Arbitration: Should It Be Sought Rather Than Fought?

by Roger L. Mandel

Mr. Mandel is an attorney at Stanley, Mandel and Iola of Dallas, Texas. CL&P invited him to discuss the following original and provocative proposal, which he presented at a panel on class actions & arbitration at the NCLC Class Action Symposium in Miami last month. This post is the second in a series based on that panel; in the first post, Mike Quirk discussed judicial decisions striking down class arbitration bans.

Plaintiffs’ class action lawyers have long fought tooth and nail against mandatory arbitration clauses. Today, in some instances they may be advised to file arbitrations rather than fight the arbitration clauses in court.

Class Arbitration Rules

Many arbitration clauses specify or allow use of the American Arbitration Association (“AAA”) or JAMS as arbitration providers. Both of those providers have specifically enacted class arbitration rules, which are available on their websites, www.adr.org and www.jamsadr.com, respectively. Both sets of rules provide for a three-step process in class arbitration:

1. A clause construction phase during which the arbitrator decides whether the arbitration clause in question allows for class arbitration;

2. If the arbitrator finds that class arbitration is allowable under the arbitration clause, a class certification phase pursuant to standards identical to Federal Rule of Civil Procedure 23; and

3. Decision on the merits of either the classwide or individual claims.

At the end of both phase 1 and phase 2, the arbitrator enters interim awards and is required to stay the proceedings for thirty (30) days to allow either party to appeal the interim award in court. If an interim award is appealed, the arbitration remains stayed during the pendency of the appeal.

In addition to its class action rules, AAA has a class arbitration policy. Under that policy, it will place on its class arbitration docket any claim involving an arbitration clause that is silent as to class arbitration. It will refuse, however, to place on its class arbitration docket a case that contains an explicit class arbitration ban. JAMS does not have such a policy and will place on its class arbitration docket any claim that is filed as a class action, regardless of the contents of the arbitration clause.

Both providers maintain special national panels of class action arbitrators. Based on my review of those panels, most plaintiffs’ lawyers would prefer the JAMS panel, although there are a number of acceptable choices on the AAA panel.

Running the Numbers: The Role of the Arbitrator's Incentives

AAA maintains on its website its entire class arbitration docket, which is extensive. It posts the claims (complaints) and all of the interim and final awards entered by the arbitrators. This allows research into trends in AAA class arbitration.

Our review of clause construction awards found that in matters involving arbitration clauses that did not contain explicit class arbitration bans, the arbitrators in 50 out of 51 AAA arbitrations held that the arbitration clauses allowed class arbitrations. In the later arbitration awards, many of the arbitrators found the overwhelming number of prior awards persuasive. I would venture to say that if 51 courts had decided this question based upon 51 different arbitration clauses, far less than 50 of them would have found in favor of class arbitration.

What could explain this discrepancy? The answer is different financial and personal incentives. A judge would have the incentive to find that class arbitration is not allowed, knowing that doing so would likely end the case and clear a case from his docket. In contrast, the arbitrator knows that if he finds against class arbitration, the case will end and so will his ability to make money. If class arbitration is allowed, the case will continue, and the arbitrator will continue to make money.

Because class arbitration at AAA is relatively new and because it takes a while to get through phase one, there are not nearly as many class certification awards. However, of the seven class certification awards posted on AAA’s website, the arbitrators certified classes in five of the seven. That, too, is a better percentage than one would expect from seven courts. Again, the discrepancy is explainable by different financial and personal incentives. The arbitrator makes more money only if the class is certified and the case continues.

Unfortunately, JAMS does not post its class action docket like AAA. It is likely that JAMS does not handle nearly as much class arbitration as AAA because many large corporations specify only AAA in their contracts. However, in one case in which I was personally involved, the JAMS arbitrator held that an arbitration clause which did not contain a explicit class ban allowed for class arbitration. It is my belief that the rulings of arbitrators on the JAMS class action panel will be just as overwhelmingly favorable as those of the AAA class arbitration panel.

