Supreme Court Hands Arbitrators the Keys to the Class Action

The Supreme Court of South Carolina held that South Carolina law in this circumstance permits class arbitration. Bazzle v. Green Tree Financial Corp., 351 S.C. 244 (2002). The court concluded that “class-wide arbitration may be ordered when the arbitration agreement is silent if it would serve efficiency and equity, and would not result in prejudice.” Id. at 266.

The state high court reasoned that to deny class actions where arbitration agreements are mandatory and adhesive would effectively deny a forum to parties with “nominal individual claims, but significant collective claims,” and leave defendants without checks for their abuses of law.

Plurality Decision

The majority of the U.S. Supreme Court agreed with the South Carolina Supreme Court that contract interpretation is a matter of state law, but ruled that the question was a matter for the arbitrator to decide. Since the record suggested that the parties had not received an arbitrator's decision on that question of contract interpretation, the court vacated the judgment of the South Carolina Supreme Court and remanded the case so that this question may be resolved in arbitration. Justice Breyer wrote for a plurality of the Court, joined by Justices Scalia, Souter and Ginsburg.

Green Tree argued that the contracts were not silent, but instead forbade class arbitration. Justice Breyer noted that if Green Tree was correct, then the South Carolina Supreme Court's holding was flawed on its own terms because the South Carolina high court neither said nor implied that it would have authorized class arbitration had the parties' arbitration agreement forbidden it. Thus, whether Green Tree was right about the contracts themselves presented a disputed issue of contract interpretation.

Justice Breyer wrote that the South Carolina Supreme Court's resolution of this contract-interpretation question could not stand because “[u]nder the terms of the parties' contracts, the question-whether the agreement forbids class arbitration-is for the arbitrator to decide.” The parties agreed to submit to the arbitrator '[a]ll disputes, claims, or controversies arising from or relating to this contract or the relationships which result from this contract.' Moreover, since the dispute about what the arbitration contract means, including whether it forbade the use of class arbitration procedures, is a dispute 'relating to this contract' and the resulting 'relationships.' Therefore, “the parties seem to have agreed that an arbitrator, not a judge, would answer the relevant question.”

Justice Stevens' Concurrence

Justice Stevens concurred in the judgment and dissented in part because in his view the arbitrator, rather than the court, should have made the interpretation of the parties' agreement in the first instance. However, because Justice Stevens found the decision to conduct a class-action arbitration was correct as a matter of law, and because Green Tree merely challenged the merits of that decision without claiming that the wrong decision-maker made it, he concluded that there was no need to remand the case to correct that possible error.

Dissent

Justice Thomas dissented, arguing that the Federal Arbitration Act (FAA) does not apply to proceedings in state courts. Therefore, he said that the FAA cannot be a ground for pre-empting a state court's interpretation of a private arbitration agreement and would leave undisturbed the judgment of the Supreme Court of South Carolina.

Chief Justice Rehnquist, in a dissent joined by Justices O'Connor and Kennedy, concluded that the contract language clearly forbade class actions. The contracts stated that disputes “shall be resolved … by one arbitrator selected by us [Green Tree] with consent of you [Green Tree's customer].” Chief Justice Rehnquist found that class arbitration was clearly inconsistent with this requirement because class arbitration involves an arbitration, not simply between Green Tree and a named customer, but also between Green Tree and other (represented) customers, all taking place before the arbitrator chosen to arbitrate the initial, named customer's dispute. Justice Breyer disagreed that the language clearly forbade class actions because the class arbitrator was “selected by” Green Tree 'with consent of' Green Tree's customers, the named plaintiffs. Furthermore, “insofar as the other class members agreed to proceed in class arbitration, they consented as well.”

Justice Breyer acknowledged that Green Tree did not independently select this arbitrator to arbitrate its disputes with the other class members. Nevertheless, he said that whether the contracts contained this additional requirement is a question that the literal terms of the contracts do not decide. He noted that:

“The contracts simply say (I) 'selected by us [Green Tree].' And that is literally what occurred. The contracts do not say (II) 'selected by us [Green Tree] to arbitrate this dispute and no other (even identical) dispute with another customer.' The question whether (I) in fact implicitly means (II) is the question at issue: Do the contracts forbid class arbitration?”

