Originally from The College of Commercial Arbitrators Guide to Best Practices in Commercial Arbitration, Fifth Edition

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I.           THE CONTEXT: CLASS ACTIONS, CLASS ACTION WAIVERS, AND THE REACTION

The class action is a procedure that has been widely used in American civil litigation since the 1960s to combine disputes that may be so similar and so numerous, and may involve such small stakes, that it is more efficient to handle them all in a single proceeding. The technique is important in a modern, complex society in which large organizations often deal with thousands or even millions of customers or employees whose claims would overwhelm the courts if litigated individually, and whose small size would not justify the cost of litigating individually.

Class actions offer plaintiffs the advantages of pursuing in a single proceeding multiple claims that would not be economical to pursue individually, with the prospect of an award of attorneys’ fees to successful lawyers for the class. As the Supreme Court put it, “The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (quoting Mace v. Van Ru Credit Corp., 109 F.3d 338. 344 (7th Cir. 1997)). However, the class action became such a popular device for pursuing such claims that the targets of these actions began to look for ways to limit or block a process that they felt had been misused to force them to settle unmeritorious claims in order to avoid the cost of defending them and the exposure they created to potentially huge verdicts.

One of the most popular antidotes to class actions was initially an arbitration clause. The federal courts for some time found that a simple agreement to arbitrate to precluded bringing a class action. See Champ v. Siegel Trading Co., Inc., 55 F.3d 269, 275 (7th Cir. 1995). As that rule came under pressure, businesses turned to including class action waivers in their contracts (often contracts alleged to be contracts of adhesion with employees and consumers). Those waivers renounced the right to bring a class action. When the waivers were challenged in court as unconscionable, businesses began to combine the waiver with an arbitration clause, because a class action waiver inside an arbitration clause benefitted from the enforceability of arbitration clauses under the Federal Arbitration Act, which has generally been found to preempt state law that might otherwise have made an arbitration clause unenforceable. E.g., Doctor’s Assocs, Inc. v Casarotto, 517 U.S. 681, 687 (1996).

The courts, caught between the competing arguments for and against class actions and for and against arbitration, became attracted by the idea of allowing class claims to proceed in arbitration. Led by the California Court of Appeals, courts began to conclude that the way to give effect to an agreement to arbitrate, while preserving the ability to bring class claims, was to order the case to “arbitration on a class-wide basis.” Keating v. Superior Court, 167 Cal. Rptr. 481, 492 (Cal. Ct. App. 1980), rev’d in part, 31 Cal. 3d 584, 183 Cal. Rptr. 360, 645 P.2d 1192 (1982), rev’d sub nom. Southland Corp. v. Keating, 465 U.S. 1, 104 S. Ct. 852 (1984) (declining to reach class arbitration issue). The culmination of that trend was the Supreme Court’s decision in Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003), allowing class arbitration under a broad arbitration clause which is discussed in Part II of this chapter. According to the AAA’s Amicus Curiae brief in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), within six years of the Supreme Court’s decision in Bazzle, 283 requests for class arbitration had been filed with and were being administered by the AAA under its new Supplementary Rules for Class Arbitration.