeds International Corp., 559 U.S. 662, 130 S. Ct. 1758, 1774 (2010). Therefore, "a party may not be compelled under the FAA to submit to a class arbitration unless there is a contractual basis for concluding that the party agreed to do so." Id. at 1775. Generally, class arbitration is effectively prohibited unless (a) it is clearly and unmistakably permitted by an arbitration agreement, or (b) some governing rule of law or decision under which the parties are arbitrating creates a default rule permitting it. Oxford Health Plans v. Sutter, 133 S. Ct. 2064, 2066 (2013).

    Regarding the first basis, the parties' incorporation by reference in an arbitration agreement of rules that permit class arbitration could suffice. In that regard, there has been significant litigation concerning the incorporation by reference of the American Arbitration Association's Supplementary Rules for Class Arbitration (eff. Oct. 8, 2003) (SRCA). Those rules provide procedures for determining (a) who will decide whether class arbitration is permitted (the arbitrator); and (b) whether the arbitration agreement permits class arbitration (incorporation of the SRCA is not to be a factor in that regard, however, see SRCA 3).

    Incorporation of the SRCA "by reference" does not require much, nor is it determinative. The AAA's announced policy is that it will administer a class arbitration if the arbitration agreement (a) is silent concerning "class claims," consolidation or joinder of claims; (b) adopts any arbitration rules of the AAA; and (c) does not (expressly or implicitly) exclude the SRCA. Thus, parties who expressly agree to any of the sets of arbitration rules of the AAA, including its Commercial Arbitration Rules, and are otherwise silent regarding class arbitration, are deemed to have consented to the AAA's SRCA. See, e.g., Reed v. Florida Metropolitan University, 681 F.3d 630, 635 (5th Circuit 2012), citing 1 Oehmke, Commercial Arbitration § 16:16 (April 2012). However, that consent and incorporation does not constitute an agreement to class arbitration, which is a matter to be adjudicated by the arbitrator. See SRCA § 3.

    As to the second basis (a governing rule of law), the Supreme Court has rejected the argument that "federal law secures a non-waivable opportunity to vindicate federal policies" by class arbitration using the procedures in Federal Rule of Civil Procedure 23 or "some other informal class mechanism in arbitration." American Express Co. v. Italian Colors Restaurant., 133 S.Ct. 2304, 2310 (2013), citing AT&T Mobility v. Concepcion, 563 U.S. 333, 131 S.Ct. 1740 (2011). Thus, the fact that the parties would be able to litigate via class action in the absence of an arbitration agreement is not a basis to conclude that they agreed to class arbitration when they entered into an arbitration agreement. See, e.g., Reed v. Florida Metropolitan Uniersity., 681 F.3d 630, 641-43 (5th Cir. 2012). Moreover, "class arbitration, to the extent it is manufactured by [state law] rather than consensual, is inconsistent with...

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