Court Eyes Arbitration Class Actions

A Consumer Issue from S. Carolina

MARCIA COYLE
National Law Journal
January 20, 2003

The U.S. Supreme Court will consider whether class actions can be brought in arbitration proceedings. Several cases raise a related issue: whether arbitration clauses can ban class action claims.

WASHINGTON -- State and federal courts struggling with whether class action claims can be brought in arbitration proceedings may get some guidance from the U.S. Supreme Court.

The court has agreed to take up the class action question in Green Tree Financial Corp. v. Bazzle, No. 02-634.

Green Tree is appealing an unfavorable lower court ruling. The South Carolina Supreme Court, upholding an arbitrator's awards of nearly $27 million against the company, held that classwide arbitration may be ordered when an agreement is silent on that issue if it would serve "efficiency and equity, and would not result in prejudice."

The issue is of "critical importance" to consumers, says David C. Frederick of Washington, D.C.'s Kellogg, Huber, Hansen, Todd & Evans, the attorney of record for the class members. Without a classwide arbitration proceeding, he says, many consumers will not be able to bring claims because the costs of arbitration may exceed the possible recovery.

Green Tree's high court counsel, Carter G. Phillips of Chicago's Sidley Austin Brown & Wood, counters that arbitration agreements must be enforced according to their terms. The South Carolina court's approach, he says, would allow courts to modify private agreements that don't explicitly preclude a proceeding or result that a court, "in its discretion, believes will 'serve efficiency and equity, and would not result in prejudice.' "

The Green Tree case actually involves two classwide arbitration proceedings.
In one, Lynn and Burt Bazzle executed a Green Tree retail installment contract and security agreement, which included the arbitration clause, for $15,000 in home improvements. In the other, Daniel Lackey signed an installment contract and security agreement to buy a mobile home.

The Bazzles later brought a class action against Green Tree for violations of the state Consumer Protection Code. They charged that the company violated requirements that lenders advise them of their right to get their own attorneys and insurance agents and that lenders record consumers' preference for those representatives at the closing of real estate transactions. A state court granted class certification and ordered arbitration. Lackey sued on the same grounds. An arbitrator, the same in both cases, permitted class action arbitration.

The Bazzles' case led to an award to the class of $10.9 million in damages and $3.6 million in attorney fees; Lackey's, $9.2 million and $3.3 million, respectively.

On appeal, Green Tree argued that its arbitration clause limited arbitration to claims by individuals. The clause speaks of disputes, claims or controversies arising from or relating to "this contract," or the relationships which result from "this contract." But the state high court said that language "at best" created an ambiguity that, under standard contract interpretation, should be construed against the drafting party, Green Tree.

The court relied on state law to permit classwide arbitrations, saying that it regularly permits consolidation of appropriate claims where the arbitration agreement is silent.
In the U.S. Supreme Court, Green Tree argues that a majority of courts have found that permitting classwide arbitrations not explicitly provided for would violate the Federal Arbitration Act (FAA). It requires enforcement of private arbitration agreements under their terms.

Frederick argues that the act doesn't pre-empt state law compatible with a federal standard. Neither the statute nor the arbitration agreement mentions class arbitrations, he says, so no conflict exists.

Green Tree is backed by the American Bankers Association and other groups. Their high court counsel, Louis R. Cohen of Washington, D.C.'s Wilmer, Cutler & Pickering, argues that the state court decision "reflects the old judicial hostility to arbitration in modern and more sophisticated dress."

Frederick says the class action process "in our case, worked extremely well." Green Tree, he says, "just doesn't like the result."

"Corporations, like petitioner here," he says, "have been engaging in predatory lending practices and trying to evade liability by imposing arbitration agreements on consumers with the expectation they will win because arbitration is a favorable dispute mechanism for them."

F. Paul Bland Jr., staff attorney at Trial Lawyers for Public Justice says that several cases raise a related issue: whether arbitration clauses can ban class action claims. "A number of courts have struck down those bans as exculpatory clauses and unconscionable," he says. His organization is handling a suit against AT&T, on appeal in the 9th U.S. Circuit Court of Appeals, in which a court found that an arbitration clause's ban on class actions was unconscionable because it denied customers a meaningful remedy.

In Green Tree, he says, "The crucial thing is, it's a question of state law. The Supreme Court has said unless it's forbidden by the FAA, interpretation is a matter of state law."

The high court trend is toward expanding private dispute resolution, says Charles Craver of George Washington University Law School. "On the other hand, given recent concerns with class action abuses and that the impact on others is so great, I could see them saying class actions must be explicitly authorized," he says.

Despite the grant of certiorari on Jan. 10, the court has asked the company to respond to the suggestion of bankruptcy that it has filed in courts around the country. That filing leads to an automatic stay of litigation against the company and could lead the high court to dismiss its writ as improvidently granted.

The automatic stay has been used by Green Tree, says Phillips, but there is a mechanism to lift the stay and he will file for such an order. "Some matters should be allowed to proceed in order to benefit the estate," he says.

Coyle's e-mail address is mcoyle@nlj.com.