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Franchisors and other mass retail merchandisers thought they were safe by mandating arbitration as the sole method of dispute resolution in their contracts. Mandatory arbitration was thought to eliminate the risk of a runaway jury, decisions based on passion and social questions beyond the merits of the controversy. For franchisors that constantly face the risk that programs in their systems would be challenged on a class-wide basis could always defeat class treatment of disputes through arbitration. This may have all changed due to the decision of the U.S. Supreme Court and a subsequent change in the Rules of the American Arbitration Association. Corporations whose agreements contain AAA arbitration clauses may find themselves arbitrating class action cases. In the case of Green Tree Financial Corp. v. Bazzle, 123 S. Ct. 2402 (2003), four justices of the Supreme Court held, which became the majority decision, that no absolute prohibition exists to prevent class treatment of arbitration cases, absent a contractual prohibition against class treatment. In addition, the court held that the question of whether an arbitration agreement forbade class arbitration is a question for the arbitrator, rather than for the courts. This decision more or less eliminated some of the previous decisions suggesting class action arbitrations were unavailable against franchise companies. In response to the Green Tree Financial Corp. decision, the AAA issued supplementary rules for class arbitrations on Oct. 8. These supplementary rules for the first time addressed class action arbitrations. Under the supplementary rules, the AAA will administer demands for class action arbitration if the arbitration agreement specifies that disputes will be resolved in accordance with the AAA rules, and a party to that agreement submits the dispute to arbitration on behalf of or against a class. The supplementary rules do not contain a prohibition against class treatment where the arbitration clause explicitly prohibits class treatment, but based on past experience, the issue of whether class treatment is available will be addressed as a threshold matter. The supplementary rules are published at www.adr.org. The supplementary rules contain similar provisions to the class action rules of Federal Rule of Civil Procedure 23. An additional requirement is that each member of the putative class be a party to an arbitration clause, which is similar to that signed by the class representative and the other class members. Like Rule 23, the supplementary rules provide for notice to the class and opportunity to object to any settlement or dismissal. The supplementary rules, while appearing to merely provide an additional forum to dispute resolution on a class basis, do radically depart from both class action litigation and arbitration as we know it. Departures from Protocols One of the benefits of arbitration is the lack of public access to arbitration demands, responses and outcomes. Parties could agree to conduct their entire arbitrations in complete privacy, until now. The supplementary rules provide that the hearings are open to the public, and pleadings will be posted on the AAA Web site. Another departure from the usual arbitration procedure is the bifurcation of the decision to proceed with class-wide relief. As a threshold matter, the arbitrator will be required to enter a “partial final award” deciding whether the applicable arbitration clause permits the arbitration to proceed as a class. The arbitrator then must stay the proceedings for at least 30 days to permit a court to confirm or vacate the decision. If the arbitrator does conclude that the arbitration clause permits class treatment, then the arbitrator after the stay period expires is required to determine class certification. The class certification decision also has a 30-day stay requirement to allow court confirmation or vacation of the arbitrator decision. In class action litigation, a court is required to determine the propriety of class certification after discovery and hearings conducted under the rules governing the court. In arbitration cases, however, discovery is generally more limited and the evidentiary rules more expansive and generally allow hearsay evidence in hearings. Arbitrators have broader latitude in rulings than do trial judges, and the court reviewing arbitrator decisions must generally defer to the decision of the arbitrator absent fraud, corruption or mistake. To the extent that class certification by a court is somewhat predictable, class certification before arbitrators will contain much more variability. Suggestions to Companies Franchise companies, lenders and securities dealers are likely to see more claims submitted to arbitration. Existing arbitration clauses likely did not anticipate the supplementary rules and the partial elimination of barriers to class wide arbitration. Here are action plans for companies that desire to reduce the threat of class wide arbitration: Shift the fees to the person demanding class treatment. The supplementary rules contain a preliminary filing fee of $3,250 for class arbitration. If the existing clause offers to split the filing fees, as is common in the employment setting, then differentiate class arbitration and state that class arbitration filing fees are to be paid only by the party making the class action demand. Amend the clause to prohibit class arbitration. The best method of preventing class treatment is to state that the arbitrator is authorized to adjudicate claims only brought by individual parties and is not authorized to determine class action claims. Consider the risk of class arbitration and provide for enhanced procedural protections in arbitration that would be present in court litigation. The clause can be amended to provide, for instance, that the federal rules of procedure and evidence will apply to the proceedings, with full discovery and motion practice. The number and qualifications of arbitrators can be enhanced. The choice of venue and governing law should be scrutinized. The supplementary rules may also have a salutary affect on the court system and dispute resolution as a whole. The litigants may choose to submit their class disputes to arbitration, rather than litigation, so that they have the opportunity to craft the forum and select their arbitrator. It may be that in the future more class action disputes are certified to proceed in arbitration than in the courts. CRAIG R. TRACTENBERG is a partner in the Philadelphia office of Nixon Peabody. He is a topics and article editor of theFranchise Law Journal of the American Bar Association. Tractenberg can be reached by e-mail at [email protected].

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