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by: Dr. Kurtis Nolan


Dr. Kurtis Nolan
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Date Created: 09/06/15
Beyond Unconscionability Preserving the Class Mechanism Under State Law in the Era of Consumer Arbitration Rightly or wrongly the class action is under attack and legislatures are pointing the nger at state trial courts and of course the plaintiffs bar Congress recently enacted legislation that among other things creates federal jurisdiction over many multistate class actions1 State legislatures have also responded to perceived shortcomings in class action litigation2 These legislative efforts all presuppose that improper class certi cation decisions by state trial courts are part of the problem Given this trend a US Supreme Court decision that constricts the authority of state courts to certify classes in one growing category of disputesithose arising from relationships governed by arbitration agreements lihardly seems anachronistic On the other hand this same decision distinguishes itself by empowering nonjudicial decisionmakers to certify classes and administer class proceedings in a forum that is virtually immune from judicial review I describe Green Tree Financial Corp V Bazzlef which held via a highly fractured Court that arbitrators not courts should 1 determine whether a silent or ambiguous agreement permits class arbitration and 2 decide whether to certify a class for claims that will be Thanks to my father S Anthony Sa who in addition to being my best friend counselor and supporter has guided me as a Writer and a student of the law since long before I ventured into Townes Hall Thanks also to Professor Patrick Woolley for his patient supervision and high standards during this Note s formative period and Professor Linda Mullenix for her comments and suggestions And not least of all thanks to my fellow editors and the membership of the Texas Law Review for making the last two years so enjoyable 1 Class Action Fairness Act of2005 Rib L No 1092 4 Feb 18 2005 2 For example Texas House Bill 4 enacted in 2003 permits interlocutory appeal of class certi cation decisions directly to the Texas Supreme Court HB 4 78th Leg Reg Sess sec 102 2222501 2003 Tex Gen Laws 204 3 One Congressman stated the matter thus The bottom line is that classaction reform is badly needed Currently cra y lawyers are able to game the system by ling large nationwide classaction suits in certain preferred State courts like Madison County Illinois Where judges are quick to certify class actions and quick to approve settlemenw which reward attorneys with millions of dollars but give their clients Worthless coupons 151 CONG REC H686 daily ed Feb 16 2005 statement ofRep Keller 4 Se e g Linda J Demaine amp Deborah R Hensler Volunteering To Arbitrate Through Predirpute Arbitration Clauses The Average Conrumer r Emerienee 67 Aw amp TEMP PROBS 55 62 2004 reporting that 35 of the sampled businesses included arbitration clauses in their consumer contracw ree alro Jean R Sternlight Ir the US Out on a Limb Comparing the US Approach to Mandatory Conrumer and Employment Arbitration to That of the Rest of the World 56 U MIAMI L REV 831 834 2002 describing the industries that currently use arbitration agreemenw 5 539 US 444 2003 1716 Texas Law Review Vol 831715 arbitrated Although Bazzle focuses upon the Federal Arbitration Act FAA and is completely silent with respect to Rule 23 or a state law analog it will undoubtedly impact consumers ability to pursue claims collectively if for no other reason than because it signals the Court s acceptance of class arbitration as evidenced by the American Arbitration Association s AAA docket of class arbitrations which continues to grow in Bazzle s wake6 Consumers then can claim Bazzle as a victory But closer analysis reveals that class arbitration s life eXpectancy could be very short This Note proceeds on the following assumptions Our system should eschew exploitation of arbitration as a means of completely avoiding liability7 Consumer protection laws are meaningless so long as injured parties cannot effectively vindicate their rights A core purpose of the class mechanism is to facilitate recovery of the small yet numerous claims that frequently arise in the consumer conteXt8 Finally arbitration is a creature of contract9 and sophisticated entities will endeavor to contract around class arbitration10 Accordingly the ability of consumers to seek classwide relief for claims arising from relationships governed by arbitration agreements depends upon how effectively wouldbe defendants can draft arbitration agreements that defuse the class mechanism 6 As of February 2005 AAA is administering ftythree arbitrations under is Supplementary Rules for Class Arbitmtions Am Arbitration Ass n Class Arbitration Case Docket at httpWWWadrorgArbitrationPolicy last visited Feb 27 2005 7 I note at the outset Without purporting to tackle directly the contradictory view held by some courts and commentators that the savings businesses realize ough the use of arbitration agreemenw inhere to the bene t of consumers See eg Metro E Ctr for Conditioning amp Health v QWest Communications Int l Inc 294 F3d 924 927 7th Cir 2002 Customers are compensated through lower rates for any net loss they may experience in arbitration They can t accept the lower rates While avoiding the means that made lower rates possible Easterbrook J39 Stephen J Ware Paying the Price of Process idicial Regukition of Consumer Arbitration Agreements 2001 J DISP RESOL 89 9amp93 assuming that the use of arbitration agreemenw lowers disputeresolution cosw for busin sses and arguing that competition forces businesses to pass these savings on to consumers But see Jeffrey W Sternpel Arbitration Unconscionability and Equilibrium T he Return of Unconscionability Analysis as a Counterweight to Arbitration Formalism 19 OHIO ST J ON DISP RESOL 757 851 2004 arguing that because there is no evidence that cost savings from arbitmtion translate into lower consumer prices judicial policing is necessary to prevent windfalls to vendors Jean R Sternlight amp Elizabeth J Jensen Using Arbitration to Eliminate Consumer Class Actions Ef cient Business Practice or Unconscionable Abuse 67 LAW amp CONTEMP PROBs 75 92799 2004 questioning whether CAPs produce 39ency gains that bene t consumers cf Russell Korobkin andedRationality Standard Form Contracts and Unconscionability 70 U CHI L REV 1203 1234739 2003 arguing that consumers failure to consider nonsalient terms in form contracw when making purchasing decisions creates incentives for dra ring parties to incorporate terms that are bene cial to them but not necessarily e icient 8 See Arnchem Prods Inc v Windsor 521 Us 591 617 1997 The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights quoting Mace v Van Ru Credit Corp 109 F3d 338 344 7th Cir 1997 9 Eg Bell v Cendant Corp 293 F3d 563 566 2d Cir 2002 Below I discuss reasons Why corporate defendants Would prefer to resolve classwide disputes in court rather than in arbitration See infra note 36 2005 Beyond Unconscionability 1717 Guided by these ideas this Note examines the legal tools that are available to consumers after Bazzle to overcome the use of arbitration agreements as a shield from classwide liability The most viable of these tools have been and will continue to be fashioned by state courts and legislatures At the federal level Congress has offered no consumer protection from predispute arbitration agreements11 and the current Court shows no sign of disavowing the national policy favoring arbitration that has forged the predispute arbitration clause into a veritable suit of armor for providers of consumer goods and services12 Although the Court has recog nized a prohibitive costs defense to arbitration13 that has been recognized in one form or another in many jurisdictions14 this will at best produce a businesssubsidized model of consumer arbitration that represents nothing more than a slightly higher price tag for the ability to contract around classwide liability How then can the States respond Part I recites Bazzle and offers an introductory explanation of how the allocation to arbitrators of authority over contract interpretation and class certi cation will guide wouldbe defendants drafting strategies and affect consumers ability to overcome the same Part II outlines the basic principles governing the enforceability of arbitration agreements under the FAA paying particular attention to the important role to be played by state law The remainder of the discussion is organized according to the two most viable drafting strategies available to wouldbe defendants after Bazzle Part III discusses the rst strategy arbitration agreements that purport to preclude plaintiffs from resorting to the class mechanism For convenience I refer to these class action preclusion clauses as CAPs After a brief discussion of the emergence of CAPs I rst address the contractual defense of unconscionability a wellestablished tool available under state law for overcoming the harshness of CAPs I am not the rst to argue that the FAA does not preempt a proper application of unconscionability to invalidate a 11 Legislative bills that Would limit the enforceability of predispute arbitration clauses in consumer contracts have been introduced in Congress Without success See Consumer Credit Fair Dispute Resolution Act of2001 S 192 107th Cong 2001 Consumer Fairness Act of 1999 HR 2258 106th Cong 1999 Senator Russell Feingold has chronicled abuses in connection With pre dispute arbitration agreemenw in the consumer and em loyment context and has called upon Congress to remedy the situation See generally Senator Russell D Feingold Mandatory Arbitration What Process is Due 39 HARV J ON LEGIS 281 2002 39s phrase rst appeared inSouthland Corp v Keating 465 US 1 10 1984 There the Court held that section 2 of the FAA preempts state law governing the enforceability of arbitration agreemenw and applies in state courts 1 at 16 13 See Green Tree Fin CorpAla v Randolph 531 US 79 90 2000 It may Well be that the existence of large arbitration costs could preclude a litigant from effectively vindicating her fedeml statutory rights in the arbitral forum See eg Murphy v MidWest Nat l Life Ins Co ofTenn 78 P3d 766 768 Idaho 2003 In re FirstMerit Bank NA 52 SW3d 749 756757 Tex 2001 Mendez v Palm Harbor Homes Inc 45 P3d 594605 Wash Ct App 2002 1718 Texas Law Review Vol 831715 CAP For my purposes unconscionability serves mainly as a point of departure for the discussion of other more effective tools available to states that want to protect their consumers from CAPs I identify statutebased antiCAP principles that are emerging such as public policies favoring collective action by consumers Moreover legislatures caniand are slowly beginning toienact statutes that speci cally target CAPs Part IV discusses the second drafting strategy arbitration agreements that are both silent with respect to class arbitration and that designate arbitra tion rules that do not provide for class proceedings For convenience I sometimes refer to these agreements as silent CAPs Because silent CAPs present such intractable issues from the perspective of consumers and sympathetic policymakers I conclude that barring relief at the federal level nothing less than a statutory right to obtain a class certi cation decision