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JAMS, the private arbitration service, has gotten itself into a jam with corporate America. The controversy stems from a new policy, announced by the group in November, that declares it is “inappropriate” for companies to write contracts that bar consumers and ordinary employees from bringing class action arbitrations. The new policy also says JAMS’ arbitrators will decide whether to enforce such prohibitions. The change has angered many in-house attorneys, who insist that a contract should be enforced as written. Corporate lawyers are also worried that other arbitration services might follow JAMS’ lead. John Welsh, general counsel at Irvine-based JAMS, says that class action prohibitions are common in many sales and employment contracts. But he says that courts, particularly in California, are increasingly voiding such 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],” says Welsh. As a result, JAMS decided that it will allow class action arbitration claims even if they are 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 stresses that it is up to JAMS’ individual arbitrators to decide whether to accept or void these clauses. JAMS’ rationale for changing its policy has failed to persuade some of its corporate clients, however. And Welsh admits that his phone has been ringing off the hook, with in-house lawyers calling to complain about the new policy. John DeMarco, general counsel of Los Angeles-based Lowe Enterprises Inc., criticized JAMS’ new policy at a November corporate counsel conference in San Francisco. In a subsequent interview, DeMarco accused JAMS of trying to “insert itself as a guardian of social policy” by interfering with the freedom to contract. Although Lowe doesn’t include mandatory arbitration clauses in its contracts, DeMarco said if his company turned to arbitration in the future, it would not use JAMS. Many corporate law departments have long relied on arbitration as a way to keep legal costs down since it’s traditionally been viewed as cheaper than litigation. And while some in-house lawyers say arbitration has already lost its price advantage, the potential costs of arbitration would certainly rise further, they argue, if the process is opened up to include class actions. In-house attorneys also fret that other arbitration services will adopt JAMS’ policy. After JAMS’ announcement, the larger American Arbitration Association issued a statement saying that it was reviewing the issue of class action arbitration clauses. In the wake of that statement, Kersten Norlin, AAA’s vice president of corporate communications, said “class action waivers are the subject of a considerable amount of ongoing litigation and [are] a developing area of the law.” Not surprisingly, plaintiffs’ lawyers are hoping that AAA follows JAMS’ lead. Cliff Palefsky, a San Francisco attorney who speaks for the National Employment Lawyers Association on arbitration issues, says the group has asked the AAA to ignore class action arbitration bans. The partner at McGuinn, Hillsman & Palefsky believes that employers have unfairly used arbitration as a way to avoid expensive class actions by their employees. Workers, says Palefsky, have more clout in an arbitration when they negotiate as a group rather than as individuals. At least one arbitration service, meanwhile, won’t be joining JAMS: Edward Anderson, managing director of the Minneapolis-based National Arbitration Forum, says, “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 whether other clauses in signed contracts might be voided in the future. The debate over class action arbitrations was kindled by the Supreme Court’s Green Tree decision. 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 nearly $32 million. As Anderson sees it, the Green Tree ruling means that if an arbitrator finds that a contractual clause clearly prohibits class action arbitrations, that 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. Both sides agree that JAMS’ new policy will likely be challenged in court. Arbitration, it seems, can’t settle every dispute. Sue Reisinger is a reporter with Corporate Counsel magazine, which is affiliated with GC California magazine.

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