United States: Is "Class Arbitration" An Oxymoron? (2) Examining Theoretical Bases For Class Arbitration

We recently began a series of articles in which we ask: Is "class arbitration" viable given the essential nature of arbitration, or is it an oxymoron? (The premise here is that "class arbitration" signifies the utilization of a Federal Rule of Civil Procedure 23 class action protocol in an arbitration proceeding.) In this article, we examine possible bases for the viability of class arbitration. Spoiler alert: they do not hold up to scrutiny.

In brief, here is why. The U.S. Supreme Court has repeatedly stated that it is an overarching principle that commercial arbitration is a creature of contract, and so the roots of a viable class arbitration presumably must be found in an arbitration agreement. The threshold problem in trying to import a class action protocol into a private arbitration proceeding is that the consent of the parties to an arbitration agreement is necessary but not sufficient. An arbitration agreement has the force of contract, not of law, and so it binds only its consenting parties. Nonparty putative "class members" are not bound by an arbitration agreement unless they each agree with the contracting parties to be mutually bound. And absent such additional ad hoc agreements, the arbitrator has no jurisdiction over the putative class members. Consequently, it seems unlikely that a true "class arbitration" award would survive a vacatur motion under Section 10(a)(4) of the Federal Arbitration Act ("FAA").

On a related note, if the foregoing is correct, then most of the litigation and judicial resources devoted to the question of the enforceability of a "class arbitration waiver" have been misspent. The premise of the controversy is that an arbitrating party has a unilateral right to employ a class arbitration mechanism. But there is no unilateral right in arbitration to any particular procedure; all must be agreed. The pertinent question regarding "class arbitration" concerns agreement; there is no unilateral right in that regard to be waived.

(Finally, we point out that a viable alternative mechanism for adding parties to an arbitral proceeding is conventional joinder according to the rules of the arbitration administering organizations. And that could be facilitated by the inclusion in an arbitration agreement of certain third-party beneficiary rights in favor of other identifiable persons.)

In General

First, it seems uncontroversial that in the absence of bilateral consent in an arbitration agreement, no class arbitration procedure should be permitted or imposed. The potential postures of the parties to an arbitration agreement with respect to the permissibility of "class arbitration" are binary: agreement or not. Currently, if there is no agreement to permit class arbitration — whether that "no agreement" posture is expressed as a prohibition or mere silence concerning it — neither party should be permitted to prosecute a class arbitration.

Thus, a prerequisite to the employment of a class arbitration mechanism is that the parties to an arbitration agreement (a) must have agreed to permit it, or (b) must be deemed to have agreed to that. Agreement might be "deemed" by reason of (i) incorporation by reference in the arbitration agreement of rules — typically the arbitration rules of an administering organization (e.g., the American Arbitration Association ["AAA"]) — that provide for a class action mechanism, without expressly excluding such "class arbitration" rules; or possibly (ii) the contracting parties' creation of pertinent third-party beneficiary rights. This is in keeping with the principle that the procedural rules of an arbitration are fashioned by agreement of the parties.

Other theoretical bases upon which a stranger to an arbitration agreement might compel a contracting party to arbitrate — e.g., estoppel by a nonparty — ultimately would not afford the means to establish a true class action. Rather, if successful, they would enable a particular stranger to engage in an arbitration proceeding, but would not enable a party to create a class of nonconsenting nonparticipant litigants in such a proceeding. So too, considering a converse dynamic in which a party to an arbitration agreement seeks to compel a nonsignatory to arbitrate, the potential legal bases — various common law contract and agency theories — do not afford the means to create a class of nonparticipant litigant parties either. (And the typical use of such theories in a motion under FAA § 4 to compel an adverse person to arbitrate is not consistent with the typical dynamic of class litigation, where a party seeks to become a representative by fiat of putative friendly co-parties.)