from an authorized decisionmaker could ensure a meaningful role for the class mechanism in the postBazzle consumer setting I Green Tree Financial Corp V Bazzle Daniel Lackey and the Bazzles brought separate but identical claims in South Carolina courts against Green Tree in connection with loans for the purchase of mobile homes Their loan agreements contained identical arbitration clauses governed by the FAA17 A trial court granted the Bazzles motion to certify a class and compelled arbitration on a classwide basis18 Lackey was forced to arbitration after his motion for class certi cation was denied but the arbitrator nevertheless certi ed a class for arbitration19 Both classes of plaintiffs prevailed in arbitration and Green Tree appealed arguing that class arbitration was impermissible20 The South Carolina Supreme Court consolidated the cases and af rmed the awards reasoning that because the contracts were silent with respect to class arbitration class arbitration was appropriate Four Justices per Justice Breyer felt that it was not completely obvious whether the arbitration clause permitted class arbitration22 The plurality looked to the Court s holding in Howsam V Dean Witter Reynolds 15 See e g Jack Wilson NoClassAction Arbitration Clauses StateLaw Unconscionability and the Federal Arbitration Act A Case for Federal Judicial Restraint and Congressional Action 23 QUINNIPIAC L REV 737 824736 2004 Green Tree Fin Corp v Bazzle 539 US 444 44amp49 2003 peach NNp t 500 N a N N 1d at 451 In relevant part the arbitration clause provided All disputes claims or controversies arising from or relating to this contract shall be resolved by binding arbitration by one arbitrator selected by us with consent of ym 1d at 448 emphasis added 2005 Beyond Unconscionability 1719 111023 which further delimited two spheres of gateway matters related to arbitration agreements that courts decide in the absence of the parties clearly expressed intent to the contrary validity whether the parties entered into a valid arbitration agreement at all and arbitrability whether a particular controversy comes within the scope of an otherwise enforceable arbitration agreement24 The question of whether the arbitration agreement forbade class arbitration fell into neither of these categories it concerned contract interpretation and arbitration procedures questions which arbitrators are well situated to answer25 Because it appeared that the trial court s certi cation order in the Bazzles case in uenced the arbitrator s decision to certify the classes the Court remanded so that the arbitrator could consider the certi cation issues independently Justice Stevens concurred in the judgment and dissented in part opining that arguably the interpretation of the parties agreement should have been made in the rst instance by the arbitrator rather than the court 27 Because however the decision to conduct a class arbitration was correct as a matter of state law and Green Tree merely challenged the merits of that decision with out claiming it was made by the wrong decisionmaker Justice Stevens would have affirmed Nonetheless because the plurality eXpressed views similar to his own Justice Stevens concurred in the judgment in order to ensure that there was a controlling judgment The narrowest reading of Bazzle is that under the FAA the arbitrator decides in the rst instance whether class arbitration is permitted by an arbitration clause that is silent or ambiguous in that respect At least one court appears to have interpreted Bazzle more broadly to mean that courts should not pass upon clauses that unambiguously forbid class arbitration ie CAPs29 but this interpretation although devastating to the antiCAP strategies discussed in this Note is surely wrong 23 537 US 79 2002 24 Bazzle 539 US at 452 citing Howram 537 US at 83 25 1d at 45253 It is important to note that the Court was not making a blanket statement that the question of Whether an arbitration clause permits class arbitration could never bear on its validity The case was not framed as a challenge to the validity of the arbitration clause s terms Rather the issue was Whether arbitmtion had proceeded in a manner that was consistent with the terms of a presumably valid agreement 26 Id at 451753 27 1d at 455 Stevens J concurring in part and dissenting in part 28 Id 29 See Johnson v Long John Silver s Rests Inc 320 F Supp 2d 656 668 MD Tenn 2004 This Court cannot determine Whether a prohibition on class arbitration Would effectively vindicate righw because this Court does not have the authority to decide Whether the contract permits class arbitration T39he Fi h Circuit has irted with this interpretation but not in the context of a challenge to the validity of a CAP See Pedcor Mgmt Co v Nations Pers of Tex Inc 343 F3d 355 359760 5th Cir 2003 suggesting that Bazzle could plausibly mean that ifthe arbitration provision clearly did forbid class arbitmtion then the arbitrators couldiand 1720 Texas Law Review Vol 831715 Whatever the strict import or precedential value of its holding might be31 and despite that the case was about contract interpretationinot procedureiBazzle has also quickly come to stand for the related yet distinct proposition that the arbitrator decides whether to certify a class for arbitration32 In this respect Bazzle effectively curtails the phenomenon of state courts certifying a class and compelling arbitration on a classwide basis33 Nevertheless consumer advocates have celebrated Bazzle as a triumph against corporations that have historically relied upon arbitration clauses to shouldimake this call Without any prior analysis by a court but nevertheless going on to address Whether or not the arbitration clause at issue was ambiguous with respect to class arbitration 30 Whatever the role that silence andor ambiguity played in the Court s decision it is crucial to remember that the class arbitration issue in Bazzle did not concern the validity of the arbitmtion agreement In this respect the Court s holding in Paeiieare Health Systems Inc v Book 538 US 401 2003 is instructive There the Court considered an arbitration clause that was ambiguous with respect to the availability of treble damages under RICO The Court reasoned that it should not on the basis of mere speculation that an arbitrator might interpret these ambiguous agreemenw in a manner that casw their enforceability into doubt resolve the question in the rst instance 1 at 406707 quoting Vimar Seguros y Reaseguros SA v MV Sky Reefer 515 US 528 541 1995 The implication ofBook is that ifthe arbitration agreement clearly purported to Waive statutory remedies the court could consider Whether that provision rendered the clause unenforceable But see Carbajal v H amp R Block Tax Servs Inc 372 F3d 903 906 7th Cir 2004 citing Book and Bazzle for the proposition that the arbitrator should have determined the validity of What appears to have been an unambiguous ancillary provision that denied attorneys fees One commentator has gone further by suggesting that courts retain the power to interpret ambiguous provisions that bear on the validity of an arbitmtion agreement Even under Book and Bazzle Where a contract ambiguity goes to the validity of the arbitration clause as a Wholeiwhere it must be resolved in order to determine Whether to conjure the arbitrator into legal existenceiit must be for the court Suppose as was purportedly the case in Bazzle an arbitration clause is ambiguous about Whether class actions are barred If the court believes the class action ban is unconscionable and renders the arbitration clause invalid the court should be allowed to interpret the contract and resolve the ambiguity David S Schwartz Undersmnding RemedyStripping Arbitration Clauses Validity Arbitrability andPreelusion Principles 38 USF L REV 49 81 2003 One commentator has asserted that the case resolved nothing due to the lack of a majority position T he Supreme Court 2002 T ewLeading Cases Federal Smtutes and Regulations 117 HARV L REV 410 414715 2003 But see Pedeor 343 F3d at 358759 interpreting Justice Stevens as agreeing with the plurality that arbitrators should interpret the parties agreement in the rst instance 32 Pedeor 343 F3d at 36339 Bess v DirectTV Inc 815 NE2d 455 459 Ill App Ct 2004 In re Wood 140 SW3d 367 369 Tex 2004 The ironic facts of Wood are Worth recounting Wellknown Texas trial lawyer John O Quinn represented a class of over 3000 Women in breast implant litigation The fee armngement contained an arbitmtion clause specifying that disputes would be resolved under AAA rules then in effect Following settlement of the breastimplant litigation O Quinn s former clients pursued class claims against him for wrongfully deducting certain expenses from the settlement proceeds A er the lawsuit was led Bazzle was decided and AAA s Supplementary Rules for Class Arbitrations Were promulgated shortly therea er The Texas Supreme Court held that under Bazzle the arbitrator should resolve the ambiguity regarding Whether AAA s class arbitration rules Were then in effect for the purposes of the class claims 1 at 36amp70 That will surely be the only time Mr O Quinn ever argues against class certi cation ugh this pmctice is genemlly associated with California courts examples of judicially tho compelled class arbitration exist in other jurisdictions See infra note 57 and accompanying ext 2005 Beyond Unconscionability 1721 preclude potential classwide liability34 These cheers are not unfounded insofar as the Court appeared to acknowledge the legitimacy of class arbitration And from wouldbe defendants perspectives class arbitration is a greater threat than class action litigation But the victory cries are hasty Bazzle s twin holdingsiand just as importantly the manner in which arbitration administrators and courts have responded to themimake it possible for corporations to draft arbitration clauses so as to virtually guarantee that claims will not be arbitrated on a classwide basis CAPs are the current strategy of choice Alternatively corporations can draft arbitration clauses designating an arbitral forum that does not administer class proceedings Before discussing these two strategies in Parts 111 and IV the next Part provides a necessary introduction to the relevant principles governing arbitration agreements under the FAA II The FAA and the Limits of Enforceability Section 2 of the FAA mandates the enforcement of arbitration agreements according to their terms preempting all state law to the contrary except for state laws that developed to govern the validity and enforceability 34 See e g Aashish Y Desai ClassAction ArbitrationiT he Chickens Come Home to Roost ORANGE COUNTY LAW Mar 2004 at 3639 see also Thomas M Byme Arbitration The Plaintz s Bar Strikes Back 57 CONSUMER FIN LQ REP 191 191 2003 describing Bazzle as a blow to the use of arbitration as a class action preventative 35 Chief Justice Rehnquist s dissent joined by Justices O Connor and Kennedy stated this explicitly See Bazzle 539 Us at 459 As petitioner correctly concedes the FAA does not prohibit parties from choosing to proceed on a classWide basis Rehnquist CJ dissenting 6 That class arbitration is generally less desirable than class action litigation from the defendant s perspective is almost beyond question To the extent that What commentators have termed the reverse auction problem actually exists under the current