Expert Advice

By Mitchell Chyette
     
      Alternative Dispute Resolution
      Appealing Classwide Arbitration Decisions
      While arbitration clauses in consumer and other standardized contracts have become increasingly common, the overlap of the rules governing arbitration and class actions can be confusing.
      Most practitioners hoped that the U.S. Supreme Court would help resolve the confusion and address the intricacies of classwide adjudication in Green Tree Financial Corp. v. Bazzle (539 U.S. 444 (2003)). However, the Court skirted the specific issues and ruled instead that the question of whether a contract permits classwide arbitration must, in the first instance, be decided by the arbitrator.
      After Bazzle, the American Arbitration Association (AAA) and JAMS adopted rules on classwide arbitration. At the outset of any such arbitration, the arbitrator is asked to decide whether the contract permits classwide arbitration and, if so, to certify the class.
      The rules also include rather unusual provisions that allow parties immediately to appeal the arbitrator's interim decision directly to a court.
      For example, the AAA rule states: "The arbitrator shall stay all proceedings following the issuance of the clause construction award for a period of at least 30 days to permit any party to move a court of competent jurisdiction to confirm or to vacate the clause construction award." (AAA Supplementary Rules for Class Arbitration, Rule 3.) And the JAMS rules provide: "The arbitrator may set forth his or her determination in a partial final award subject to immediate court review." (JAMS Class Action Procedures, Rule 2.)
      The forum to which the decision is appealed matters greatly, because the standard of review in each may be different.
      The Federal Arbitration Act (FAA) allows an arbitrator's decision to be overruled if it is "in manifest disregard of the law." (9 U.S.C. §10.)
      Under the California Arbitration Act, an arbitrator's decision can be overturned only for a limited set of reasons?such as corruption or fraud?not for errors of fact or law, even when such errors cause substantial injustice. (Cal. Code Civ. Proc. §§ 1286.2, 1286.4, and 1286.6; Moncharsh v. Heily & Blase, 3 Cal. 4th 1 (1992).) The scope of this review is much narrower than review under the FAA. (See Crowell v. Downey Cmty. Hosp. Found., 95 Cal. App. 4th 730, 738 (2002).)
      Of course, California law readily accepts the notion of classwide arbitration. (See Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005).) However, the rule is not so clear in federal court.
      A party opposing classwide arbitration would be better off appealing an adverse decision to a federal court, where the scope of review is broader and there is more precedent against allowing classwide arbitration. A party seeking to uphold a decision allow-ing classwide arbitration would likely prefer to be in state court, where the chances of overturning the arbitrator are slim, and where state law allows classwide arbitration.
      Adding to the confusion on the forum issue, neither the AAA nor the JAMS rules specify the court to which the appeal must be made. Federal courts traditionally have jurisdiction in diversity and federal subject-matter cases. Federal jurisdiction over class actions was recently expanded, however, by the Class Action Fairness Act (CAFA). CAFA generally gives the federal courts original jurisdiction over any class actions in which the amount in controversy exceeds $5 million. (28 U.S.C. § 1332(d).) So, it would seem that an appeal could be made if federal jurisdiction applies under any of the above rules.
      But removal of an appeal may be different. First, if the action began in the state courts and was referred to arbitration, it could be argued that the initial court retains jurisdiction over the case. Also, it could be argued that the appealing party gets to choose the court.
      The ostensible function of the court in reviewing decisions by the arbitrator is to carry out the parties' agreement. The justification behind giving arbitrators broad latitude in reaching decisions is that the parties agreed to have their dispute resolved expediently by arbitration. To the extent that the rules allow the parties to appeal to any "court of competent jurisdiction," then, once the appeal lands in such a court, the matter is settled. Removal involves applying federal law over and beyond the parties' express agreement.
     
      Mitchell Chyette (mchyette@lpslaw.com) is of counsel at Leland, Parachini, Steinberg, Matzger & Melnick in San Francisco, concentrating on business litigation.
     

---