Choosing Between Judicial and Arbitral Fora in Class Actions

by Mike Quirk

This is a response to Roger Mandel's post from earlier this week, "Arbitration: Should it Sought Rather Than Fought?", and is the third in a series of posts on arbitration and class actions.

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 fora 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.

Comments

[Brian]

This back-and-forth has been very informative. Roger's and Mike's posts were terrific. As to Mike's post, I think his last point is powerful. Federal decisional law under the Federal Arbitration Act is, to put it charitably, favorable to the big guys. Plaintiffs' litigation victories, though admirable and impressive, are on the margins. We basically have a system in which when the big guy wants to arbitrate, the big guy can arbitrate. A case like the Supreme Court's decision in Bazzle suggests that the big guy not only gets to arbitrate, but to arbitrate on the big guy's terms, even if the result the little guy wants can't reasonably be described as premised on hostility to arbitration (again, see Bazzle). Therefore, unless Congress changes the basic rules, as Mike says, in the long run, the only things likely to be sustained are things that the big guys perfer. Of course, the big guys would prefer NO class actions, either in aribtration OR court, and it is possible, as Mike acknowledges, the big guys might not get that. (But, as I believe Roger pointed out, in some jurisdictions consumer class actions are very difficult to maintain these days.)