state of class action litigation defendanw can frequently leverage a relatively favorable settlement See John C Coffee Jr Class Wars The Dilemma of the Mass Tort Class Action 95 COLUM L REV 1343 1372 1995 describing the reverse auction problem as a competition among teams of plaintiffs attorneys that the defendants can exploit and recognizing that the problem can arise in various contexw Although concededly unclear it seems unlikely that a reverse auction could occur in arbitration because in most cases all members of a class would be bound by arbitmtion agreements designating a particular arbitration administrator It is doubtful Whether the multiplicity of concurrently pending overlapping class claims necessary to facilitate a reverse auction could exist on the docket of a single arbitration administrator Even if the creation of new fedeml jurisdiction curtails reverse auctions see supra note 1 and accompanying text defendanw will still prefer a fedeml district judge over an arbitrator because of the availability of meaningful appellate review see First Options of Chicago Inc v Kaplan 514 Us 938 942 1995 stating that courts will set aside arbitrators decisions only in very unusual circumstances The stakes are simply too high to trust an arbitration panel Whose judgment will almost always be nal See also Jean R Ster nlight As Mandatory BindingArbitration Meets the ClassAction Will the Class Action Survive 42 WM amp MARY L REV 1 117719 2000 positing other reasons Why companies might prefer class action litigation over class arbitration Of course one need not make inferences when defendanw state their preferences explicitly as for example in Discover Bank v Superior Cmrt 129 Cal Rptr 2d 393 398 n7 Ct App 2003 Where counsel informed the trial court that should the prohibition against class action arbitration be invalidated as unconscionable Discover Bank would elect to proceed with a judicial class action 1722 Texas Law Review Vol 831715 of contracts generally37 The US Supreme Court s interpretation of the FAA has been consistently expansive38 particularly with respect to section 2 s effect upon state law For example in Southland Corp V Keaiing the Court reversed the California Supreme Court s holding that the California Franchise Investment Law required judicial consideration of claims arising therefrom In enacting 2 of the FAA Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration 39 In Perry V Thomas the Court held that the FAA preempted a provision of the California Labor Code providing that actions for wage disputes could be maintained without regard to the existence of any private agreement to arbitrate 40 The Court explained A statelaw principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with section 2 of the FAA A court may not construe that agreement in a manner different from that in which it otherwise construes nonarbitration agreements under state law Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a statelaw holding that enforcement would be unconscionable 4 Similarly in Doctor s Associates Inc V Casaroiio the Court held that the FAA preempted a Montana statute conditioning the enforcement of arbitration agreements on a special notice requirement not applicable to contracts generally42 Still the Court recognized that generally applicable contract defenses such as fraud duress or unconscionability may be applied to invalidate arbitration agreements without contravening 2 Aside from state law the Supreme Court has fashioned a limit on the enforceability of arbitration agreements that is particularly relevant in the context of typically small consumer claims In Green Tree Financial Corp 37 Section 2 provides A Written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy therea er arising out of such contract or transaction or the refusal to perform the Whole or any part thereof or an agreement in Writing to submit to arbitration an existing controversy arising out of such a contmct transaction or refusal shall be valid irrevocable and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract 9 USC 2 2000 38 See Prima Paint Corp v Flood amp Conklin Mfg Co 388 US 395 1967 holding that the FAA applies in diversity cases notwithstanding that it sew forth substantive law Southland Corp v Keating 465 US 1 1984 holding that the FAA applies in state courts AlliedBruce Terminix Cos v Dobson 513 US 265 1995 holding that the FAA s reach is coextensive with Congress s Commerce Clause power 39 Southkmd Corp 465 US at 10 40 482 Us 483 484 1987 quoting CAL LAB CODE 229 West 1971 41 Id at 493 n9 42 517 US 681 687 1996 43 Id 2005 Beyond Unconscionability 1723 Alabama V Randolph the Court acknowledged that arbitration costs that would prohibit the plaintiff from effectively vindicating her federal statutory rights in the arbitral forum could render an arbitration clause f Two 39 39 39 tend to 39 39 Randolph as a viable avenue by which to overcome defendants use of arbitration agreements as a shield against classwide exposure First under Randolph a plaintiff seeking to avoid arbitration based on a prohibitivecosts argument bears the burden of proving the likelihood of such costs While courts have differed with respect to what a plaintiff must demonstrate46 what the cases do have in common is that plaintiffs rarely succeed on a prohibitivecosts theory Second by simply agreeing to pay all arbitration costs defendants can virtually guarantee that a prohibitivecosts argument will fail47 Some courts will even allow a defendant to in effect unilaterally modify the cost provi sions of an arbitration agreement in order to moot a prohibitivecosts challenge thus making an oppressive costallocation scheme a nolose proposition48 Regardless the best possible longterm effect of Randolph rom the consumer s perspective is that arbitration agreements will increasingly require the business to pay arbitration costs Most defendants will consider this a small price to pay for effective protection against the class mechanism Admittedly more individual claims would likely be led under this businesssubsidized model of consumer arbitration than under a less generous costallocation scheme Given the smallness of the claims however other incentives to sue that are provided under state consumer protection schemes eg minimum statutory damages treble damages 44 531 US 79 90 91792 2000 45 1d at 91 For example in Randolph the arbitration agreement s silence with respect to the allocation of cosw standing on its own created only a risk of prohibitive cosw that was too speculative to justify invalidating the agreement I 6 Pro essor Budnitz chamcterized the various approaches as follows courts focus on the nancial condition of the plaintiff requiring her to prove that under the facw of the particular dispute she cannot afford to proceed on her claim Other courts consider the costs of the particular arbitration coupled with the plaintiffs nancial situation Still others compare the cosw of proceeding to arbitration with the cosw oflitigating the same claim dnitz The High Cost of llIandatory Comumer Arbitration 67 LAW amp CONTEMP PROBS 133 ISLSS 2004 footnotes omitted 47 See eg Zuver v Airtouch Comm Inc 103 P3d 753 763 Wash 2004 suggesting that even if the plaintiff had presented evidence suf cient to establish a prohibitivecosts defense it would nonetheless have failed because the defendant offered to pay the arbitration fees of Zobrist v Verizon Wireless 822 NE2d 531 539 Ill App Ct 2004 rejecting the plaintiffs prohibitive costs argument which was based on a costsplitting provision contained in the arbitration agreemeng in part because the defendant stipulated to a Waiver of this provision which in effecg served to moot the plaintiffs argument 48 See eg Zuver 103 P3d at 763 n7 rejecting the argument that the court should ignore the defendant s offer to pay the arbitrator s fees When that offer was made a er the parties entered into the contract see also Budnitz mpra note 46 at 147748 discussing different approaches that courts have taken in response to defendants offers to pay arbitration costs a er litigation has commenced 1724 Texas Law Review Vol 831715 attorneys fees and the like will probably not make the number of claims led suf cient to effectively deter unlawful business practices In addition to generally applicable state law and prohibitivecosts arguments a third theoretical limit on the enforceability of arbitration agreements designed to shield against classwide eXposure is federal legislation As discussed above congressional attempts to protect consumers from unfair deployment of arbitration agreements have been unproductive49 An act of Congress then is unlikely The prohibitivecosts defense is ineffective This Note therefore looks to generally applicable state law as fashioned by state courts and legislatures for consumer protection against the use of arbitration clauses designed to preclude resort to the class mechanism III The Current Strategy CAPs A Background During oral argument in Bazzle Justice Stevens asked Does this case have any real future signi cance because isn t it fairly clear that all the arbitration agreements in the future will prohibit class actions 50 Indeed even prior to Bazzle corporations began drafting arbitration clauses that either eXpressly prohibited class proceedings or barred one or both parties from participating in a class proceeding The CAP is an invention of fairly recent vintage born of necessity Historically defendants could rest assured that a binding arbitration clause buried within the terms of a contract of adhesion would foreclose the possi bility of classwide eXposure51 because courts perceived the class mechanism and arbitration as 39 l quot 39 52 C l 39 when f 39 with a putative class of plaintiffs whose claims arose from a relationship governed by a binding arbitration clause courts felt that they were put to the choice of either allowing a class action to proceed in the judicial forum thereby outing an otherwise binding arbitration agreement or compelling arbitration despite misgivings that few if any of the individual claimants would actually seek redress for their relatively small claims As between a 49 See 5147M note 11 and accompanying text 50 Transcript ofOral Argumeng Green Tree Fin Corp v Bazzle 539 US 444 No 02634 2003 WL 1989562 at 55 Apr 22 2003 51 See Edward Wood Dunham The Arbitration Clause as ClamAetion Shield 16 FRANCHISE LJ 141 142 1997 An arbitration clause may not be an invincible shield against class action litigation but it is surely one of the strongest pieces of armor available 52 In the Words ofone dissenting judge Arbitration does not lend itself to the many subsidiary proceedings incident to an ongoing class action eg determination of Whether class action status should be granted de nition of the class determination of the nature and kind of notice and by Whom it should be seng provision for opting oug etc In sum if the matter is to proceed in arbitration it must proceed as an individual claim Harris v Shearson Hayden Stone Inc 441 NYS2d 70 79 App Div 1981 Bloom J dissenting 2005 Beyond Unconscionability 1725 7753 7754 legislative mandate and a procedural nicety the choice was clear Courts compelled arbitration The California Supreme Court rst articulated the concept of class arbitration in Keaiirig V Superior Court and in another case four years later a California appellate