Corporations frequently rely on arbitration clauses in contracts to expediently resolve disputes, cut down litigation costs, preserve relationships with business partners and customers, and keep proprietary information private. However, despite their prevalence in other types of contracts, companies rarely use arbitration clauses in class action settlement agreements in California. For many companies, that may be a missed opportunity.
The absence of arbitration clauses in class settlements may stem from a myopic view of arbitration. When most individuals hear the term “arbitration clause,” they think about clauses in adhesion contracts that compel waiver of the contracting parties’ right to initiate or join class actions. Likewise, when people think about class actions, their minds limit these types of cases to litigation in courts. Thus, the common misconception is that arbitration and class actions are inherently at odds. As a result, companies fail to contemplate arbitration as an option once a class action has been filed in court.
Arbitration is actually a much broader form of dispute resolution. It has long been permissible for parties in California to resolve their disputes in class arbitration. At least since 1982, the California Supreme Court has allowed such proceedings. This article examines whether the parties in a class action before a court can agree to use it to resolve future disputes arising from the class settlement. It concentrates on California because, though federal courts seem to commonly enforce arbitration clauses in class settlement agreements, there is a dearth of California case law on the enforceability of such clauses.
Anecdotal evidence suggests that California trial courts may have a perception that arbitration clauses in class settlement agreements conflict with their duty to retain jurisdiction to enforce class settlements. The state trial courts may also believe that special considerations for absent class members—those who are not the named plaintiffs—are irreconcilable with arbitration proceedings. Because of these misunderstandings, California courts have been reluctant to enforce arbitration clauses in class settlement agreements even though California has a strong public policy in favor of arbitration, and any doubt should be resolved in favor of effectuating the parties’ intention to arbitrate. Case law relating to the Federal Arbitration Act and the California Arbitration Act intimate that this aversion to enforce arbitration of disputes arising from class settlements may be unlawful.
Class Settlements Are Private Agreements
California courts have held that class settlement agreements are private consensual contracts between the parties. Moreover, the U.S. Supreme Court has consistently held that arbitration is a matter of contract. Accordingly, the parties to a class action should generally be able to agree on any matter of contract in the class settlement agreement, including the use of arbitration to resolve future disputes arising from the settlement.
Federal courts of appeals and district courts have approved and enforced arbitration provisions in class action settlement agreements. For instance, in Shell Oil Co. v. CO2 Committee, Inc. (2009), the U.S. Court of Appeals for the Tenth Circuit upheld a district court’s dismissal of the complaint because the class settlement agreement “unambiguously reflect[ed] the parties’ intent that any and all disputes, disagreements and claims arising out of the class settlement agreement are arbitrable.” Federal district courts in California have similarly approved class action settlement agreements that provided for binding arbitration.