In any case, there is a fundamental problem too where there is a bilateral agreement to permit "class arbitration" in a particular proceeding. Such a bilateral agreement binds only the parties to it, and no current law clearly extends its effect further. If that is so, then a true "class action" protocol would seem not to be viable. A Rule 23 protocol makes a defined group of nonconsenting persons into de jure members of a litigating class, who will be bound by the result of a litigation unless they take steps to opt out of that class. That is inconsistent with the nature of arbitration, which is contract-based and inherently consensual. Furthermore, an arbitral tribunal would not have jurisdiction over additional persons who are not parties (or deemed parties) to the controlling bilateral arbitration agreement. Therefore, a true class arbitration award should be vacated under FAA § 10(a)(4) because the arbitral panel will have exceeded its powers by purporting to bind persons beyond its jurisdiction.

On the other hand, a bilateral agreement, relying on an opt-in protocol, to permit joinder of additional identifiable persons — e.g., those with virtually identical claims against the same respondent — might be effective. That is, it might be agreed by the parties to an arbitration agreement that certain identifiable others may, in defined circumstances, opt into that agreement. The result would be consensual joinders, not a class action protocol. And a resultant award would be sustainable.

Is this approach (and the analysis above) plausible? At least two justices of the Supreme Court have indicated that purported "class members" who have not opted into a "class arbitration" proceeding would not be bound by a purported class arbitration award. See, Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064, 2072 (2013) (Justices Samuel Alito and Clarence Thomas, concurring).

Agreement (and its Limits)

1. The Arbitration Agreement Requirement

"Class arbitration" is not permitted under the FAA unless it is authorized by the parties in their arbitration agreement (or by some controlling law). Stolt-Nielsen v. AnimalFeeds Int'l Corp., 559 U.S. 662, 684, 130 S.Ct. 1758 (2010).

The jurisdiction of an arbitrator to adjudicate and issue an award derives only from an arbitration agreement, and applies only to the parties to it. Therefore, an arbitrator presumably cannot compel nonparties to arbitrate. So too, a court is not authorized by the FAA to compel arbitration by persons who are not bound by an arbitration agreement. EEOC v. Waffle House Inc., 534 U.S. 279, 289 (2002); see 9 U.S.C. § 4; cf., United Steel Workers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 581 (1960).

2. Interpretation of an Arbitration Agreement

Where class arbitration is not clearly prohibited in an arbitration clause, whether it is permitted is a matter of contract interpretation typically applying state law. E.g., 2 Domke, Commercial Arbitration § 32:32 (June 2016); Stolt-Nielsen, 559 U.S. at 681 ("interpretation of an arbitration agreement is generally a matter of state law"); 9 U.S.C. § 2 (FAA § 2).

There must be a textual basis for concluding that the parties agreed to class arbitration in particular. Stolt-Nielsen, 559 U.S. at 684-85. Mere silence in that regard in an arbitration clause may not be construed to constitute or indicate an agreement to class arbitration. Stolt-Nielsen, 130 S.Ct. at 1776; 1 Oehmke, Commercial Arbitration § 16:1.

3. Inherent Limits of a Bilateral Agreement

Contracting counterparties may agree among themselves to permit the utilization of a particular procedural mechanism — e.g., class arbitration — in their private dispute resolution proceeding. Their bilateral agreement in that regard would bind no other persons, however. Therefore, while such an agreement might effectively neutralize an objection by either contracting party to the employment of a class arbitration mechanism, it would not bind any other person, or be a basis for a party or arbitrator to compel any other person, to join in the arbitral proceeding as a class member. (You and I can agree that we are the new Kings of Spain, and that our subjects will contribute funds to raise an armada to conquer England. Forty-seven million Spaniards might question our authority, however, even if we gave them the option of filing papers to opt out of our "deal.")

And a bilateral arbitration agreement, whatever its terms, does not confer upon an arbitrator jurisdiction over a person who has not agreed with the parties to be mutually bound by it. Arbitration "is a matter of consent, not coercion." Stolt-Nielsen, 103 S.Ct. at 1773, citing Volt Information Sciences Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 479, 109 S.Ct. 1248 (1989).