Class Action Arbitration in Employment Context

The enforceability of arbitration clauses explicitly prohibiting class actions is certain to be rigorously contested. A core issue is whether asserting class claims and relief is a statutory right under the anti-discrimination statues or merely the invocation of a procedural rule. Recall that the Supreme Court ruled that arbitration is only appropriate “so long as the prospective litigant effectively may vindicate [his or her] statutory case of action in the arbitral forum allowing the statute to serve its purpose.” Gilmer v Interstate/Johnson Lane Corp., 500 U.S,.20, 28, 111 S. Ct. 1647, 114 L. Ed. 2d 26, (alteration in original) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 105 S. Ct. 3346, 87 L.Ed. 2d. 444 (1985)).

Does this mean that the litigant in an arbitral forum may only vindicate his or her individual rights? Or is this person also vindicating individual rights by asserting his or her right to be in a workplace free from discrimination against others, particularly those in the same protected category? Especially in the development of Title VII, many pattern or practice and disparate impact class actions significantly advanced the rights and opportunities of women, African-Americans, and members of other national origin groups. One core purpose of Title VII and other anti-discrimination statutes is to prohibit discrimination against applicants and employees and provide for opportunities to those groups of people who experience historical discrimination. Whether an employment discrimination class action can be prosecuted in an arbitral forum has been infrequently litigated.

Bazzle, at least as it addresses arbitration provisions in consumer contracts, appears to permit parties to explicitly preclude arbitration of class claims. Whether this will apply to the arbitration of employment discrimination cases in light of the statutory purposes of the federal anti-discrimination statues remains open. It also appears likely, depending on the contract language, that the arbitrator will make the determination whether the case may be litigated as a class claim, especially if the contract is silent concerning the issue or where the language is ambiguous.

A few pre-Bazzle cases addressing employment discrimination and other class claims are worthy of note.

One district court in a race discrimination case compelled arbitration of plaintiff's race claims and authorized the arbitrator to determine whether plaintiff could proceed as a class action where the arbitration agreement was silent on class actions. Brennan v. ACE INA Holdings, Inc., 2002 WL 1804918 (E.D.Pa. Aug. 1, 2002). The court relied on language in the agreement that granted the arbitrator “all the powers that a judge would have in dealing with any questions that may arise before, during, and after the arbitration hearing.”

Other courts considered prohibitions on class actions as a factor among others in invalidating the arbitration agreement. For example, one district court denied defendant's motion to compel because the arbitration agreement deterred plaintiffs from vindicating their statutory rights under the Fair Labor Standards Act. See Bailey v. Ameriquest Mortgage Co., 2002 WL 1835642 (D.Minn. Jan. 23, 2002). A provision in the agreement prohibited plaintiff from proceeding collectively. The court held that to deny the plaintiff the right to proceed as a class effectively denied plaintiff a forum in which to bring his claim because the plaintiff's individual claims were so small, they were impracticable to pursue individually. Importantly, the court noted that Gilmer does not hold that procedural limitations can never be grounds to invalidate an arbitration agreement.

The Ninth Circuit in Ingle v. Circuit City Stores , 323 F. 3d. 1165, (9th Cir. May 13, 2003), examined an arbitration agreement that directed arbitrators not to consolidate claims of different employees into one proceeding and generally prohibited the arbitrator from hearing an arbitration as a class action. The court found this bar on class-wide arbitration patently one-sided, and concluded that it is substantively unconscionable. The court noted that '[t]he ability to pursue legal claims in a class proceeding has firm roots in both the federal and California legal systems.” The court found the arbitration agreement one sided because it could not “conceive of any circumstances under which an employer would bring a class proceeding against an employee,” and “through its bar on class-wide arbitration, seeks to insulate itself from class proceedings while conferring no corresponding benefit to its employees in return.” Id. at 1176.

Conclusion

The Bazzle Court left many questions undecided. For instance, what is the fate of specific waivers of class actions contained in arbitration agreements, especially employer-promulgated plans? How are arbitrators going to administer class actions? Who will pay the costs of arbitration class actions, including the arbitrators' fees? What law will arbitrators apply in deciding whether class actions are prohibited or allowed by the agreement? This decision plays a significant role in the drafting of arbitration agreements.

We are certain to see decisions in the near future addressing these issues in the context of employment arbitrations, especially statutory discrimination claims.

A plurality of the U.S. Supreme Court ruled that an arbitrator must decide whether class action arbitration in a consumer action is authorized. Green Tree Financial Corp. v. Bazzle , 123 S.Ct. 2402, (June 23, 2003). Four Justices concluded that whether or not the contracts forbid class arbitration is a disputed issue of contract interpretation and that such a dispute must be decided by an arbitrator. Justice Stevens concurred in the judgment. This decision is likely to directly impact the arbitration of statutory discrimination claims as well as other employment arbitrations. The question is in what ways and to what effect.

