Divided Supreme Courts Decide Bazzle v. Green Tree: Lack of Clarity in Decision Requires Caution in Dealing with Arbitration and Class Actions

The Supreme Court in a divided 4-3 – 1-1 decision reversed the decision of the South Carolina Supreme Court in Green Tree Financial Corp. v. Bazzle 2003 U.S. Lexis 4798 to allow class actions in arbitrations when the agreement between the parties was silent on the issue. The Court remanded the case for consideration by the arbitrator of the parties' intent concerning the availability of class actions in arbitration proceedings. The Court did not address the key issue of whether arbitration agreements can preclude class actions. This Alert will discuss the impact of this decision and practical steps parties can take in light of the unanswered questions stemming from this decision.

Background

In a number of cases dealing in diverse areas ranging from consumer claims, employment and civil rights, and statutory claims, including civil rights, employment and RICO, the Supreme Court has consistently favored the use of arbitration to resolve disputes where the parties have agreed to arbitration. Circuit City Stores, Inc. v. Adams 532 U.S. 105 (2001); Gilmer v. Interstate/Johnson Lane 500 U.S. 20 (1991). Bazzle featured two areas where the use of arbitration and the application of the Federal Arbitration Act was not clear and at times controversial. These concerned the use of arbitration agreements to preclude class actions and the interplay between federal law under the Federal Arbitration Act and state law, particularly in state court proceedings.

Bazzle involves two cases against Green Tree Financial Corp. arising from consumer finance contracts containing binding arbitration clauses that did not address whether class actions would be permitted in the arbitration. In its decision, the South Carolina Supreme Court held that South Carolina law, rather than the Federal Arbitration Act, would determine the result. The South Carolina Court applied a standard of equity and efficiency to hold that the trial court and the arbitrator had correctly ordered the class actions to proceed within the arbitrations. Bazzle et. al. v. Green Tree Financial Corp., 351 S.C. 244 (2002).

In the case brought by the Bazzles following the trial court's determination that a class-wide arbitration could proceed, the arbitrator found in their favor and ordered Green Tree to pay a total of $14 million in damages and fees, including $3 million in legal fees. In the second case brought by Daniel Lacky, the same arbitrator, after being apprised of the court's ruling in Bazzle, held the arbitration could proceed as a class action as plaintiffs argued.

The South Carolina Supreme Court placed particular emphasis on the fact that the arbitration clauses were contained in form contracts and suggested a waiver of class actions might impermissibly curtail the parties' underlying substantive rights. Typically, arbitration agreements make no reference to whether and in what forum arbitration may proceed. There is a split among the courts whether arbitration agreements can prohibit class actions and whether class actions can proceed in arbitration. Champ v. Siegel Trading Co. 55 F.3d 269 (7^th Cir. 1995); Doctor's Associates, Inc. v. Bennett, 1948 U.S. App. Lexis 38837 (2^nd Cir 1998); Johnson v. West Suburban Bank, 225 F.3d 366 (3^rd Cir. 2000); Ting v. AT&T, 319 F.3d 1126 (9^th Cir. 2003); Randolph v. Green Tree Financial Corp., 244 F.3d 814 (11^th Cir. 2001).

The "Decision" of a Fractured Court

In one of the most fragmented decisions in recent years, the court voted 4-3-1-1 to remand the case for further findings by the arbitrator concerning the parties' intentions as to class actions as expressed in their arbitration agreement.

The plurality opinion, authored by Justice Breyer and joined in by Justices Souter, Ginsberg and Scalia, held the decision concerning class actions in the arbitration should be made by the arbitrator. Justice Breyer did not believe the South Carolina trial courts in Bazzle and the arbitrator in Lacky, despite ordering class actions in the arbitrations, had considered the parties' intent in the arbitration agreement. Justice Breyer reasoned that the parties, by authorizing the arbitrator to determine the scope of his/her authority, had agreed that the arbitrator could also determine the nature of the arbitration proceeding and whether class actions were available.

Justices Rehnquist, O'Connor and Kennedy dissented, and voted to reverse the judgment of the South Carolina Supreme Court but for different reasons. They argued that the decision of the South Carolina Court so conflicted with the intent of the parties that the court's decision allowing class actions in arbitration conflicted with the Federal Arbitration Act. The dissenters relied principally on provision of the arbitration agreement allowing the parties to select the arbitrator in each individual arbitration case to conclude the parties did not intend to appoint one arbitrator to determine a class of cases. The dissenters also argued that, unless the parties had expressly agreed to grant the arbitrator the authority to allow class actions, that issue, like the existence of an arbitration agreement, was a matter of law left to Court.

Justice Stevens' separate opinion that the decision was a matter of state law and therefore the lower court decision should be left alone. However, because Judge Breyer's views were close to his own and in order to allow the Court to enter a judgment decision, he concurred in judgment, but not in Judge Breyer's opinion.

Finally, Judge Thomas opined that the Federal Arbitration Act should not apply in state court proceedings.

Conclusions and Future Directions

• The Court again Favors Arbitration

• Eight of the nine Justices wrote or concurred in opinions that supported the use of arbitration although in with differing outcomes.

• Party Choice as Expressed in Arbitration Agreements is Key

• While the Justices may disagree concerning the application of federal or state law, the majority all stressed the overriding importance of the choices of the parties in their arbitration agreements. This is particularly important because judicial review of contractual interpretations by arbitrators is extremely limited.

• Arbitrations Provisions Should Reflect Decisions about Class Actions

• The majority of court decisions endorse arbitration agreement provisions barring class actions. However, until the Supreme Court resolves the matter, there will be continuing conflict between the Ninth Circuit and these other courts Champ v. Siegel Trading Co. 55 F.3d 269 (7^th Cir. 1995); Randolph v. Green Tree Financial Corp., 244 F.3d 814 (11^th Cir. 2001).

• Key Issues in Reviewing Existing and Drafting New Arbitration Agreements

• The uncertainty of the law and the great deference to party choice make the terms of arbitration agreements critical. The following are a few of the key issues parties should now consider, particularly since almost all arbitration agreements in use today do not even refer to this issue.

  • Should the arbitration agreements expressly preclude class actions? If so, how should the agreement deal with circuits or states that do not permit a party to impose such a provision in a standard form?
  • If class actions can proceed, should they proceed in court, arbitration or in a combination?
  • Who should make decisions concerning the applicability, scope, enforceability and operation of class actions?
  • Which law should apply?

  Nixon Peabody's ADR Group has developed provisions to deal with these and other contingencies.

• Parties May Seek to Control Class Actions Other than by Arbitration

• Parties should consider limiting or controlling the use of class actions in agreements regardless of whether they call for arbitration, Nixon Peabody's ADR Group has developed techniques and forms to limit class actions by utilizing other procedures and contractual choices that may be applicable.

Conclusion

While the Bazzle case may not have answered many of the key questions concerning arbitration and class action, the fragmented opinions of the Court underscore the need for a detailed review of existing arbitration agreements already in use and, expressly, the careful drafting of new or revised arbitration agreements. The Bazzle case, when viewed in the context of other recent decisions, suggests that arbitration remains a powerful tool that Court will uphold to quickly, cost-effectively and efficiently resolve disputes.

For more information concerning the Bazzle and other recent cases, to obtain a review of arbitration clauses already in use or to determine whether arbitration or clauses limiting the use of class actions make sense in your agreements, please contact David H. Gibbs at (617) 345-1328.