4. Express Agreement to Class Arbitration — the Optimal Case

Illustrating the point that bilateral agreements do not bind third parties, we can imagine an example involving multiple identical consumer contracts — e.g., credit card agreements — in which the card issuer and each cardholder agree to permit class arbitration; indeed, they agree to import the Rule 23 class action protocol, with its opt-out option, into an arbitration. In that case, could a representative cardholder create a class of all cardholders and conduct an effective class arbitration without the affirmative consent of any other cardholder to be bound by the arbitration agreement?

The representative cardholder can rely on the card issuer's agreement to block an objection by the issuer to permitting a class arbitration procedure. But each party only agreed that a class arbitration mechanism would be permitted in the arbitration of a claim by that cardholder against the issuer (or vice versa). No cardholder will have pre-agreed with the issuer to become a class member in an arbitration commenced by another cardholder, or to be bound by an agreement, however similar, made by another cardholder with the issuer. And an arbitrator has no inherent power, any more than a court, to compel (or to permit) a noncontracting party to join an arbitration.

Consequently, even in the case of a broadly common bilateral agreement expressly to permit a class arbitration mechanism, a further affirmative agreement by each of the other cardholders who intend to assert a claim and to be bound by an award in a particular arbitral proceeding would seem to be required. And that would not be "class arbitration."

5. Third-Party Beneficiaries

However, a bilateral agreement arguably could be the basis to invite additional parties — presumably, similarly situated parties — to join in a particular arbitration proceeding. That is, an arbitration agreement might make a defined group of persons third-party beneficiaries. If an arbitration agreement permitted identifiable persons to opt in by agreeing to become additional parties to an arbitration agreement, and if such persons did so, their claims arguably could be joined in a single proceeding. The result would be the joinder of additional persons, with consents by all parties, and subject to conventional administrative rules in that regard (see, e.g., ICC Arb. Rules Art. 7-10; LCIA Arb. Rules Arts. 22.1(vii)). And in that scenario, a resulting award would be confirmable.

Incorporation of Pertinent Rules by Reference

There are a variety of procedural rules that parties to an arbitration agreement may incorporate by reference and that relate to the addition to an arbitral proceeding of noncontracting persons.

1. AAA Rules

The AAA's Supplementary Rules for Class Arbitrations ("SRCA") (eff. Oct. 8, 2003) in effect imports the elements of Rule 23 into the AAA's arbitration rubric. The AAA's policy is that it will administer a class arbitration applying those rules if the arbitration agreement (i) indicates that the arbitration will be conducted in accordance with the rules of the AAA without excluding the SRCA; and (ii) is silent concerning consolidation, joinder of claims, and "class claims."

The arbitrator must consider two screening criteria before applying the SRCA, however. He/she must first determine "whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class." (SRCA-3.) However, in construing the applicable arbitration agreement, "the arbitrator shall not consider the existence of [the SRCA] ... to be a factor either in favor of or against permitting the arbitration to proceed on a class basis." (Id.) If the arbitrator is satisfied that a class arbitration may proceed under the arbitration clause in question, he/she "shall determine whether the arbitration should proceed as a class arbitration." (SRCA-4(a).) One of the requirements in that regard is that "each class member has entered into an agreement containing an arbitration clause which is substantially similar to that signed by the class representative(s) and each of the other class members." (SRCA-4(a)(6).)

Eventually, if the arbitrator makes a Class Determination Award (and it is not vacated), a Notice of Class Determination to each of the class members would be required, and that notice would describe an opt-out right of the class members. (See, SRCA-6(b)(5).)

Finally, parties to a class arbitration under the SRCA are "deemed to have consented that judgment upon each of the awards rendered in the arbitration may be entered in any federal or state court having jurisdiction thereof." (SRCA-12.) (The definition of "parties" for that purpose is not specified.)