The Decision

At issue in Bazzle were contracts between a commercial lender and its customers, each of which contained a clause providing for arbitration of all contract-related disputes. The arbitration clauses were silent as to whether arbitration might take the form of class arbitration.

The Supreme Court of South Carolina held that South Carolina law in this circumstance permits class arbitration. Bazzle v. Green Tree Financial Corp. , 351 S.C. 244 (2002). The court concluded that “class-wide arbitration may be ordered when the arbitration agreement is silent if it would serve efficiency and equity, and would not result in prejudice.” Id. at 266.

The state high court reasoned that to deny class actions where arbitration agreements are mandatory and adhesive would effectively deny a forum to parties with “nominal individual claims, but significant collective claims,” and leave defendants without checks for their abuses of law.

Plurality Decision

The majority of the U.S. Supreme Court agreed with the South Carolina Supreme Court that contract interpretation is a matter of state law, but ruled that the question was a matter for the arbitrator to decide. Since the record suggested that the parties had not received an arbitrator's decision on that question of contract interpretation, the court vacated the judgment of the South Carolina Supreme Court and remanded the case so that this question may be resolved in arbitration. Justice Breyer wrote for a plurality of the Court, joined by Justices Scalia, Souter and Ginsburg.

Green Tree argued that the contracts were not silent, but instead forbade class arbitration. Justice Breyer noted that if Green Tree was correct, then the South Carolina Supreme Court's holding was flawed on its own terms because the South Carolina high court neither said nor implied that it would have authorized class arbitration had the parties' arbitration agreement forbidden it. Thus, whether Green Tree was right about the contracts themselves presented a disputed issue of contract interpretation.

Justice Breyer wrote that the South Carolina Supreme Court's resolution of this contract-interpretation question could not stand because “[u]nder the terms of the parties' contracts, the question-whether the agreement forbids class arbitration-is for the arbitrator to decide.” The parties agreed to submit to the arbitrator '[a]ll disputes, claims, or controversies arising from or relating to this contract or the relationships which result from this contract.' Moreover, since the dispute about what the arbitration contract means, including whether it forbade the use of class arbitration procedures, is a dispute 'relating to this contract' and the resulting 'relationships.' Therefore, “the parties seem to have agreed that an arbitrator, not a judge, would answer the relevant question.”

Justice Stevens' Concurrence

Justice Stevens concurred in the judgment and dissented in part because in his view the arbitrator, rather than the court, should have made the interpretation of the parties' agreement in the first instance. However, because Justice Stevens found the decision to conduct a class-action arbitration was correct as a matter of law, and because Green Tree merely challenged the merits of that decision without claiming that the wrong decision-maker made it, he concluded that there was no need to remand the case to correct that possible error.

Dissent

Justice Thomas dissented, arguing that the Federal Arbitration Act (FAA) does not apply to proceedings in state courts. Therefore, he said that the FAA cannot be a ground for pre-empting a state court's interpretation of a private arbitration agreement and would leave undisturbed the judgment of the Supreme Court of South Carolina.

Chief Justice Rehnquist, in a dissent joined by Justices O'Connor and Kennedy, concluded that the contract language clearly forbade class actions. The contracts stated that disputes “shall be resolved … by one arbitrator selected by us [Green Tree] with consent of you [Green Tree's customer].” Chief Justice Rehnquist found that class arbitration was clearly inconsistent with this requirement because class arbitration involves an arbitration, not simply between Green Tree and a named customer, but also between Green Tree and other (represented) customers, all taking place before the arbitrator chosen to arbitrate the initial, named customer's dispute. Justice Breyer disagreed that the language clearly forbade class actions because the class arbitrator was “selected by” Green Tree 'with consent of' Green Tree's customers, the named plaintiffs. Furthermore, “insofar as the other class members agreed to proceed in class arbitration, they consented as well.”

Justice Breyer acknowledged that Green Tree did not independently select this arbitrator to arbitrate its disputes with the other class members. Nevertheless, he said that whether the contracts contained this additional requirement is a question that the literal terms of the contracts do not decide. He noted that:

“The contracts simply say (I) 'selected by us [Green Tree].' And that is literally what occurred. The contracts do not say (II) 'selected by us [Green Tree] to arbitrate this dispute and no other (even identical) dispute with another customer.' The question whether (I) in fact implicitly means (II) is the question at issue: Do the contracts forbid class arbitration?”

