California Decision Upholding Class Action
Arbitrations Under The FAA
Threatens To Undermine Benefits Of
By Jeffrey W.
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.
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.
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.
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)
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
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)
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.
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
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.
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
2. 9 U.S.C. § 1 et seq. Back to
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
4. Id. at 785.Back to
5. Id. at 792-93.Back to
6. 55 F.3d 269 (7th Cir. 1995).Back to
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.
8. In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1298
(7th Cir. 1995).Back to
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