The Litigation-Arbitration Dichotomy Meets the Class Action
Nagareda, Richard A., Notre Dame Law Review
Observers typically cast litigation and arbitration in contrast to one another. Litigation takes place under off-the-rack rules prescribed by public law--for the federal courts, the Federal Rules of Civil Procedure. By contrast, arbitration is a creature of the private law of contracts and part of the larger realm of alternative dispute resolution (ADR). The term "alternative" highlights the contrast with litigation. One prominent concern in recent years posits that ADR mechanisms have given rise to a troubling body of "contract procedure" (1) that shunts off to an opaque, privatized forum many kinds of civil disputes that previously would have formed the grist for the open, public process of litigation. On this account, litigation and arbitration comprise dichotomous, even rivalrous, regimes for the resolution of civil claims.
Two decisions from the October 2009 Term of the Supreme Court--Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co. (2) in the context of litigation and Stolt-Nielsen S.A. v. AnimalFeeds International Corp. (3) in the setting of arbitration--frame a need for more systematic dialogue across the two domains. The engine behind the need for dialogue stems from one of the most distinctive and controversial features of the U.S. civil justice landscape: the possibility of procedural aggregation through the mechanism of a class action or its ADR counterpart, class arbitration. Indeed, the atypical nature of many features of U.S. civil litigation from a comparative standpoint--the U.S.-style class action included--sheds light on the Court's arbitration jurisprudence in ways not yet fully appreciated.
At their cores, both Shady Grove and Stolt-Nielsen turn crucially upon characterization of the essential nature of the class mechanism. Is it merely a super-sized form of joinder (which permits multiple plaintiffs to combine in a single lawsuit) (4) or is it more transformative in nature? (5) At first glance, one might have expected the Court to arrive at a similar view of class treatment across the two decisions. That, however, is not so. The affinity between the questions in the two cases and the divergent answers that the Court provides accentuate the pressure on the litigation-arbitration dichotomy.
In Shady Grove, the Court confronted a question that first-year Civil Procedure students would find familiar. In section 901 (b) of its Civil Practice Law and Rules, the New York state legislature specifies that an action to recover statutory damages--in Shady Grove, "statutory interest penalties" for overdue payments of insurance benefits (6)--"may not be maintained as a class action" unless the law that provides for such damages "specifically authorizes" the class format. (7) Insofar as legislative materials reveal, the notion behind section 901(b) is to avoid remedial "overkill" (8)--the addition of class treatment to a remedy already designed to "provide an aggrieved party with a sufficient economic incentive to pursue a claim," so as to generate a whopping level of potential liability in the aggregate. (9) By the terms of section 901 (b), the proposed class action in Shady Grove clearly could not have been maintained in New York state court. The question for the Court, however, was whether section 901 (b) categorically bars the maintenance of a class action in federal court on the basis of diversity of citizenship. (10) By a 5-4 vote, the Court answered "no." (11)
The Court holds that Rule 23 of the Federal Rules of Civil Procedure exclusively governs the conditions under which a class action "may be maintained" (12) in federal court. Specifically, Rule 23 displaces New York section 901 (b) to the contrary by the terms of the federal Rules Enabling Act, as long as Rule 23 itself is proper under that statute. (13) The Rules Enabling Act famously authorizes the Supreme Court "to prescribe general rules of practice and procedure" for the federal courts, subject to the caveat that "[s]uch rules shall not abridge, enlarge or modify any substantive right. …