Class Action Arbitration in Employment Context

The enforceability of arbitration clauses explicitly prohibiting class actions is certain to be rigorously contested. A core issue is whether asserting class claims and relief is a statutory right under the anti-discrimination statues or merely the invocation of a procedural rule. Recall that the Supreme Court ruled that arbitration is only appropriate “so long as the prospective litigant effectively may vindicate [his or her] statutory case of action in the arbitral forum allowing the statute to serve its purpose.” Gilmer v Interstate/Johnson Lane Corp. , 500 U.S,.20, 28, 111 S. Ct. 1647, 114 L. Ed. 2d 26, (alteration in original) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. , 473 U.S. 614, 637, 105 S. Ct. 3346, 87 L.Ed. 2d. 444 (1985)).

Does this mean that the litigant in an arbitral forum may only vindicate his or her individual rights? Or is this person also vindicating individual rights by asserting his or her right to be in a workplace free from discrimination against others, particularly those in the same protected category? Especially in the development of Title VII, many pattern or practice and disparate impact class actions significantly advanced the rights and opportunities of women, African-Americans, and members of other national origin groups. One core purpose of Title VII and other anti-discrimination statutes is to prohibit discrimination against applicants and employees and provide for opportunities to those groups of people who experience historical discrimination. Whether an employment discrimination class action can be prosecuted in an arbitral forum has been infrequently litigated.

Bazzle, at least as it addresses arbitration provisions in consumer contracts, appears to permit parties to explicitly preclude arbitration of class claims. Whether this will apply to the arbitration of employment discrimination cases in light of the statutory purposes of the federal anti-discrimination statues remains open. It also appears likely, depending on the contract language, that the arbitrator will make the determination whether the case may be litigated as a class claim, especially if the contract is silent concerning the issue or where the language is ambiguous.

A few pre-Bazzle cases addressing employment discrimination and other class claims are worthy of note.

One district court in a race discrimination case compelled arbitration of plaintiff's race claims and authorized the arbitrator to determine whether plaintiff could proceed as a class action where the arbitration agreement was silent on class actions. Brennan v. ACE INA Holdings, Inc., 2002 WL 1804918 (E.D.Pa. Aug. 1, 2002). The court relied on language in the agreement that granted the arbitrator “all the powers that a judge would have in dealing with any questions that may arise before, during, and after the arbitration hearing.”

Other courts considered prohibitions on class actions as a factor among others in invalidating the arbitration agreement. For example, one district court denied defendant's motion to compel because the arbitration agreement deterred plaintiffs from vindicating their statutory rights under the Fair Labor Standards Act. See Bailey v. Ameriquest Mortgage Co., 2002 WL 1835642 (D.Minn. Jan. 23, 2002). A provision in the agreement prohibited plaintiff from proceeding collectively. The court held that to deny the plaintiff the right to proceed as a class effectively denied plaintiff a forum in which to bring his claim because the plaintiff's individual claims were so small, they were impracticable to pursue individually. Importantly, the court noted that Gilmer does not hold that procedural limitations can never be grounds to invalidate an arbitration agreement.

The Ninth Circuit in Ingle v. Circuit City Stores , 323 F. 3d. 1165, (9th Cir. May 13, 2003), examined an arbitration agreement that directed arbitrators not to consolidate claims of different employees into one proceeding and generally prohibited the arbitrator from hearing an arbitration as a class action. The court found this bar on class-wide arbitration patently one-sided, and concluded that it is substantively unconscionable. The court noted that '[t]he ability to pursue legal claims in a class proceeding has firm roots in both the federal and California legal systems.” The court found the arbitration agreement one sided because it could not “conceive of any circumstances under which an employer would bring a class proceeding against an employee,” and “through its bar on class-wide arbitration, seeks to insulate itself from class proceedings while conferring no corresponding benefit to its employees in return.” Id. at 1176.

Conclusion

The Bazzle Court left many questions undecided. For instance, what is the fate of specific waivers of class actions contained in arbitration agreements, especially employer-promulgated plans? How are arbitrators going to administer class actions? Who will pay the costs of arbitration class actions, including the arbitrators' fees? What law will arbitrators apply in deciding whether class actions are prohibited or allowed by the agreement? This decision plays a significant role in the drafting of arbitration agreements.

We are certain to see decisions in the near future addressing these issues in the context of employment arbitrations, especially statutory discrimination claims.