court remanded with instructions to certify a class and compel arbitration57 Although it is probably impossible to know when the rst CAP was incorporated into an arbitration agreement one could con dently assume it followed shortly after the rst judicially compelled class arbitration in California Justice Stevens was surely correct that Bazzle would further encourage the implementation of CAPs 8 The American Arbitration Association AAA7the largest provider of ADR services in the United Statesi responded to Bazzle by implementing its Supplementary Rules for Class Arbitrations59 Under these rules however AAA will not without a court order administer a class arbitration for claims governed by an arbitration agreement with a CAP 0 Although AAA s docket of class arbitrations has 53 See Doctor s Assocs Inc v Casarotto 517 US 681 688 1996 stating that the FAA mandates the enforcement of arbitration agreements alterations and quotations omitted 54 See Champ v Siegel Trading Co 55 F3d 269 276777 7th Cir 1995 When contracting parties stipulate that disputes will be submitted to arbitration they relinquish the right to certain procedural niceties which are normally associated with a form trial One of those procedural niceties is the possibility of pursuing a class action under Rule 23 citations omitted e eg Vernon v Drexel Burnham amp Co 125 Cal Rptr 147 Ct App 1975 In Vemon despite is nding that a valid arbitmtion agreement existed the trial court nonetheless denied the defendant s motion to compel arbitration of the class representative s claim because the policy that class actions shall not be subverted by depriving the class of its representative outweighed the policy of enforcing arbitmtion agreemenw 1d at 152 The appellate court reversed holding that the policy favoring arbitration trumped the policy supporting class actions 1 56 645 P2d 1192 Cal 1982 rev d in part rub nom on other groundr Southland Corp v Keating 465 US 1 1984 In granting the appellanw request to instruct the trial court to consider class certi cation issues so that arbitration could proceed on a classwide basis the California Supreme Court observed that denia1 of a class action in cases Where it is appropriate may have the effect of allowing an unscrupulous Wrongdoer to retzin the bene ts of his Wrongful conductm 1d at 1207 quoting Vasquez v Superior Court 4 Cal 3d 800 808 1971 In addition to looking to fedeml and state cases consolidating claims for arbitration the court also noted that class arbitration could overcome the inef ciency created by the inapplicability of collateral estoppel in arbitration proceedings 1 at 1207709 57 ewis v Prudential Bache Sec Inc 225 Cal Rptr 69 Ct App 1986 In addition to California and South Carolin a Penns lvania court compelled arbitration on a classwide basis in Dickler v Shearron LehmanHutton Inc 596 A2d 860 Pa Super Ct 1991 58 Am Arbitration Ass n Policy on Clarr Arbitrationr at httpWWWadrorg ArbitrationPolicy last visited Feb 27 2005 9 or a copy of the rules see Am Arbitration Ass n Supplementary Ruler for Clarr Arbitrationr Oct 8 2003 at httpWWWadrorgArbitrationPolicy Judicial Arbitration and Mediation Services JAMS a major provider ofADR services has also established rules to govern class arbitrations See JUDICIAL ARBITRATION amp MEDIATION SERvs JAMS CLAss ACTION PROCEDURES Feb 2005 hereina er JAMS CLAss ARBITRATION RULES available at httpWWWjamsadrcomimagesPDFJAMS7C1ass7Action7Procedurespdf 60 Am Arbitra 39 n ss n Policy on Clarr Arbitrationr at httpWWWadrorg ArbitrationPolicy last visited Feb 27 2005 1726 Texas Law Review Vol 831715 grown continuously since Bazzlef1 one would expect to see it shrink over time to the extent that CAPS attain boilerplate status But there may be a future for class arbitration yet The remainder of this Part examines antiCAP principles that are developing in state courts and legislatures and argues that they are fully consistent with and not preempted by the FAA The commonlaw doctrine of unconscionability whichI discuss next is a tool almost entirely judicial in nature and has heretofore been the most frequently utilized weapon against CAPs State statutes expressing a policy favoring collective action by consumers can also be effective but will often require cooperative policy construction by courts Finally statutes are beginning to emerge that speci cally target purported waivers of the ability to seek classwide relief I discuss each of these approaches in turn B Unconscionabiliiy The 1000 000x 29 Question Plaintiffs frequently challenge the validity of CAPs by deploying the doctrine of unconscionability This has met with some success in several jurisdictions63 while other jurisdictions have atly rejected the 61 See swra note 6 and accompanying text 62 Another possible source of antiCAP principles might be the policies of arbitration administrators For example in a policy statement issued in November 2004 that was retmcted in March 2005 JAMS stood up for consumers by taking the position that it is inappropriate for a Company to restrict the right of a consumer to be a member of a class action arbitration or to initiate a class action arbitration Judicial Arbitration amp Mediation Servs JAMS Policy Regarding Use of Class Action Preclusion Clauses in Consumer Cases at httpWWWjamsadrcomimageSPDF JAMSClaSSActionPrecluSionPolicypdf last visited Jan 11 2005 on le with the Texas Law Review Pursuant to this policy JAMS would not have enforced CAPS in proceedings Where classwide relief is sought Id39 see also Caroline E Mayer Arbitration Grow Backs ClassActions Firm Won t Enforce Bans in Contracts WASH POST Nov 25 2004 at E04 According to JAMS it retreated from this policy because it created both a perception of bias and confusion about how the policy Would be applied PreSS Release Judicial Arbitration amp Mediation Servs JAMS Reaf rms Commitment to Neutrality Through Witlrdmwal of ClaSS Action Arbitration Waiver Policy Mar 10 2005 available at httpWWWjamSadrcompreSSShowireleaseaSpid198 Furthermore the rules governing claSS arbitrationS promulgated by JAMS subsequent to the issuance of the policy statement authorize JAMS arbitrators to consider proceeding on a classwide basis only if the Arbitrator iS Satis ed that the arbitration clause permiw the arbitration to proceed as a claSS arbitration or a court has ordered that an Arbitmtor determine Whether a claSS arbitration may be maintained JAMS CLASS ARBITRATION RULES supra note 59 at 2 In any event such a policy iS inconsistent with the notion that the courtinot the arbitratorgdetermines the validity of an unambiguous CAP At least one court has so held See Gipson v CroSS Country Bank 354 F Supp 2d 1278 1281 1289 MD Ala 2005 granting defendant s motion to enjoin the plaintiff from pursuing claSS arbitmtion a er a JAMS arbitrator held that the validity of an expreSS CAP contained in the partieS agreement would be determined by the arbitmtor and holding that it iS for the court and not an arbitrator to determine Whether an expreSS prohibition against class action arbitration contained in an arbitration agreement iS valid and enforceable 63 Eg Szetela v Discover Bank 118 Cal Rptr 2d 862 Ct App 2002 cert denied 537 US 1226 2003 Discover Bank v Shea 827 A2d 358 NJ Super Ct Law Div 2001 Eagle v Fred Martin Motor Co 809 NE2d 1161 Ohio Ct App 2004 Several other courts have applied unconscionability to invalidate apparently CAPleSS arbitration agreemenw that would have had the effect of preventing plaintiffs from seeking classwide relief See infra note 126 2005 Beyond Unconscionability 1727 unconscionability arguments4 In this subpart I concentrate on recent California cases because they not only echo the tenor of this debate but also appear to have produced an appropriate vehicle for the Supreme Court to consider whether the FAA permits the application of state law to invalidate a The leading California case invalidating a CAP is Szetela V Discover Banks5 in which a putative class of credit card holders brought an action against Discover for overcharges alleging breach of contract and deceptive business practices Discover amended its cardholder agreements with a CAPinfused arbitration clause The court found that the arbitration clause was procedurally unconscionable67 because it was adhesive ie presented on a take it or leave it basis68 Furthermore the CAP rendered the clause substantively unconscionable The court s rationale is representative of the rationales enunciated by most other courts that have invalidated CAPs as unconscionable The clause is not only harsh and unfair to Discover customers who might be owed a relatively small sum of money69 but it also serves as a disincentive for Discover to avoid the type of conduct that might lead to class action litigation in the first place Discover has essentially granted itself a license to push the boundaries of good business practices to their furthest limits fully aware that relatively few if any customers will seek legal remedies and that any remedies obtained will only pertain to that single customer with no collateral estoppel effect The potential for millions of customers to be overcharged small amounts without an effective method of redress cannot be ignored Therefore the provision violates fundamental notions of fairness 64 Eg Edelist v MBNA Am Bank 790 A2d 1249 Del Super Ct 2001 Rosen v SCIL LLC 799 NE2d 488 111 App Ct 2003 Ranieri v Bell At1 Mobile 759 NYS2d 448 App Div 2003 Federal courts have also been genemlly unreceptive to this argument But see Ingle v Circuit City Stores Inc 328 F3d 1165 1175 9th Cir 2003 We nd that this bar on classWide arbitration is patently onesided and conclude that it is substantively unconscionable Luna v Household Fin Corp 111 236 F Supp 2d 1166 1182783 WD Wash 2003 holding an arbitration rider was unenforceable due to several onesided provisions including a CAP 65 118 Cal Rptr 2d 862 Ct App 2002 cert denied 537 US 1226 2003 66 The CAP stated Neither you nor We shall be entitled to join or consolidate claims in arbitration by or against other cardmembers with respect to other accounw or arbitrate any claims as a representative or member of a class or in a private attorney general capacitym 1d at 864 67 In most jurisdictions unconscionability entails a twopart inquiry Procedural unconscionability relates to surprises or other de ciencies in the bargaining process While substantive unconscionability concerns the fairness of the terms themselves 8 WILLISTON ON CONTRACTS 1810 4th ed 1990 70 1d at 868 Additionally the court noted that although the CAP literally applied to both Discover and its customers it was nevertheless blindingly onesided because credit card companies typically do not sue their customers in class action lawsuiw 1d at 867 1728 Texas Law Review Vol 831715 The court unanimously remanded with instructions to sever and strike the CAP71 In a subsequent case Mandel v HouseholdBank the same court adopted its earlier reasoning in Szetela and once again remanded with instructions to sever and strike a CAP72 The California Supreme Court has granted review in Mandel but brie ng and arguments are on hold pending a decision in a case that represents the other side of the unconscionability debate Discover Bank V Superior Court Discover Bank involved the same arbitration clause and CAP at issue in Szetela and once again the putative class of plaintiffs argued that the