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San Francisco—JAMS, the private arbitration service, has gotten itself into a jam with corporate America. In November, JAMS announced a new policy saying that it is “inappropriate” for companies to write contracts that bar consumers and ordinary employees from bringing class action arbitrations. JAMS added that its arbitrators will decide whether to enforce such prohibitions. The change has angered many in-house attorneys, who insist that contracts should be enforced as written. Corporate lawyers are also worried that other arbitration services might follow JAMS. John “Jay” Welsh, general counsel at JAMS, which is based in Irvine, Calif., said that class action prohibitions are common in many sales and employment contracts. But he added that courts, especially in California, are increasingly voiding these provisions out of concern that they give companies an unfair advantage in disputes with customers and employees. “We felt obliged not to be a part of that [unfairness],” Welsh said. So JAMS decided that it will allow class action arbitration claims, even if they’re expressly prohibited in an employment or sales contract. For support, JAMS cites a 2003 U.S. Supreme Court decision, Green Tree Financial v. Bazzle, 539 U.S. 444, which it says allows arbitrators to decide whether contractual clauses prohibiting class action arbitrations are valid. Welsh stressed that it is up to JAMS’ individual arbitrators to decide whether to accept or void these clauses. The unpersuaded JAMS’ rationale for changing its policy has failed to persuade some of its corporate clients, however. (The service averages more than 10,000 cases per year.) Welsh admitted that his phone has been ringing off the hook as in-house counsel call to complain about the move. John DeMarco, general counsel of hotel and real estate company Lowe Enterprises Inc., criticized JAMS’ new policy at a November corporate counsel conference in San Francisco. Interviewed for this article, DeMarco accused JAMS of trying to “insert itself as a guardian of social policy” by interfering with the freedom to enter into contracts. Lowe doesn’t include mandatory arbitration clauses in its contracts, but DeMarco said that if his company turned to arbitration in the future, it wouldn’t use JAMS. Company lawyers have long relied on arbitration as a way to keep legal costs down since it’s traditionally been viewed as cheaper than litigation. Not everyone agrees; some in-house attorneys argue that arbitration has already lost its price advantage. But the potential costs of arbitration would certainly rise if the process is opened up to include class actions. In-house attorneys also fret that other arbitration services will adopt JAMS’ policy. JAMS is a midsize service, with 11 offices in California and 10 others nationwide. The industry leader is the American Arbitration Association (AAA), with 38 offices nationwide. After JAMS’ announcement, the AAA issued a statement saying that it was reviewing the issue of class action arbitration clauses. Responding to a request for further comment, Kersten Norlin, AAA’s vice president of corporate communications, said in a December e-mail that AAA would announce its position on the issue “in the coming weeks.” Not surprisingly, plaintiffs’ lawyers want AAA to copy JAMS’ policy. Cliff Palefsky, a spokesman on arbitration issues for the National Employment Lawyers Association, said his group has asked AAA to ignore class action arbitration bans. A partner at McGuinn, Hillsman & Palefsky in San Francisco, Palefsky believes that employers have unfairly used arbitration as a way to avoid expensive class actions by their employees. Workers, he maintains, have more clout in an arbitration when they negotiate as a group than as individuals. At least one arbitration service won’t be joining JAMS: the National Arbitration Forum (NAF), a Minneapolis-based service with additional offices in Los Angeles and New Jersey. NAF Managing Director Edward Anderson said, “We enforce the parties’ agreements as written, which is what the Federal Arbitration Act requires.” Anderson believes that JAMS’ new policy threatens the credibility of all arbitrators because companies will now wonder which clause in a signed contract could be voided next. The debate over class action arbitrations was kindled by the Supreme Court’s decision in Green Tree. Customers of the St. Paul, Minn.-based lender brought a class action arbitration because, they said, their contract with the company was silent on whether such actions were permitted. Green Tree ended up filing an appeal under the Federal Arbitration Act. The Supreme Court sent the case back, saying that it was up to the arbitrator-not a court-to decide if Green Tree’s contract allowed class action arbitrations. The company (now known as GreenTree Servicing) subsequently settled for $31.75 million. In the view of NAF’s Anderson, the Green Tree ruling means that if an arbitrator finds that a contractual clause clearly prohibits class action arbitrations, then the arbitrator must enforce the clause. JAMS’ Welsh, on the other hand, believes that the justices meant to empower an arbitrator to decide if such a clause is valid in the first place.

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