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Arbitrators, not the courts, decide whether class action claims are permitted in arbitration contracts that are silent on the issue, the U.S. Supreme Court ruled Monday. In a 5-4 decision, the justices validated the overall concept of class action arbitrations, but ruled that it is up to individual arbitrators to make the call as to whether a specific contract permits class action claims. The decision means that many arbitration contracts will likely now be written to expressly forbid class actions, and it raises the stakes in two cases pending before the California Supreme Court that will examine whether such bans are unconscionable. Writing for the majority in Green Tree Financial v. Bazzle, 02-634, Justice Stephen Breyer wrote that interpreting whether a contract permits class actions is a procedural issue that falls squarely within an arbitrator’s purview. The courts, Breyer wrote, have a limited authority to decide certain arbitration-related matters, such as the validity of an arbitration agreement or whether an agreement is binding for a type of dispute. “The question here — whether the contracts forbid class arbitration — does not fall into that narrow exception,” Breyer wrote. “It concerns contract interpretation and arbitration procedures. Arbitrators are well situated to answer that question.” Breyer was joined by Justices Ruth Bader Ginsburg, Antonin Scalia and David Souter. Justice John Paul Stevens wrote a concurring opinion. In his dissent, Chief Justice William Rehnquist said the contract’s stipulation that each party must approve an individual arbitrator for a dispute was violated when a single arbitrator was appointed to the whole class of plaintiffs. “Petitioner may well have chosen different arbitrators for some or all of these other disputes; indeed, it would have been reasonable for petitioner to do so, in order to avoid concentrating all of the risk of substantial damages awards in the hands of a single arbitrator,” wrote Rehnquist, who was joined by Justices Sandra Day O’Connor and Anthony Kennedy. Justice Clarence Thomas wrote a concurring dissent. The case involves a 1995 home improvement loan that Lynn and Burt Bazzle secured from Green Tree Financial Corp. The couple alleged that Green Tree failed to provide them and other customers with certain documents at the time of the transaction and filed suit. A South Carolina court certified the case as a class action and then sent the case to arbitration pursuant to the arbitration contract the customers had signed. Green Tree argued that the arbitration contract barred class action claims. The South Carolina Supreme Court held that Green Tree’s arbitration contract was silent as to whether it permitted class action claims and that state law thus interprets the contracts as permitting class actions. The U.S. Supreme Court vacated that decision and remanded the case to state court. By leaving class action interpretation up to individual arbitrators, the high court handed a great deal of power to arbitrators. “A lot of people in the world of arbitration are going to be shocked to think that an arbitrator has the power to decide whether or not a matter can proceed as a class action,” said professor Jean Sternlight of University of Nevada, Las Vegas’ Boyd School of Law. Since arbitration rulings cannot be appealed, businesses can be exposed to substantial liability as a result of a single arbitrator’s decision. And unlike court system class actions, there are few established rules and procedures governing class actions within an arbitration context. For many businesses, the natural reaction will be to rewrite arbitration contracts so that they categorically ban class actions. But the legality of such class action bans is not clear. Two cases before the California Supreme Court, Discover Bank v. Los Angeles County Superior Court, 03 C.D.O.S. 449, and Mandel v. Household Bank, 03 C.D.O.S. 190, deal with the issue of whether clauses in arbitration contracts that bar class actions are unconscionable under state law.

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