CAP was unconscionable74 The trial court eventually agreed after reconsideration in light of Szetela severing and striking the CAP The appellate court reversed after rejecting Szetela and Mandel declining to engage in an unconscionability analysis and concluding that the FAA preempts any otherwise applicable California judicial law nding CAPs to be substantively unconscionable and invalid 76 Discover Bank s conclusion that the FAA preempts application of unconscionability to CAPs is exceptional Few other courts have explicitly stated FAA preemption as a basis for rejecting an unconscionability chal lenge to a CAP But one can nevertheless discern the role that the FAA plays in many of these decisions For example some courts refusing to nd CAPs unconscionable have been heavily in uenced by the policy favoring enforcement of arbitration agreements These cases implicate the largely unexplored ipside of the principles governing enforcement of arbitration agreements Just as a criterion for invalidating any contractual provision should not operate more forcefully when applied to the provisions of an arbitration clause neither should it apply with less force78 Accordingly courts should not give more effect to a CAP contained within an arbitration clause than they would to any other CAP The fact that CAPs do not ever appear outside of arbitration clauses is simply immaterial because a conclusion of unconscionability could apply 1 Id at 868 72 129 Cal Rptr 2d 380 385786 Ct App 2003 review granted 132 Cal Rptr 2d 525 200 1 P V 129 Cal Rptr 2d 393 Ct App 2003 review granted 132 Cal Rptr 2d 526 2003 Id at 396797 Id at 400 Id at 406 ampn12 407 7 See Hutcherson v Sears Roebuck amp Co 793 NE2d 886 896 Ill App Ct 2003 Although We recognize the importance of class actions as a tool for protecting consumers We cannot ignore the strong policy that favors enforcement of arbitration provisions Ranieri v Bell Atl Mobile 759 NYS2d 448 449 App Div 2003 lll OxUIb 1 e the FAA is to place arbitration agreemenw upon the same footing as other contmcts added citations omitted see also Cange v Stotler amp Co 826 F2d 581 597 7th Cir 1987 emphasizing that the FAA does not purport to make arbitmtion clauses more readily enforceable than other agreements Easterbrook J concurring 2005 Beyond Unconscionability 1729 with equal force to an effort to enforce a contract provision silent as to arbi tration yet prohibiting participation in a class action under similar circumstances 79 That this is true in theory if not in fact brings the application of common law contractual defenses to CAPs within the scope of authority speci cally reserved to states by the FAA so long as state courts do not apply them in a way that suggests hostility to arbitration agreements Thus the Szetela court correctly ignored the fact that the CAP at issue was contained in an arbitration clause Indeed the word arbitration appears nowhere in the analysis of substantive unconscionability80 Rather the court focused upon criteria well established in unconscionability doctrine such as lack of mutuality and unreasonably favorable terms The court may as well have been discussing an exculpatory clause or some other purported limita tion upon the drafter s liability contained in a nonarbitration agreement81 The California Supreme Court granted review in Discover Bank and Mandel to consider whether the FAA permits invalidation of a CAP as unconscionable and will issue an opinion later this year That the appellate court did not actually consider whether the CAP was unconscionable is probably itself a suf cient ground for reversal Assuming it does not make the misstep of interpreting Bazzle as prohibiting consideration of the validity of unambiguous CAPs whichI alluded to earlier82 there is no reason that the court should not take the extra step of embracing Szetela Furthermore by striking the CAP and compelling arbitration it would nevertheless be enforcing the parties basic agreement to arbitrate their claims If the 79 Leonard v Terrninix Int l Co 854 So 2d 529 539 Ala 2002 emphasis added 80 See supra text accompanying notes 69770 The reference to the lack of collateml estoppel effect however does suggest that considemtions particular to arbitration played some albeit minimal role in e court s reasonin Se 39 81 One student commentary contends that Szetela erred because as applied to CAPs unconscionability analysis must focus on the plaintiffs ability to assert his righw in arbitration rather than the relative bene ts of such provisions to either party Peter J Kreher amp Pat D Robertson 111 Case Comment Substance Process and the Future of Class Arbitration 9 HARV NEGOT L REV 409 428 2004 This argument places undue reliance upon the Supreme Court s decision in Green Tree Financial CorpAlabama v Randolph 531 US 79 2000 There the plaintiff argued that she would not be able to vindicate her righw under the Truth in Lending Act in arbitration due to prohibitive costs The Court recognized that the existence of large arbitration costs could preclude a litigant from effectively vindicating her federal statutory rights in the arbitral forum but held that the plaintiff had failed to meet her burden of demonstrating that arbitration was cost prohibitive 1d at 90792 Randolph should not be read as creating a federal common law of unconscionability that supersedes rather than merely supplemenw state law anti CAP principles Schwartz supra note 30 at 8439 cf Randolph 531 US at 97 n4 Ginsburg J concurring in part and dissenting in part Randolph alternatively urges af rmance on the ground that the arbitration agreement is unenforceable because it precludes pursuit of her statutory claim as a class action I do not read the Court s opinion to preclude resolution of that question on remand A validity challenge based on an unconscionable CAP is conceptually distinct from a challenge based on the plaintiffs inability to vindicate statutory righw in the arbitral forum The former relates to the validity of the agreement iwelf While the latter relates to the adequacy of the forum to hear the particular claim 82 See supra notes 29730 and accompanying text 1730 Texas Law Review Vol 831715 California Supreme Court nds that the CAP in either Discover Bank or Mandel is unconscionable its holding would seriously undermine the ability of CAPs to insulate defendants from liability83 State and perhaps even federal courts will probably start thinking twice before dismissing unconscionability or other public policy arguments against CAPs solely on the basis of FAA preemption Companies can still avoid the risk of class arbitration by supplementing a CAP with a nonseverability provision such that the entire arbitration clause stands or falls with the CAP84 If a court nds that the CAP is unconscionable or otherwise invalid there is little risk that the court will strike the CAP and compel arbitration thereby creating the possibility of class certi cation by an arbitrator which as I discussed above probably poses a greater risk for defendants than facing putative class claims in court Either arbitration will proceed on an individual basis or the dispute will be resolved through litigation where consumers can avail themselves of class action procedural rules Thus courts can maintain consumers access to the class mechanism when faced with nonseverability clauses Operating alone however individual judges notions of fairness as eXpressed through unconscionability in individual cases probably will not effectively deter the use of CAPs Without antiCAP principles that are more wellde ned than unconscionability many courts probably will uphold CAPs such that CAPs will insulate companies from liability with sufficient frequency to outweigh any special riskiand there is virtually none with nonseverability provisionsiassociated with them I now turn to more effective antiCAP principles policies derived from statute C Public Policy The UliimaieAriii CAP Principle Although unconscionability has heretofore proven to be the most frequently used tool for invalidating CAPs the effectiveness of unconscionability doctrine is undermined by the fact that it typically applies on a casebycase basis One commentator insists that the FAA would preempt a per se rule against CAPs because unconscionability applies on a casebycase basis While it is true that courts almost never denounce con 83 There is little reason to think that the current Court would ever issue a Writ of certiorari in a case like Discover Bank Assuming the lower court applied unconscionability in an arbitration neutral fashion to invalidate a CAP reversal would raise serious federalism concerns On the other hand so long as the Court is committed to liberal enforcement of arbitration agreemenw it would probably fear that affirming a decision to invalidate might be perceived by courts as a license to strike down arbitration agreemenw through scrupulous application of unconscionability 84 Alan Kaplinsky one of the defense bar s leading advocates in this area has begun advising clienw to dra arbitration clauses in this Way See T he Current State of ClarrActionArbitration 22 ALTERNATIVES TO HIGH COST LITIG 63 68 2004 hereina er CPR Meeting 85 See 5147M note 36 86 S e Leading Carer rupra note 31 at 417 stating that generally applicable unconscionability doctrine requires a casebycase factspeci c inquiry citing RESTATEMENT 2005 Beyond Unconscionability 1731 tractual provisions as unconscionable per se one need not be overly concerned with semantic distinctions to observe that this argument assumes that unconscionability is the only viable argument against CAPs But there is no reason to think that the FAA prohibits invalidating a provision within an arbitration clause as against the generally applicable public policy of a state because public policy is a basis at law or in equity for the revocation of any contract Legislative public policies against CAPs can take two forms First some states have statutory consumer protection schemes that contemplate a right to seek redress through the class mechanism Although these statutes do not speak directly to purported waivers of the ability to proceed collectively courts have construed them as eXpressing policies that are contravened by CAPs The second form is legislation speci cally aimed at CAPlike contractual provisions These two approaches present distinct considerations under the FAA 1 Statutory Rights to Seek Collective ReliefiConsumer protection laws in several states eXpressly contemplate classwide relief as part of their remedial schemes From these statutes courts are beginning to glean policies of affording consumers the opportunity to seek classwide remedies and invalidating CAPs on this basis Take for example Eagle V Fred Martin Motor Co88 which involved a claim against a car dealership for violations of the Ohio Consumer Sales Practices Act CSPA89 The plaintiff challenged the validity of the arbitration clause with a CAP in her purchase contract The court agreed with the plaintiff that the arbitration clause was entirely unenforceable for numerous reasons With respect to the CAP the court interpreted the CSPA as conferring a right upon consumers to act as a private attorney general for violations of the statute90 Because the CAP impeded this remedial function of the CSPA the court held it unenforceable as against public policy91 Other courts have declined to