The Lesson for Class Action Lawyers

These facts counsel very strongly that a plaintiff’s class action lawyer faced with an arbitration clause that does not contain an explicit class arbitration ban should strongly consider filing an arbitration with AAA or JAMS in the first instance, rather than fighting the arbitration clause in court. The odds of obtaining a ruling that class arbitration is allowed is overwhelmingly favorable, and likely much more favorable than in court. Further, the odds of obtaining class certification are, depending upon the jurisdiction, at least as good as, if not better than, filing in court.

Significantly, I believe that filing a class arbitration will significantly enhance the ability of the plaintiff’s lawyer to obtain a favorable settlement. As reflected in much defense bar writing, corporations are deathly afraid of class arbitrations with their lack of review and the strong financial incentives for arbitrators to certify classes. Corporations only want arbitration if classwide proceedings are not available. For that reason, I believe that in instances where class arbitration is likely to occur, it should be sought.

What about cases where the arbitration clause contains an explicit class arbitration ban?  I believe that in certain jurisdictions where the case law is such that there is little or no chance of getting a court to strike either the arbitration clause or the class ban, a plaintiff’s lawyer should also strongly consider filing an arbitration in the first instance.

If arbitration is available in front of JAMS, the case can be filed as a class arbitration. If the case must be filed in front of AAA, it must be filed as an individual arbitration. In either case, a declaratory judgment claim should be included asking the arbitrator to declare the class ban unconscionable or otherwise unenforceable. If the arbitrator declares the class ban unconscionable, then the matter ends up back in the favorable posture of an arbitration clause that does not contain an explicit class ban. In that case, AAA should switch the case from the individual docket to the class docket.

One interesting note is that the argument in favor of striking a class ban should be much stronger in arbitration than it is in court. In court, because the class ban is part of the arbitration clause, it will be judged in light of the strong federal policy in favor of arbitration embodied in the Federal Arbitration Act and thus be subject to a strong presumption in favor of arbitration. In court, therefore, the burden a plaintiff must meet to strike a class ban is very high.

In arbitration, however, the object of the Federal Arbitration Act has already been obtained -- the case is in arbitration. Accordingly, in arbitration, there is no presumption in favor of class arbitration bans. Accordingly, there is a strong argument that the burden the plaintiff must meet to strike a class action ban in arbitration is significantly less than in court.

The bottom line is that in some unfavorable jurisdictions, the plaintiff’s lawyer has nothing to lose. If there is no chance of getting the arbitration clause or the class ban struck in court, the plaintiff’s lawyer might as well try in arbitration. In arbitration, of course, the arbitrator will have a strong financial incentive to strike the class ban to allow the case to continue and his handsome fees to continue to flow.

In summary, plaintiff’s class action lawyers should in some cases embrace, not fight, arbitration.

Comments

[Joseph]

Lawmaker take an oath to protect The U.S. Constitution. Like Martha Stewart Any lawmaker who signed or even a statement signed against ones right to the protection of The U.S. Constitution needs investigating. Help Me Help You Should I file Large suit against AAA When I win I will donate every sent. This is not about money but Honor, Respect, Truth, and Justice. Please Post yes or no

[Joseph]

AAA Client plead GUILTY to HOME REPAIR FRAUD AAA maliciously slanders Victims/Single Father, 4 and 9 year old then making victims pay AAA client/Contractor Guilty of Home Repair Fraud $5,000.00 plus AAA arbitration fees. Yes AAA makes the victims pay $5,000.00 to AAA/client the criminal plus arbitration fees. AAA false statement also used against THE STATE OF ILLINOIS Winnebago County States Attorneys Office to get AAA/clients indictment charges dropped. Even with AAA fraud statement maliciously slandering single father ,4 and 9 year old was not enough Father has overwhelming amount of evidence also full investigation by one of the top 20 in the fortune 500 which will back father 100% on fraud charges. All based on facts. AAA/client PLEAD GUILTY TO HOME REPAIR FRAUD. FACT PROVE AAA MALICIOUSLY used award to give perception that father breached contract and benefited to award AAA/client $5,000.00 nominal Damages Both AAA and client profit from victim. Full story more malicious then one would make up. AAA award 5/12/2006 AAA denied all father request and complaints telling father NO ATTORNEY DARE FIGHT AGAINST AAA. Father has been fighting alone since 5/12/2006 and has been able to get Full Investigation ,Warrant issued, charges, 2nd investigation indictment and on 5/5/2008 A plea of Guilty by Indictment from AAA/client for Home Repair Fraud.. [Winnebago County Illinois Court Case 2007 CF 01469] Overwhelming facts. NO BUT ANDS OR IF ABOUT IT. Family lost over $37,000.00, B Better living conditions, been Falsely Accused, Family Name Slandered and had to Pay AAA fees and AAA client Guilty of Criminal/fraud $5,000.00 Father will now fight against Goliath

