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California Decision Upholding Class Action Arbitrations Under The FAA
Threatens To Undermine Benefits Of Arbitration

By Jeffrey W. Sarles

Arbitration is widely hailed a means of reducing the time and expense of resolving disputes. But health care providers, credit card issuers, and other businesses often favor arbitration for an additional reason it reduces the risk of a huge damages award. Litigation presents the danger of runaway juries, exorbitant punitive damages, and, perhaps the scariest feature, class actions that may require company-breaking payouts to thousands or even millions of plaintiffs. A recent California appellate court decision now has jeopardized the ability to avoid class actions through arbitration.

In Blue Cross of Cal. v. Superior Court,(1) the court held that the Federal Arbitration Act (FAA),(2) which governs most arbitral disputes involving interstate commerce, does not preempt California case law authorizing courts to order classwide treatment of arbitration claims. Blue Cross is the first decision by a state or federal court that holds such classwide treatment consistent with the FAA.

The plaintiffs in Blue Cross sued in California state court to challenge the lawfulness of policy exclusions in Blue Cross's health plans. Blue Cross responded with a petition to compel arbitration and stay plaintiffs' suit, on the ground that its contracts with plaintiffs required resolution of all disputes through binding arbitration. The trial court granted Blue Cross's petition to compel arbitration, but it refused to stay the lawsuit, ruling that it could lawfully certify a class of claimants for one classwide arbitration. In a decision of "first impression," the appellate court agreed, denying Blue Cross's writ of mandate.

Prior California cases had authorized classwide arbitration where California arbitration law governed the arbitration.(3) But here Blue Cross argued that the FAA precludes classwide arbitration unless the parties expressly agreed to it and therefore preempts California decisional law. Blue Cross relied on Section 4 of the FAA, which requires enforcement of arbitration agreements "in accordance with the terms of the agreement" between the parties. The plaintiffs replied that because neither their agreements with Blue Cross nor FAA 4 speak to the class treatment of arbitrable disputes, there was no barrier to certifying a class for arbitration.

The court of appeal held that the FAA does not preempt California authority permitting classwide arbitration. First, it reasoned that FAA 4 is a procedural provision that does not apply to proceedings in state courts (unlike FAA 2, a substantive provision that makes arbitration agreements enforceable).(4) Second, it found that California's authorization of classwide arbitration does not conflict with the FAA, which does not even address the resolution of multiparty contractual disputes, and actually furthers federal policy favoring the enforcement of arbitration agreements.(5)

Thus, the court concluded, California courts may order classwide arbitration unless the agreement of the parties expressly prohibits it. If the statutory standards for class certification are met, the trial court may certify a class for arbitration.

The decision in Blue Cross conflicts with the few federal court decisions that directly address this issue. In the leading case, Champ v. Siegel Trading Co.,(6) the Seventh Circuit held that a court may not order classwide arbitration unless the applicable agreements authorize it. To do otherwise, the court reasoned, would violate the directive of FAA 4 that courts must enforce arbitration agreements "according to the terms of the agreement." The court relied on prior cases holding that the FAA does not authorize a court to consolidate arbitrations unless all parties had agreed to such consolidation. In addition, the Seventh Circuit suggested that to permit a court to read a classwide arbitration term into the parties' agreements would "disrupt" the parties' "negotiated risk/benefit allocation" and direct "a different sort of arbitration" than they had bargained for.(7)

The Blue Cross court distinguished Champ by noting that the latter presented no issue of state law that authorized classwide arbitration. But FAA 4 either permits or precludes a court from ordering classwide arbitration where the parties' agreement is silent, and the two courts reached starkly differing conclusions on that question. The California court's decision likely will embolden plaintiffs in other jurisdictions to attempt classwide treatment of arbitrable disputes, and a continuing divergence of views may ultimately require Supreme Court resolution.

Clearly, the stakes are high. The California court holding permits plaintiffs to aggregate their small individual claims and threaten an award of enormous classwide damages from a single arbitral decisionmaker. Whereas courtroom litigation offers the protection of searching review on appeal, review of arbitration awards is exceedingly limited and narrow. Thus, the threat of classwide arbitration is even more likely than judicial class actions to create "intense pressure to settle"(8) and "blackmail settlements."(9)

Moreover, the removal of protection against class action arbitrations will tend to make businesses, including health care providers, wary about entering into arbitration agreements, especially with consumers. If litigation again becomes the preferred means of resolving disputes, both businesses and consumers will lose the benefits that arbitration generally offers, including speed, low cost, and informality. In addition, foreign businesses may be less amenable to arbitrating in the United States if they may be subject to classwide arbitration, a risk that they do not face elsewhere and that, until now, they did not face in arbitrations governed by the FAA.

However, the consequences of the Blue Cross decision, even if extended to other jurisdictions, need not be so dire. Contractual parties may protect themselves from potential classwide arbitrations by including in their arbitration clauses an agreement that class treatment of arbitral claims is precluded. So long as such a provision can survive an unconscionability challenge and a claim that an arbitration provision is unconscionable is rarely successful such an expression of the parties' intent should be upheld by the courts, including those following Blue Cross.


1. 78 Cal. Rptr.2d 779 (App. 1998). Back to Top

2. 9 U.S.C. 1 et seq. Back to Top

3. See Keating v. Superior Court, 183 Cal. Rptr. 360 (Cal. 1982), rev'd on other grounds sub nom. Southland Corp. v. Keating, 465 U.S. 1 (1984); Izzi v. Mesquite Country Club, 231 Cal. Rptr. 315 (App. 1986).Back to Top

4. Id. at 785.Back to Top

5. Id. at 792-93.Back to Top

6. 55 F.3d 269 (7th Cir. 1995).Back to Top

7. Id. at 275. Accord Randolph v. Green Fin. Corp., 991 F. Supp. 1410, 1424 (M.D. Ala. 1997); Howard v. Klynveld Peat Marwick Goerdeler, 977 F. Supp. 654, 665 n.7 (S.D.N.Y. 1997); Gammaro v. Thorp Consumer Discount Co., 828 F. Supp. 673, 674 (D. Minn. 1993).Back to Top

8. In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298 (7th Cir. 1995).Back to Top

9. Henry J. Friendly, Federal Jurisdiction: A General View 120 (1973); see also Castano v. American Tobacco Co., 84 F.3d 734, 746 (5th Cir. 1996) (pressure emanating from certifications of big classes amounts to "judicial blackmail").Back to Top

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