Arbitration Clauses And Class Certification Standards: How The Supreme Court Is Limiting Plaintiffs’ Ability To Maintain Class Actions

The little-noticed impact of two distinct lines of decisions by the Supreme Court in recent years has given companies greater ability to limit the use of class action lawsuits and more effectively contest class certification. The current term may continue this trend, with four cases having the potential to significantly impact the ability of plaintiffs to bring or maintain class actions. Taken together, the Court's willingness to decide these issues and its decisions to date suggest that the Court is cutting back on plaintiffs' ability to successfully prosecute class actions while promoting defendant-companies' ability to avoid or defeat class actions.

The modern federal class action lawsuit gained prominence following Congress's revision of Federal Rule of Civil Procedure 23 ("Rule 23'') in the 1960s. Since that time, class actions have grown, both in terms of the number of filings and the amount of damages awarded, and have had a significant impact on how business is transacted. Proponents of class action litigation point to the fact that, where a defendant is alleged to have caused injury to a significant number of parties, class litigation increases efficiencies and promotes judicial economy by eliminating the need for repeatedly litigating the same or substantially similar claims. Additionally, class litigation helps to overcome the problem that de minimis recoveries often ' ''do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.' '' (Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (citation omitted)). Class actions, however, come at a high cost to American businesses and foreign companies that either operate here or have securities traded on a U.S. exchange. Because a class action aggregates the claims of dozens, hundreds, or even millions of individual plaintiffs, the potential for a massive judgment and (at the very least) a prolonged and expensive litigation process, places significant pressure on the defendant(s) to settle, even where the plaintiffs' claims are meritless. Additionally, class actions are notoriously lawyer-driven, with members of the plaintiffs' bar reaping substantial fees for the opportunity to "serve'' plaintiffs who often have little interest, and therefore, little involvement in the litigation.

Because of the controversial nature and potential impact of the class action lawsuit, there is significant interest when class action issues are adjudicated by the Supreme Court or one of the federal Courts of Appeal. Recent Supreme Court decisions on contractual arbitration provisions and class certification standards suggest the Court may further limit the ability of plaintiffs to file and maintain class action lawsuits in the future.

Contractual Arbitration Agreements

Arbitration is a method of dispute resolution generally involving one or more neutral third-parties-known as arbitrators-whose decision is binding on the parties. Arbitration, at least in theory, offers the potential for a faster and less-costly dispute resolution process than litigation. The discovery process, which can be enormously time-consuming and expensive to parties involved in litigation and especially in class actions, may be narrowly tailored in an individual arbitration (with limited document exchanges, interrogatories and depositions). Additionally, motion practice can be significantly curtailed in an arbitration proceeding.

The benefits of arbitration, including those referenced above, have induced companies to include mandatory arbitration provisions in consumer and commercial contracts. These arbitration clauses, in many cases, mandate that a potential plaintiff must pursue any and all claims against the company individually, rather than as a member or representative of a class. Not surprisingly, these provisions have faced substantial opposition from consumer rights advocates and plaintiffs' lawyers who pursue claims in the class action context. The Supreme Court has recently had the opportunity to review several decisions involving class arbitration issues, and its holdings may afford companies the ability to substantially decrease the number of class action lawsuits.

1. Stolt-Nielsen v. AnimalFeeds Int'l Corp.

   In 2010, the Supreme Court was presented with the following question: can parties to a commercial contract that provides for mandatory arbitration of all disputes-but is silent on the issue of class procedures-be compelled to engage in class arbitration? (See Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010).) In Stolt-Nielsen, the Court found that a pre-dispute arbitration agreement that was silent on the issue of class procedures could not be interpreted to allow classwide arbitration. (See id. at 1762 ("a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so'') (emphasis in original)).

   In the wake of Stolt-Nielsen, a circuit split has developed with respect to the appropriate interpretation of that decision. Consistent with what appears to be the holding in Stolt-Nielsen, the Fifth Circuit has determined that "arbitrators should not find implied agreements to submit to class arbitration'' where the arbitration clause is silent on this topic. (See Reed v. Florida Metro. Univ., Inc., 681 F.3d 630, 646 (5th Cir. 2012)). The Second and Third Circuits, on the other hand, have interpreted Stolt-Nielsen far more narrowly. These courts have held that where the parties' agreement is silent on the class arbitration issue, an arbitrator can permit classwide arbitration upon determining that the parties implicitly agreed to that procedure. (See Jock v. Sterling Jewelers Inc., 646 F.3d 113, 123 (2d Cir. 2011) ("no explicit agreement to permit class arbitration . . . is not the same thing as stipulating that the parties had reached no agreement on the issue''), cert. denied, 132 S. Ct. 1742 (2012); Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 222-23 (3d Cir.) ("No stipulation between [the parties] is conclusive of the parties' intent and, indeed, the parties dispute whether or not they intended to authorize class arbitration. Therefore, the arbitrator in this case was not constrained to conclude that the parties did not intend to authorize class arbitration''), cert. granted, No. 12-135, 2012 BL 321896 (U.S. Dec. 7, 2012)).

   In order to distinguish Stolt-Nielsen, the Jock and Sutter courts relied on the fact that the parties in Stolt- Nielsen entered into a stipulation providing that there was no agreement on class procedures. This appears to be a distinction without a difference, however, as the same...