As Mandatory Binding Arbitration Meets the Class Action, Will the Class Action Survive?
Sternlight, Jean R., William and Mary Law Review
It is no secret that banks, insurance companies, and other potential corporate defendants do not like class actions.(1) Today, such potential defendants, in a broad array of industries, hope that they have found a surreptitious way to defeat the feared class action: mandatory binding arbitration.(2) These companies and their attorneys assert that they may use contracts of adhesion(3) to compel consumers, employees, and others to arbitrate rather than litigate their claims,(4) and to require that such arbitration must proceed on an individual rather than class basis. Increasingly, potential defendants are drafting arbitration clauses that explicitly bar class actions, hoping that these will facilitate favorable court rulings(5)
Thus far, it is not clear whether such strategies will work, at least in the long term. This Article argues that it would be wrong to allow companies to use arbitration clauses to insulate themselves entirely from class action liability, and that courts and legislators should take steps to protect access to class actions.
The companies and attorneys who seek to use arbitration to eliminate class actions contend that plaintiffs, and especially their attorneys, exploit the class action remedy as a way to extort unfair settlements from innocent defendants.(6) In an article aptly entitled Excuse Me, But Who's the Predator?, attorneys Alan S. Kaplinsky and Mark J. Levin state:
All of the dangers inherent in an individual consumer lawsuit--the threats of costly and drawn-out litigation, runaway juries, gargantuan punitive damages awards and adverse publicity--are magnified exponentially when a class of hundreds or thousands of consumers is certified. Faced with these threats, companies often feel pressured to pay substantial amounts in settlement for reasons having nothing to do with the actual merits of the dispute.(7)
This opposition to class actions is common to defendants in many kinds of suits, but particularly includes defendants in mass tort claims, securities fraud claims, and consumer claims.(8) While class action opponents have tried numerous legislative and other strategies to limit or eliminate class actions in various arenas,(9) these measures have still left some defendants feeling vulnerable to the class claim. As attorneys Kaplinsky and Levin put it: "Consumers have been ganging up on banks. But now [referring to binding arbitration] the institutions have found a way to defend themselves."(10)
When corporate defendants, their attorneys, arbitral organizations, and other commentators sing the praises of arbitration to the public at large, they generally do not highlight the impact of arbitration on class actions. Instead, they make claims to the effect that arbitration is quicker, cheaper, and better for all concerned, and that consumers and employees will benefit just as much as will the companies that are imposing the arbitration clauses.(11) In private, however, and in their own industry publications, defense counsel and other arbitration advocates readily observe that arbitration can be used to deter the filing of a class action suit, or secure dismissal of a class action that was nonetheless brought.(12) The potential defendants know that because many claims are not viable if brought individually, plaintiffs will often drop or fail to initiate claims once it is clear that class relief is unavailable.(13) The potential defendants also believe that, should plaintiffs choose to pursue individual claims in arbitration, defendants' exposure still will be much lower than it would have been in class action litigation.(14)
Attorney Edward Wood Dunham bluntly describes this strategy in his article, The Arbitration Clause as Class Action Shield.(15) He states:
The nine-figure jury verdict in the Meineke Discount Muffler class action is a bracing reminder that franchising is full of potentially catastrophic litigation risks. …