construe consumer protection laws that contemplate classwide remedies as creating a right to seek classwide relief SECOND OF CONTRACTS 208 cmt e 1981 Butsee RESTATEMENT SECOND OF CONTRACTS 208 cmt e 1981 Some types of terms are not enforced regardless of context While other terms may be unconscionable in some contexw but not in others 9 USC 2 2000 Professors Sternlight and Jensen have also observed that state legislative efforts to protect against arbitration clauses purporting to Waive the right to proceed on a classwide basis could be formulated consistently with the FAA See Jean R Sternlight amp Elizabeth J Jensen Using Arbitration to Eliminate Consumer Class Actions E icient Business Practice or Unconscionable Abuse 67 LAW amp CONTEMP PROBs 75 1024B 2004 observing that state legislation might not be preempted if it protected both litigation and arbitration class actions and did not speci cally target or eliminate the use of arbitration 88 809 NE2d 1161 Ohio Ct App 2004 89 Id at 1165 90 Id at 1169770 91 Id at 1183 1732 Texas Law Review Vol 831715 because they perceive that such a policy amounts to a nonwaivable right to a judicial forum92 Courts should recognize that Bazzle liberates them from this constraint The presumption that classwide relief is not available in arbitration is at least in theory no longer correct93 Because the class mechanism is no longer inextricably bound up with the judicial forum courts can construe statutory schemes that eXpressly authorize class actions as creating a statutory right to pursue classwide relief without going so far as to nd a nonwaivable right to a judicial forum One California case demonstrates how application of this type of anti CAP policy can be arbitrationneutral In America Onlirie Inc V Superior Court a putative class of plaintiffs brought an action in California under the California Consumers Legal Remedies Act CLRA despite forumselection and choiceoflaw clauses designating Virginia for the purposes of forum and governing law94 The trial court denied AOL s motion to stay or dismiss the claims on the basis of the forumselection clause concluding that the clause was unenforceable The appellate court affirmed reasoning that enforcement of the choiceoflaw and forumselection provisions would necessitate a waiver of the statutory remedies of the CLRA in violation of that law s antiwaiver provision and California public policy 95 The court proceeded to compare the relevant laws of California and Virginia paying particular attention to the inability of consumers to bring class actions in Virginia inconsistent with the CLRA s eXpress authorization of class actions96 Finally the court quoted eXtensively from a 1971 California Supreme Court opinion eXtolling the virtues of consumer class actions97 Given these indicia of a California public policy favoring consumer class actions the court concluded that the unavailability of class action relief in this conteXt was sufficient in and by itself to preclude enforcement of the forum selection clause 98 92 See Pyburn v Bill Heard Chevrolet 63 SW3d 351 365 Tenn Ct App 2001 implicitly assuming that construin the Tennessee Consumer Protection Act as providing a right to seek class action relief Would be tantamount to nding a nonwaivable right to a judicial forum preempted by the FAA 93 See supra note 35 and accompanying text 94 108 Cal Rptr 2d 699 701702 Ct App 2001 95 Id at710 96 1d at 7111 CAL CIv CODE 1781a West 1998 provides Any consumer entitled to brin an action ma if the awful me od act or practice has caused damage to other consumers similarly situated bring an action on behalf of himself and such other consumers to recover damages or obtain other relief See also id 1752 Nothing in this title shall limit any other statutory or any common law rights of the Attorney General or any other person to bring class actions 97 AOL 108 Cal Rptr 2d at 712 quoting Vasquez v Superior Court 484 P2d 964 Cal 1971 98 111 emphasis added The Discover Bank court discussed AOL stating that although choice of law and forum selection clauses may be invalidated under California law as s own in AOL there is no blanket prohibition against class action Waiver clauses Discover Bank v Superior Court 129 Cal Rptr 2d 393 404 Ct App 2003 In support ofthis proposition the court 2005 Beyond Unconscionability 1733 AOL could serve as the foundation for a policybased per se rule against contractual provisions that effectively deny consumers the ability to bring claims under the CLRA as a class representative in arbitration in court or in a foreign venue This would apply to CAPs in arbitration clauses CAPs in nonarbitration clauses and forumselection clauses like the one in AOL Is this not a generally applicable state law principle governing the enforceability of contracts described in section 2 of the FAA State legislatures should not hesitate to craft their consumer protection schemes in a manner that facilitates the results such as those reached in Eagle and AOL and courts in jurisdictions with consumer protection schemes that evince policies favoring collective relief should not hesitate to invoke those policies in an arbitrationneutral fashion99 But these policies must be carefully articulated Speci cally the FAA would not be contravened by a public policy recognizing a statutory right in consumers to pursue collective relief when appropriate and not necessarily in court I emphasize these quali cations for two reasons First it would be impossible to eXpect nor would I advocate that a court or legislature recognize an absolute right in quoted the California Supreme Court s opinion in Washington Mutual Bank v Superior Court 15 P3d 1071 Cal 2001 Class actions are provided only as a means to enforce substantive law Altering the substantive law to accommodate procedure Would be to confuse the means with the endsito sacri ce the goal for the going Consequently an otherwise enforceable choiceoflaw agreement may not be disregarded merely because it may hinder the prosecution of a multismte or nationwide class action or result in the exclusion of nonresident consumers from a Californiabased class action Washington Mutual 15 P3d at 1079780 emphasis added internal citations and quotations omitted quoted in Discover Bank 129 Cal Rptr 2d at 404 Standing on its own this language Would seem to undermine any claim that class action Waivers are invalid under California law as Well as portend af rmation of Discover Bank by the California Supreme Court Closer analysis of Washington Mutual reveals that it is distinguishable from the California cases I have discussed thus far There the California Supreme Court reversed an order granting class certi cation reasoning that the trial court did not adequately consider the choiceoflaw issues that potentially could have made certi cation inappropriate The claims Were governed by choiceof laW clauses providing that claims Would be governed by the law of the state Where the property at issue was located This rendered a nationwide class action potentially problematic due to the applicability of the laws of different states to different class members claims Cf FED R CIv P 23b3 requiring that questions of law common to the class as a Whole predominate over questions affecting only individual members The language quoted above was directed at the appellate court s suggestion that it could disregard the choiceoflaw provision insofar as it Would ive businesses deali with consumers a means of avoiding a nationwide class action Washington Mutual 15 P3d at 1079 Clearly the court was concerned more With the due process considerations enunciated in Phillips Petroleum Co v Shutts 472 US 797 1985 than it was With adhesive Waivers of the ability to pursue claims collectively See Washington Mutual 15 P3d at 1080 discussing Shutts The choiceoflaw provision did not contain a CAP nor did it effectively eliminate the possibility of a statewide or otherwise properly maintainable class action 99 In fact a er analyzing the policies underlying their own consumer protection statutes courts in other jurisdictions have refused to enforce forumselection clauses based on the inability of consumers to seek collective relief in the designated forum Virginia See Dix v ICT Group Inc 106 P3d 841 844746 Wash Ct App 2005 America Online Inc v Pasieka 870 So 2d 170 171772 Fla Dist Ct App 2004 1734 Texas Law Review Vol 831715 consumers to proceed as a class Although many claims arising from simple buyerseller relationships will be suitable for class treatment some may not When I speak of a right to classwide relief then I mean a right to a determination of whether class certi cation is appropriate Second a nonwaivable statutory right to a judicial forum under state law is clearly preempted by the FAA100 Accordingly these policies must contemplate nothing more than a right to seek a class certi cation decision by an author ized decisionmaker Formulated in this way such a right does not expand the rights of consumers to bring class claims in court or affect procedural standards governing class certi cation Nor does it exhibit the hostility toward arbitration that the FAA seeks to eliminate101 It simply functions to remove the postBazzle hurdles that arbitration agreements can create for a putative class of consumers such as CAPs or as I discuss in Part IV designation of arbitration rules that do not provide for class action procedures Such a right as this will evoke skepticism Some might invoke the substanceiprocedure dichotomy expressed in the Rules Enabling Act Procedural rules shall not abridge enlarge or modify any substantive rights 102 This principle of course only binds federal courts applying the Federal Rules of Civil Procedure103 More to the point when confronted with arguments that an arbitration agreement should not be enforced because of the unavailability of classwide relief in the designated forum the US Supreme Court has not responded by talismanically invoking the substancei procedure dichotomy Instead the Court has looked to the substantive statute under which the cause of action arises to determine whether Congress 100 See Southland Corp v Keating 465 US 1 10 1984 In enacting 2 of the FAA Congress withdrew the power of the states to require a judici forum for the resolution of claims which the contmcting parties agreed to resolve by arbitration 101 See Schwartz mpra note 30 at 55 To the extent that enforcement of a contractual choice of arbitration is in any sense favored nothing in the FAA suggesw that that favoritism should extend to such logically separate issues as the damages remedies that will be available or whether the case should proceed as a class action 102 28 USC 2072b 2000 103 This is not to say that the class mechanism does not have some substantive componenw even under federal law For example the US Supreme Court s mootness doctrine has recognized that class representatives have interesw distinct from their own individual claims See US Parole Comm n v Gemghty 445 US 388 404 1980 holding that an action brought on behalf of a class does not become moot upon expiration of the named plaintist substantive claim even though class certi cation has been denied because the class representative retains a personal stake in obtaining class certi cation suf cient to assure that Art 111 values are not undermined Deposit Guar Nat l Bank v Roper 445 US 326 336 1980 holding that