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The U.S. Supreme Court held this year that arbitrators, not the courts, have the power to decide whether or not arbitration agreements prohibit classwide arbitrations. In deciding Green Tree Financial Corp. v. Bazzle, 123 S. Ct. 2402 (2003), the high court may have created an unintended consequence that virtually guarantees that all potential class action arbitrations are certified for class action status. The ruling may also compel businesses to include clear and unambiguous provisions in their arbitration agreements that prohibit class arbitration. In 1995, Lynn and Burt Bazzle secured a home improvement loan from Green Tree and entered into a lending agreement that was subject to both South Carolina law and the Federal Arbitration Act. The agreement included an arbitration clause in which the parties agreed that “[a]ll disputes, claims, or controversies arising from or relating to this contract or the relationships which result from this contract . . . shall be resolved by binding arbitration by one arbitrator selected by us with consent of you.” Additionally, Daniel Lackey and George and Florine Buggs entered into loan contracts and security agreements with Green Tree. These agreements also contained the same arbitration clause found in the Bazzles’ contract. In all three agreements, Green Tree failed to provide a form that would have informed the parties of their right to name their own lawyers and insurance agents and would have provided space for them to write in those names; this was a violation of South Carolina law. The Bazzles sued Green Tree in state court, seeking damages, as well as requesting the court to certify the claims as a class action. In response, Green Tree filed a motion to stay the state court action and compel arbitration. The state court granted class certification and the motion to compel arbitration. The arbitrator administered the proceeding as a class arbitration and awarded the class $10,935,000 in statutory damages plus attorney fees. The trial court confirmed the award. Green Tree, 123 S. Ct. at 2405. Green Tree then appealed to the South Carolina Court of Appeals, claiming, among other things, that class arbitration was legally impermissible. Lackey and the Buggses had earlier begun a similar court proceeding in which they, too, sought class certification. Green Tree moved to compel arbitration. The trial court initially denied the motion; however, Green Tree pursued an interlocutory appeal, and the state Court of Appeals reversed the decision. Green Tree, 123 S. Ct. at 2406. The arbitrator then certified a class in arbitration and ultimately ruled in favor of the class, awarding it $9.2 million in statutory damages in addition to attorney fees. The trial court confirmed the award. Green Tree appealed to the South Carolina Court of Appeals, claiming once again that class arbitration was legally impermissible. The South Carolina Supreme Court withdrew both cases from the Court of Appeals and subsequently held that the contract was silent in regard to class arbitration and that the arbitration had properly taken that form. The U.S. Supreme Court reversed and remanded the decision. In a split decision, the court concluded, in response to Green Tree’s contention that the arbitration agreement forbids class arbitration, that the court was not empowered to answer the question because it was a matter for the arbitrator to decide. Under the terms of the parties’ contracts, the question-whether the agreement forbids class arbitration-is solely the decision of the arbitrator and not the court. Although the court may decide certain “gateway matters,” such as whether the parties have a valid arbitration agreement or whether an arbitration clause applies to a certain type of controversy, here the issue was: What type of arbitration proceeding was agreed upon by the parties? Specifically, the court ruled that class arbitration or single-party arbitration is a question for the arbitrator to decide. Green Tree, 123 S. Ct. at 2407. The road ahead Green Tree may, over time, prove to have unintended consequences. Suppose, for example, a claimant involved in an arbitration hearing asks the arbitrator for an order seeking class arbitration. The arbitrator denies class arbitration. However, a second claimant, alleging the same facts against the same respondent/defendant, in another arbitration hearing then asks a different arbitrator to certify class arbitration. The second arbitrator agrees with the argument and certifies it as a class arbitration. If not the second claimant and arbitrator, then perhaps the third or fourth claimant will find an arbitrator who is willing to certify the class arbitration. It may only be a matter of time before one of multiple claimants finds an arbitrator who is receptive to class arbitration. In any situation where there are multiple claimants, Green Tree may have the unintended consequence of virtually guaranteeing that all future multiple-claimant arbitrations will eventually be certified for class arbitration. In the past, an attorney representing multiple claimants might have preferred to demand a single arbitration hearing on behalf of multiple claimants to save fees and costs. In light of Green Tree, if claimants’ counsel believes that class arbitration may be available or appropriate, he or she might employ the strategy of demanding multiple arbitrations, one arbitration demand for each claimant, and in turn, a different arbitrator for each claimant, to increase the likelihood that one of the arbitrators will certify class arbitration. Although multiple arbitrations will likely increase the total fees, costs and expenses that will be incurred, claimants and their counsel may feel that such a strategy is justified by increasing the likelihood of finding an arbitrator who will grant their request for class arbitration. Respondents faced with multiple arbitrations by multiple claimants, but involving identical factual and legal issues such as those in Green Tree, might consider a motion before one of the arbitrators to consolidate the several arbitrations into one proceeding. A successful motion to consolidate multiple arbitrations into a single action could generate substantial cost savings and reduce the possibility that one of multiple arbitrators might grant class arbitration status. In an instance of multiple arbitrations by multiple plaintiffs, the tendency might be to “forum shop” among the arbitrators to see which would be most receptive to a motion to consolidate. However, the most persuasive argument for consolidation should probably be made to the first arbitrator selected, seeking to consolidate subsequent claimants into the first arbitration proceeding. Drafting caveats Respondents who are opposed to class arbitration may utilize several strategies to minimize the risk of an arbitrator certifying a class arbitration. First and foremost is to make certain that the arbitration agreement between the parties includes a provision that clearly and unambiguously prohibits class arbitration. Even though Green Tree concluded that class arbitration is a decision for the arbitrator, not the courts, most arbitrators will apply the terms of the arbitration agreement. However, if the terms are not clear and unambiguous, then the arbitrator may not feel obligated to enforce them. In its argument, Green Tree contended that the wording of its arbitration agreement could only refer to individual party arbitrations, not class arbitrations. However, there was no express prohibition of class arbitrations in Green Tree’s agreement. If the express prohibition of class arbitrations had existed, the arbitrator might not have certified the action as a class arbitration. If the arbitration agreement clearly and unambiguously states that the arbitrator is not empowered to arbitrate a class arbitration, and the arbitrator disregards the express limitation on his or her authority, grounds may exist to vacate the award. Specifically, 9 U.S.C. 10(a)(4) provides that the court may vacate an arbitrator’s award when the arbitrator has exceeded his or her powers. The Supreme Court might have ruled differently in Green Tree if the arbitrator had clearly exceeded his powers by agreeing to class arbitration had there been an unambiguous prohibition of class arbitration in the arbitration agreement. If the respondent is able to cite precedent of other arbitrators who have denied class arbitration, although it is not necessarily binding on an arbitrator, such precedent might carry some amount of weight and influence a given arbitrator’s decision on whether to grant class arbitration. This approach will be most successful if the precedent is in the form of a written order or award. A trial court judgment affirming another arbitrator’s denial of class certification could be used in much the same way, and perhaps carries more weight than just an arbitration award or order. Paul W. Taylor is a mediator and arbitrator in Silicon Valley and is of counsel to Sacramento, Calif.’s Hefner, Stark & Marois. He can be reached at [email protected].

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