Federal Arbitration Preemption of State Contract Law: When May an Arbitration Be Conducted on a Classwide Basis?


Linda S Mullenix

7 Preview of United States Supreme Court Cases 419


This article previews the issues and arguments in Green Tree Financial Corp. v. Bazzle, on appeal to the Supreme Court during the 2002-03 Term. The Green Tree Financial appeal raises the cutting-edge problem whether class action procedure may used in a state arbitration applying state law, when the underlying arbitration agreement made no provision for class action treatment.

The central problem is whether a court may order the class action treatment and resolution of claims in a state arbitration, when the arbitration agreement does not itself provide for the class action resolution of claims during the arbitration. This issue also is framed as asking whether the imposition of classwide procedures, when an arbitration clause is silent, violates the Federal Arbitration Act, or rather is a matter of state contract law interpretation over state claims.

The Supreme Court strongly favors arbitration clauses and has supported the enforceability of arbitration clauses in numerous cases. Notwithstanding this substantial jurisprudence, the Court has not definitively ruled on the relationship of arbitration clauses to class actions. Although a few courts have addressed issues relating to the relationship of arbitration clauses and class actions, the statutory authorities governing arbitration are silent.

Neither the Federal Arbitration Act nor the Uniform Arbitration Act deal with the relationship of arbitration to the class action mechanism. Similarly, no state arbitration statute contains provisions dealing with the treatment of class actions when an arbitration provision exists.When confronted with an arbitration clause, plaintiffs often seek to avoid enforcement of the arbitration agreement, marshalling several arguments: that the arbitration clause is an invalid contract of adhesion, that arbitration is not appropriate for their class claims, that arbitration denies the plaintiff the right to proceed as a class action, and that if arbitration is appropriate, the plaintiffs have a right to classwide arbitration.

When an arbitration clause is silent as to classwide resolution of claims, defendants typically will seek to enforce the arbitration clause as written, to avoid allowing an individual arbitration to transmute into a class action litigation. If forced into an arbitral proceeding, plaintiffs, on the other hand, may very well urge utilization of the arbitration auspices to resolve all claims on a classwide basis.

The Court’s decision whether classwide arbitration may occur in absence of such a provision in the arbitration agreement, is singularly important for both businesses and potential class claimants. Although historically the business sector has been the greatest supporter of arbitration clauses, the corporate sector now urges the Supreme Court not to expand the legal reach of arbitrations to include classwide resolutions of claims when the arbitration agreement itself does not make provision for classwide resolution of claims.

In essence, business interests contend that although they have agreed to the utility of arbitration to resolve individual grievances, the corporations have never signed onto the proposition that an arbitration agreement permits individual plaintiffs to bootstrap the class action mechanism onto a bilateral arbitration agreement.

Plaintiffs, however, view the question of classwide arbitration – at least as presented on the facts in this appeal – as raising questions of state contract interpretation rightly committed to the state courts. As such, the plaintiffs favor those state courts that have permitted the class action mechanism to be annexed to the arbitration process. In this view, the cost, speed, and efficiencies of the class action device will be maximized if accomplished in the context of the arbitration process, and state consumer protection rights may be vindicated.

Full Citation

Linda S. Mullenix, Federal Arbitration Preemption of State Contract Law: When May an Arbitration Be Conducted on a Classwide Basis?, 2002-2003 Preview of United States Supreme Court Cases 419 (Apr. 18, 2003).