[Joe]

AAA Arbitration is to CLEAR not ADD cases to a judges docket. "A judge would have the incentive to find that class arbitration is not allowed, knowing that doing so would likely end the case and clear a case from his docket". AAA-Integraty.-NON-PROFIT is how much money is to be made. "In contrast, the arbitrator knows that if he finds against class arbitration, the case will end and so will his ability to make money. If class arbitration is allowed, the case will continue, and the arbitrator will continue to make money". What is
AAA's definition of a B_.S_. Degree?
.

[Mike Quirk]

Roger has provided an important and provocative analysis that we practitioners who represent consumers must give serious consideration. In light of the data Roger has gathered and analyzed, consumer class action lawyers must give serious consideration to the pros and cons of the judicial and arbitral forum before proceeding with particular cases.

What follows is meant as a critique not of Roger's analysis, but of the actual arbitral system he describes. This arbitral system for deciding when cases may or may not proceed as class actions raises serious questions of sensibility, legitimacy, and ultimately sustainability.

1. Sensibility

The first step in this process is a "clause construction phase," where the arbitrator decides if a clause allows for class arbitration. But, as described, the case only gets to the arbitrator for this determination if the ARBITRATION SERVICE has already determined that the clause is silent concerning class actions (which it is not in the vast majority of cases where companies now expressly ban class claims). Putting aside the appropriateness of the service making this pre-threshold determination, what is an arbitrator to do in "interpreting" a provision already found to be silent on the subject at issue?

More fundamentally, what is the sense of looking to a contract to determine what procedures will govern a dispute? Can any of us imagine a court or other competent decision-maker deciding class certification, discovery rights, or rights to present testimony by looking to a private contract rather than neutral and generally applicable rules? It is an indisputable fact that consumer arbitration clauses are written by businesses. Having already allowed the business party to pick the forum, why would we let the party to a dispute write the rules by which the dispute is going to be resolved?

2. Legitimacy

Roger accurately describes a system in which decision-makers have a strong financial stake in the outcome of make-or-break determinations in these cases. If an arbitrator is paid by the hour for his or her work (which they typically are), then they have a strong financial incentive to rule at the "clause construction" and class certification stages in a way that will keep the proceedings going. Conversely, an arbitration service that also is paid based on the volume of cases it handles, may have an incentive in making its pre-threshold determinations to rule in a way that will keep its volume customer (the business side in a consumer case) satisfied with its services.

The existence of these incentives calls into serious question the legitimacy of this system for deciding disputes. The fact that one of the two identifiable incentives would favor allowing class proceedings will not in all cases lead to a "pro-consumer" result. In cases where the normal class certification criteria, such as adequate representation of the class, are not satisfied, it is not in consumers' interests to have their claims resolved with possibly preclusive effect.

These concerns over apparent or actual bias are not, of course, unique to class action cases, though the class action setting may magnify the effect of such bias.

3. Sustainability

Finally, given that consumer arbitration is entirely the creation of corporate contracts, how long can a system where consumers consistently prevail on class determinations survive? The results Roger describes may be one reason that the vast majority of consumer arbitration clauses now expressly ban class arbitration. If consumers are winning more in arbitration than in court, then companies would have no incentive to continue requiring arbitration in cases where class-wide relief is available.

Of course, given the serious legitimacy concerns this system raises, that may be the most desirable result from the perspective of a justice system's goals in any event.

-Mike Quirk