Arbitration has become an enormously popular means of resolving disputes because it generally is faster, cheaper, and less complicated than litigation. But unless the courts leave it alone, arbitration soon will look an awful lot like litigation.
One of the features of arbitration that has made it so attractive to so many commercial parties is the opportunity to resolve contractual disputes individually. This one-on-one process underlies the efficiency of arbitral dispute resolution and avoids the risk of company-breaking awards based on the aggregated claims of numerous claimants.
A recent California appellate court ruling threatens these benefits. In Blue Cross of Cal. v. Superior Court, 78 Cal. Rptr.2d 779 (App. 1998), review denied Jan. 13, 1999, the court held that the Federal Arbitration Act (FAA), which governs most commercial disputes subject to arbitration, does not preempt California case law authorizing courts to certify classes for arbitration. Blue Cross is the first decision by a state or federal court that holds such classwide treatment consistent with the FAA.
The impact of the Blue Cross decision is that California courts now may order classwide arbitration unless the agreement of the parties expressly prohibits it. Thus, if the statutory standards for class certification are met, the trial court in Blue Cross may certify a class of arbitration claimants to bring all their claims, which challenge the lawfulness of exclusions in Blue Cross health plans, in one arbitral proceeding.
The ruling in Blue Cross appears flatly inconsistent with Section 4 of the FAA, which authorizes courts to enforce arbitration agreements only "in accordance with the terms of the agreement" between the parties. Blue Cross never agreed to arbitrate disputes with its health plan subscribers on a classwide basis. To the contrary, the contract invoked by each of the claimants mandated arbitration of disputes arising out of that contract — not of all similar disputes raised by other health plan subscribers.
The decision in Blue Cross conflicts with the conclusions of the few federal courts that have addressed the issue of classwide treatment of arbitration claims. The Seventh Circuit ruled that a court may not order classwide arbitration unless the applicable agreements authorize it, because doing so would "disrupt" the parties’ "negotiated risk/benefit allocation" and direct "a different sort of arbitration." Champ v. Siegel Trading Co., 55 F.3d 269, 275 (1995). The California decision likely will embolden plaintiffs in other jurisdictions to seek classwide treatment of arbitrable disputes, and a continuing divergence of views may ultimately require Supreme Court resolution.
Clearly, the stakes are high. The California ruling permits plaintiffs to aggregate their small individual claims and threaten an award of enormous classwide damages from a single arbitral decisionmaker. The exceedingly limited and narrow judicial review of arbitration awards makes such an outcome considerably more troubling that in judicial litigation, which offers the protection of searching review on appeal. Thus, the threat of classwide arbitration is even more likely than in the judicial arena to unduly pressure defendants into settling meritless claims.
Moreover, the removal of protection against classwide arbitrations will tend to make businesses wary about entering into arbitration agreements at all, especially with consumers. A backslide away from arbitration and a renewed turn toward traditional litigation of consumer disputes will prove costly both to businesses and consumers.
Contracting parties still can protect against the danger of arbitral class actions by expressly precluding such class treatment in their arbitration agreements. But given the widespread use of "generic" arbitration clauses in commercial contracts, such express preclusion is unlikely to become widespread.
What is needed is a recognition by the courts that arbitration is different from litigation and should remain so. Illinois courts, for example, unlike their federal counterparts, refuse to uphold punitive damages awards by arbitrators unless the parties’ agreement expressly authorized the arbitrator to award such damages. See Ryan v. Kontrick, 1999 WL 167522 (Ill. App. 1st Dist. Mar. 26, 1999). Commercial parties have been flocking to arbitration both to reduce costs and to reduce the risk of runaway juries, exorbitant punitive damages, and — perhaps the scariest feature of litigation — class actions that threaten enormous payouts to thousands or even millions of plaintiffs. The courts should respect agreements to arbitrate and avoid these risks. They should not blight the arbitration landscape with the worst features of litigation.
* Mr. Sarles is a litigation attorney at Chicago’s Mayer, Brown & Platt. He also is an adjunct professor at Northwestern University School of Law, where he teaches a seminar in commercial arbitration.
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