19th Jan 2017

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General principles; “who decides” whether an arbitration provision is to include class-action-proceedings; court or arbitrator?  

The subject of “who decides”  whether an arbitration provision is to include class-action-proceedings; court or arbitrator is a matter of contract agreement.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 243, citing First Options of Chicago (1995) 514 U.S. 938, 943]  To arrive at “who decides” there are three steps:

1.    The courts should apply ordinary state-law principles that govern formation of contracts.  If the issue is disputed, state law applies.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 244 (parties to the contract stipulated California law was to be applied)]  See § C27 CHOICE OF LAW.

2.    If the question of “who decides” is uncertain or ambiguous, and the arbitration provision is in an adhesion contract [see § A25 ADHESION CONTRACT], the court will decide the ambiguity against the drafter.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 248 ].  Sandquist held that where a detailed arbitration provision in an adhesion contract  makes no specific mention on whether class-action-proceeding was to be included, the Supreme Court construed this uncertainty against the drafter and in favor of the weaker party contending that class-action-proceeding was within the provision. See 4. below.

3.    If the arbitration agreement states that the arbitration shall be held pursuant to the Federal Arbitration Act, such Act controls but the parties may elect to follow state procedures in lieu of federal procedures.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 250]  See discussion § A86:1.4.01 Preemption; meaning and scope, OBSERVATION [Substantive and procedural provisions from the FAA].

4.    Under the Federal Arbitration Act, as to “who decides” where the adhesion contract is ambiguous, the California Supreme Court has decided that the arbitrator decides whether the agreement provides for a CLASS ACTION.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 258-260]  See § A86 ARBITRATION [§ A86:1.5.1].

Class action arbitration procedures

Once gateway questions of arbitrability have been settled, the FAA switches presumptions for issues affecting the manner in which an arbitration is to be conducted.  Thus, procedural questions which grow out of the dispute and bear on its final disposition are presumptively NOT for the judge, but for an arbitrator, to decide.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 252]

Consolidation of class proceeding

A determination by an arbitrator that the agreement permits class-action-proceedings will also then permit the arbitrator to consolidate actual or potential agreed-to arbitrations into a single proceeding.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 258]

Rights of would-be class members

Any potential binding arbitration award will arise only after it has been decided that an arbitrator will govern the class action proceeding.  To the extent a would-be absent class member may believe he or she has unique defenses to enforcement of the arbitration agreement, the major arbitration entities provide clear notice and opt-out rights.  See JAMS class action procedures, rule 4; American Arbitration Association, supplementary rules for class arbitration, rule 5(b)©.  Those same rules also require consideration of the full panoply of Federal Rules of Civil Procedures, Rule 23 (28 USC) requirements before any class is certified.  See Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 258.  There is no reason to assume a non-JAMS, non-American Arbitration Association arbitrator would refuse to afford similar protection.  If the arbitrator did refuse, the resulting award would doubtless not be binding.  [Sandquist v. Lebo Automotive, supra]  Given prehearing hearing, an absent class member can decide for him or herself whether to abide by the prior court ruling that the arbitration agreement is enforceable and applicable, or opt out and take his or her chances in a separate proceeding.  In neither instance will the absent class member be subjected to arbitration without consent or the opportunity to have court assessment of the validity of his or her agreement to arbitrate.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, 258]

Class arbitration can only proceed after an arbitrator has determined the arbitration agreement, applicable to present and absent parties, contains precisely such an authorization.  There is no reason to presume that determination will be in error or that opt-out procedures, adequate in most ordinary class proceedings, will be insufficient to protect absent parties who disagree with the arbitrator’s determination or would simply prefer not to arbitrate on a class basis.  [Sandquist v. Lebo Automotive (2016) 1 Cal. 5th 233, fn. 7]

References in bold are to Mr. Cornblum’s text CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE, 2016 Edition, published by ThomsonReuters (1-800-344-5008 to order 3-Volume text).

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