putative class representatives could appeal a denial of certi cation notwithstanding that their individual claims had been mooted by settlement because they retained an interest in shi ing the costs of bringing the claim to the class as a whole More radically Professor Leubsdorf has suggested that the Free Association and Petition Clauses of the First Amendment should be read as creating a constitutional right to seek classwide relief John Leubsdorf Constitutional Civil Procedure 63 TEXAS L REV 579 617720 1984 2005 Beyond Unconscionability 1735 intended to create a nonwaivable right to seek classwide relief104 Similarly such a right under state law would not be premised on the particular jurisdiction s class action rule its basis would be in substantive law most likely a consumer protection statute If state legislatures and courts want to recognize a statutory right in consumers to seek class certi cation from an authorized decisionmaker for claims arising from a statutory consumer protection scheme that choice is not constrained by principles underlying federal procedural law Simply put a state can freely choose to characterize classwide relief as an integral component of the remedial scheme it makes available to its consumers 2 CAP Specific Legislationismte legislatures have begun to take CAPs head on Connecticut and Georgia recently enacted legislation that speci cally targets CAPs in certain types of consumer credit agreements A comparison of these two statutes illustrates how future antiCAP legislation should be drafted Connecticut s statute atly prohibits the inclusion of any purported waiver of the right to pursue collective relief within high cost home loan agreements105 It neither singles out CAPs within arbitration agreements nor does it require casebycase determination by courts as unconscionability arguably does It would therefore seem to effectively safeguard mortgagees in a manner that is impervious to attack under the FAA Georgia s payday loan statute is more problematic It prohibits enforcement of arbitration agreements within speci c types of loans if they are unconscionable and then directs courts to consider the circumstances of the transaction as a whole including but not limited to whether the contract restricts or excludes damages or remedies that would be available to the borrower in court including the right to participate in a class action 106 Georgia s statute exempli es why lawmakers need to start thinking outside of the arbitrationunconscionability box when developing antiCAP policies It is difficult to imagine that the legislature actually intended that courts should scrutinize CAPs only when they appear in arbitration agreements For example the statute unequivocally prohibits choiceoflaw and forumselection clauses that designate another state for the purposes of governing law or venue regardless of whether such clauses appear in arbitration agreements107 Why would the legislature distinguish between 104 See Gilmer v InterstateJohnson Lane Corp 500 Us 20 32 1991 examining Whether individualized arbitration advanced the purposes of the Age Discrimination in Employment Act of 67 05 ONN GEN STAT ANN 36a 746c West Supp 2004 provides A high cost home loan shall not provide for or include awaiver of participation in a class ac 39on 106 GA CODE ANN 16172c2 Supp 2004 107 Id 16172c1 1736 Texas Law Review Vol 831715 these types of clauses and CAPs given that they would all similarly impair the ability of the statute s bene ciaries to seek redress One could reasonably infer that in singling out CAPs within arbitration agreements and invoking unconscionability as the rubric for enforceability the legislature was guided by the fact that CAPs appear only in arbitration agreements and that unconscionability has heretofore proven the most successful method of attacking them By falling into this trap the Georgia legislature not only afforded its citizens relatively less effective protection from CAPs ie casebycase rather than per se it produced a statute that dances dangerously near the FAA s preemptive swath The statute did however survive an FAA challenge in Bankwest Inc V 135117212108 In Bankwest several banks brought an action in federal court to enjoin enforcement of Georgia s statute arguing that because there is no general public policy right to participate in a class action under either Georgia or federal law the designation of CAPs as an indicator of unconscionability did not re ect Georgia law of general application109 The court rejected this argument concluding that the statute was not on its face preempted by the FAA Because the statute did not render all lending contracts with CAPs unconscionable it was consistent with Georgia s totality of the circumstances approach to unconscionability110 It would hardly be surprising if Bankwest is vacated on reconsideration111 or reversed on appeal Arguably the court correctly rejected the plaintiffs challenge insofar as the statute directed courts to apply unconscionability in a manner consistent with Georgia law On the other hand the statute undeniably singles out certain types of arbitration agreements for special treatment clearly contravening Perry and Casarotto11 In sum state legislatures need to remember one simple axiom when drafting antiCAP laws Forget about arbitration113 108 324 F Supp 2d 1333 ND Ga 2004 109 Id at 1354 110 Id 111 Although the court denied the plaintiffs motion for a preliminary injunction it granted their motion for expedited consideration Id at 1358 112 See 5147M notes 4amp43 and accompanying text 113 A bill pending in the Texas legislature re ecw this principle but because it is unclear Whether the bill will become law as of this Note s publication I relegate discussion of it to this footnote Texas House Bill 398 relates to tax refund anticipation loans HE 398 79th Leg Reg Sess Tex 2005 avaikible at httpWWWcapitolstatebrus on le with Texas Law Review It prohibiw facilitators of such loans from including in any document provided in connection with e loan a Waiver ofthe ability to seek classwide relief Id at 14 The bill makes no mention of arbitration See id 2005 Beyond Unconscionability 1737 IV Agreements that Designate Arbitration Rules that Do Not Provide for Class Proceedings Silent CAPs Arbitration administrators have always possessed a high level of autonomy in developing their own rules of procedure114 and before Bazzle no arbitration administrator had its own rules for class arbitration Some courts overcame this limitation by certifying classes and then compelling arbitration on the merits115 Although there is some suggestion in the Supreme Court case law that this practice was consistent with the FAA s policy favoring arbitration116 Bazzle clearly forecloses this possibility in most situations117 Accordingly the CAP may not be an indispensable tool for companies seeking to shortcircuit classwide liability After Bazzle avoiding classwide liability may be as simple as drafting an arbitration clause providing that disputes will be resolved according to rules that do not provide for class proceedings The American Arbitration Association AAA and Judicial Arbitration and Mediation Services JAMS have promulgated special rules to govern class arbitrations118 but there is little reason to think that other arbitration administrators will follow the lead119 The market for arbitration services is competitive120 and after Bazzle demand for the services of arbitration administrators that do not administer class proceedings should grow121 In response to AAA s class arbitration rules at least one law rm 114 See Volt Info Scis Inc v Bd ofTrs ofLeland Stanford Junior Univ 489 US 468 476 1989 There is no federal policy favoring arbitration under a certain set of procedural rules Judge Posner offered an especially colorful statement of this principle Indeed short of authorizing trial by battle or ordeal or more doubtfully by a panel of three monkeys parties can stipulate to Whatever procedures they Want to govern the arbitration of their disputes Baravati v Josephthal Lyon amp Ross Inc 28 F3d 704 709 7th Cir 1994 1 See rupra note 57 and accompanying text39 see also CPR Meeting rupra note 84 at 66768 reciting statemenw by AAA s president that prior to Bazzle AAA only administered demands for class arbitration pursuant to court orders compelling arbitration on a classwide basis 116 Cf Volt 489 US at 476 n5 recognizing that the FAA itself contains no provision designed to deal with the special problems that arise in multiparty contmct disputes and pmising California arbitration rules authorizin courts to consolidate arbitration proceedings because they generally foster the federal policy favoring arbitration 117 See rqpra notes 32733 and accompanying text 1 18 See rqpra note 59 and accompanying text 119 Along with AAA and JAMS the National Arbitration Forum NAF is one of the largest arbitration administrators in the United States Under NAF Rule 19A an arbitrator cannot join claims without the consent of all parties NAT L ARBITRATION FORUM CODE OF PROCEDURE 25 Jan 1 2005 hereina er NAF PROCEDURES available at httpWWWarbforumcomprograms codeineW20057codepdf 120 Edward Brunet Replacing Folklore Arbitration with a Contract Model of Arbitration 74 TUL L REV 39 52 1999 121 Arbitration administmtors potentially cater to institutional repeat players In this era of entrepreneurial ADR the arbitrator o en does have a subtle but substantial economic interest in the outcome of the case in that his or her ability to get future cases depends at least in part on party satisfaction As a result the arbitrator 1738 Texas Law Review Vol 831715 has advised clients to utilize the services of arbitration administrators that do not have rules for class arbitrations122 There is already evidence that JAMS will lose patronage as a consequence of its decision to issue its shortlived antiCAP policy123 discussed above124 And according to the research of one commentator the National Arbitration Forum NAF a large arbitration administrator markets itself with assurances that its rules do not allow for classwide proceedings125 Prior to Bazzle courts would occasionally invalidate CAPless arbitration agreements based on the unavailability of the class mechanism in the arbitral forum but these agreements usually contained other provisions that the court found unconscionable126 Furthermore these courts were working on the assumption that classwide relief is never available in arbitrationian assumption that is no longer correct Nevertheless courts appear reluctant to treat a CAPless agreement that designates an arbitral forum where the plaintiff could not pursue classwide relief as they would an agreement that contains a CAP One might wonder why these courts did not look beyond the express language of the arbitration clause and determine whether the rules of the arbitration administrator clearly forbade class arbitration Indeed when an arbitration agreement speci es that disputes has an economic incentive or bias to issue rulings that are favorable to or that at least do not offend parties that are large institutional players such as insurers or nanci institutions and other repeat players that are capable of bringing more cases to the arbitrator Richard C Reuben Constitutional Gravity A Unimry Theory ofAlternative Dispute Resolution and Public CivilJustiee 47 UCLAL REV 949 10634 2000 