The question remains, however, whether the jurisdiction of an arbitrator, which is inherently limited to the parties to the arbitration agreement that empowers him (for purposes of issuing an award) is, as a matter of law, expanded to include other persons by reason of the contracting parties' agreement to the applicability of the SRCA in an AAA arbitration. We suggest not.

The AAA Commercial Arbitration Rules (eff. July 1, 2016) contain no provisions specifically regarding joinder (or consolidation of proceedings), but do provide that the arbitrator shall have the power to rule on the existence, scope and validity of any arbitration agreement (R-7(a)), and on objections to the jurisdiction of the arbitrator (R-7(c)). On the other hand, the current (June 1, 2014) arbitration rules of the International Centre for Dispute Resolution ("ICDR") — the international arm of the AAA — include provisions concerning joinder (and consolidation of proceedings). (See Arts. 7, 19(1), 8.)

2. ICC Rules

The current ICC Rules of Arbitration (effective March 1, 2017) include joinder (and case consolidation) provisions (see, ICC Arts. 7-10, 6), but do not appear to provide a basis for class arbitration.

3. LCIA Rules

The LCIA Arbitration Rules (effective Oct. 1, 2014) too do not consider class arbitration, but do provide for consensual joinder of additional persons (and consolidation of arbitral proceedings) (see Arts. 22.1(viii)-(x)).

Estoppel

Estoppel is a legal theory by which a nonsignatory may compel a signatory of an arbitration agreement to arbitrate. E.g., Thomson-CSF SA v. American Arb. Ass'n, 64 F.3d 773, 776, 778 (2d Cir. 1995). A signatory may be estopped from avoiding arbitration with a nonsignatory when the issues that the nonsignatory is seeking to resolve in arbitration are "intertwined" with the particular commercial agreement (containing an arbitration clause) that the party to be estopped signed. Estoppel thus may enable certain strangers to a bilateral arbitration agreement individually to compel arbitration by a party to such an agreement. Any such stranger would have to be an active participant in the proceedings, at least in its application to compel arbitration, rather than a passive "class member." There would seem to be no road to class arbitration using this theory.

Furthermore, a different variation of an estoppel theory may enable a signatory of an arbitration agreement to compel a nonsignatory to arbitrate (i) if the nonsignatory knowingly accepted benefits "flowing directly from [an] agreement" that contains an arbitration clause, MAG Portfolio Consult, GmbH v. Merlin Biomed Group LLC, 268 F.3d 58, 61 (2d Cir. 2001), (ii) if the nonsignatory reaped a direct benefit made possible by the agreement containing an arbitration clause, Hartford Fire Insurance Co. v. Evergreen Org Inc., 410 Supp.2d 180, 182, 186-87 (SDNY 2006); (iii) if the non-signatory exploits an agreement to acquire or use an asset created by such an agreement, e.g., Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1063-64 (2d Cir. 1993); or (iv) if a benefit to the non-signatory is (a) provided or contemplated in the agreement containing an arbitration clause or (b) otherwise clearly contemplated by the signatories of the agreement, Deloitte Noraudit, 9 F.3d at 1063-64. Applying this version of the theory would not seem to be a basis for creating a class arbitration either.

A "Class Arbitration Waiver" Is Pointless

Finally, we note that if the foregoing analysis is correct, then the notion of a "class arbitration waiver" is unnecessary. (Much paper and many electrons may have been wasted on this superfluous subject.) An arbitrating party has no inherent unilateral right to "class arbitration." Neither that nor any other procedure may be invoked unilaterally in an arbitration; all must be adopted by agreement. If there is no actual or deemed agreement to permit "class arbitration," then there should be no possibility that that mechanism could be employed. "Class arbitration" is either permitted by agreement of the parties or not. A "waiver" of a non-existent unilateral right to employ it would be superfluous.

(In the case of the incorporation by reference in an arbitration agreement of a set of rules that include provisions for class arbitration (e.g., the AAA's SRCA), a simple exclusion of those provisions in the terms of the arbitration agreement is what is called for, not a "waiver.")

Originally published in Law 360 (April 23, 2017).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.