122 See AAA Issues New Rules for Class Arbitrations CLIENT ALERT King amp Spalding LLP Atlanta Ga Oct 23 2003 at 2 available at httpWWW kslawcomlibrarypd ca102403pdf 123 For example some consumer lenders have modi ed the terms of their arbitration agreement by removing JAMS as a potential arbitration administmtor See e g Customer Notice Citibank Notice of Change in Terms Right to Opt Oug and Information Update Feb 2005 on le with the Texas Law Review We are removing JAMS as a potential arbitration rm 39 Customer Notice Home Depot Notice of Change in Terms for Your Home Depot Rewards MasterCard Credit Card Right to Opt Out and Information Update Feb 2005 on le with the Texas Law Review same 124 See supra note 62 125 See Sternlight supra note 36 at 72 amp n278 cataloging Written correspondence from NAF executives and inhouse counsel 126 For example in Powertel Inc v Bexley 743 So 2d 570 Fla Dist Ct App 1999 the unavailability of class relief was merely one basis for nding unconscionable an arbitration agreement that limited liability to actual damages and forced consumers to Waive other statutory remedies such as injunctive relief 1 at 576 Similarly in Suite ex rel Dunkip v Berger 567 SE2d 265 W Va 2002 the arbitration clause denied the arbitmtor authority to award punitive damages and speci ed that costs of arbitration Would be split equally among the parties 1 at 2777 78 281 A notable counterexample is Leonard v T erminix International Co 854 So 2d 529 Ala 2002 There the court held that an apparently CAPless arbitration agreement was unconscionable because it foreclosed the plaintiffs from an attempt to seek practical redress through a class action and restricted them to a disproportionately expensive individual arbitmtion 1d at 539 2005 Beyond Unconscionability 1739 will be governed by a particular set of rules those rules become incorporated by reference and are themselves terms of the arbitration agreement127 The problem is that an arbitration administrator s rules may be silent or ambiguous with respect to the availability of class treatment For example NAF s rules considered by many to be the most hostile to class arbitration are silent or at best ambiguous with respect to the availability of classwide relief Any individual or entity may only with the consent of all other Parties join any dispute controversy Claim or Response in an arbitration by filing a Claim document stating the grounds accompanied by the fee as provided in the Fee Schedule An Arbitrator has no authority to issue an Order or Award binding any individual not a named Party or Entity not a named Party unless that individual or Entity agrees128 Before a court can determine whether classwide relief would be available under this rule it would rst need to consider eXtrinsic evidence of whether the parties would agree to consolidated treatment Even then it is not clear that an unnamed party s failure to opt out would constitute an agreement to be bound by the arbitrator s award as required by the rule This ambiguity though it may go to the issue of validity makes it a question for the arbitrator under Bazzle and Howsam129 Of course the most reason able reading of this rule is that it is silent as to the availability of classwide proceedings It contemplates only joinder of parties not classwide proceedings a precondition of which is that the number of plaintiffs is such that joinder is impracticable 130 Furthermore even if the rules of an arbitration administrator speci cally prohibit class proceedings there is little reason to think that courts will apply 127 The Supreme Court stated as much in C amp L Enterprises Inc v Citizen Band Potawatomi Indian Tribe 532 Us 411 2001 United States urges us to remain Within the four corners of the contract and refrain from reliance on secondary sources The American Arbitration Association Rules and the Uniform Arbitration Act however are not secondary interpretive aides that supplement our reading of the contract they are prescriptions incorporated by the express terms of the agreement itself 1 at 419 n1 internal citation omitted 128 NAF PROCEDURES mum note 119 at 25 129 See Green Tree Fin Corp v Bazzle 539 Us 444 452753 2003 stating that arbitrators are Well situated to answer questions involving contract interpretation and arbitration procedures HoWsam v Dean Witter Reynolds Inc 537 Us 79 85 2002 The NASD arbitrators comparatively more expert about the meaning of their own rule are comparatively better able to interpret and to apply it 130 See eg FED R CIv P 23a At least one court has recognized that classwide proceedings are not a realistic possibility under NAF s rules See Taylor v First N Am Nat l Bank 325 F Supp 2d 1304 1318 MD Ala 2004 accepting for the purposes of analysis the defendant s contention that NAF Rule 19A prohibits classwide arbitration 1740 Texas Law Review Vol 831715 unconscionability in this context First whereas severing and striking a CAP does not affect the basic agreement to arbitrate nding the rules of an arbitration administrator to be unconscionable as applied to a particular dispute reeks of hostility toward arbitration An argument for procedural unconscionability might be tenable on the theory that the plaintiff was unfairly surprised by the unavailability of classwide relief in the designated forum believing that she was only giving up her right to have her claims adjudicated in court But a nding of substantive unconscionability in this context would amount to a judicial decree that the rules of an arbitration administrator are onesided or otherwise unfair Very few courts have taken this step probably because such a nding would seem inconsistent with the national policy favoring arbitration which presumes that arbitration is a procedurally fairior at least acceptableialtemative to the judicial system It is even clearer that legislation could not be drafted in a way that directly reaches an arbitration administrator s rules without being preempted by the FAA because it would necessarily either single out arbitration agree ments for special treatment or declare that certain disputes must be resolved in a judicial forum What then of the third antiCAP principle discussed in Part 1117a statutebased right to seek a certi cation decision from an authorized decisionmaker In the context of silent CAPs challenges to the enforceability of an arbitration agreement based on the inability of consumers to seek classwide remedies need not as with unconscionability allege that the rules are unfair but rather that the rules cannot serve the remedial interests of a statutory consumer protection scheme131 The very foundation of the trend toward compelling arbitration of federal statutory claims has been the notion that by agreeing to arbitrate a statutory claim a party does not forgo the substantive rights afforded by the statute it only submits to their resolution in an arbitral rather than a judicial forum 132 Similarly there is a presumption that arbitrators can grant the same type of relief that would be available in court at least where the arbitration agreement does not by its terms limit available remedies and the applicable arbitration rules give the arbitrators wide remedial latitude133 Consistent with this approach the 131 Particularly in the context of silent CAPS this argument is probably more accurately described as a challenge to the arbitrability of claims with which the right to seek a certi cation decision is associated rather than as an attack upon the validity of the arbitration agreernentper re The overarching concern of this Note is the en rceability of explicit CAPs and silent CAPs as to articular consumer claims Thus the distinction between questions of validity and arbitrability is relatively unimportant for my purposes and accordingly disregarded here in the interest of simplicity 132 Mitsubishi Motors Corp v Soler ChryslerPlymouth Inc 473 Us 614 628 1985 133 Consider for example the following passage from a circuit court opinion quoted by the es Supreme Court 1n which the court presumed that the arbitmtor could award punitive damag 2005 Beyond Unconscionability 1741 Court has con rmed that arbitrators may award punitive damages134 and fashion equitable relief135 But even in jurisdictions that recognize a right in consumers to seek classwide relief challenging a silent CAP requires that a court acknowledge the eXistence of a silent CAP that prevents consumers from exercising that right Yet Bazzle instructs courts not to conjecture upon silent terms How then can silence in this conteXt speak as loudly as clear and unambiguous language such that courts could pass upon the effect of a silent CAP in the rst instance First courts can engage in a double negative approach to reading the arbitration agreement The court would assume for the purposes of analysis the eXistence of a valid agreement and that arbitration will proceed according to the arbitration rules designated by the agreement as modi ed by the agreement itself If an arbitration agreement designates arbitration rules that are silent as to the authority of arbitrators to administer classwide proceedings and does not by its own terms confer such authority upon an arbitrator then it should be beyond peradventure that consumers bound by that agreement cannot seek classwide relief in arbitration In other words Were We to con ne our analysis to the plain language of the arbitmtion clause We would have little trouble concluding that a contract clause which bound the parties to settle all disputes through arbitration conducted according to rules which allow any form of just and equitable remedy of relief was suf ciently broad to encompass the award of punitive damages Inasmuch as agreemenw to arbitrate are generously construed it would seem sensible to interpret the all disputes and any remedy or relief phrases to indicate at a minimum an intention to resolve through arbitration any dispute that would otherwise be settled in a court and to allow the chosen dispute resolvers to award the same varieties and forms of damages or relief as a court would be empowered to award Raytheon Co v Automated Bus Sys Inc 882 F2d 6 10 lst Cir 1989 quoting Mtxubirhi Motors 473 US at 626 citation omitted Woted in Mastrobuono v Shearson Lehman Hutton Inc 514 US 52 61 n7 1995 134 AIartrobuono 514 US at 61 135 Gilmer v InterstateJohnson Lane Corp 500 US 20 32 1991 136 A federal district court took a similar approach in Walker v Ryan s Family Steak Homer Inc 289 F Supp 2d 916 MD Tenn 2003 a d 400 F3d 270 6th Cir 2005 In Walker a putative class of employees brought an action under the Fair Labor Standards Act FLSA 1d at 919 The plaintiffs challenged the enforceability of the arbitration agreement which provided that disputes would be resolved in arbitration by Employment Disputes Services Inc EDSI Previous versions of EDSI s rules had provided for class actions but EDSI eliminated those provisions from is rules 1 at 926 Cognizant of Bazzle s instruction that arbitrators should address the availability of class arbitmtion when the agreement is silent the court nevertheless determined that class arbitration was unavailable In this case EDSI unilatemlly eliminated from its rules a provision allowing class actions suggesting an intent to preclude them Given an intentional removal instead of mere silence it would be dif cult for an arbitrator to interpret the Agreement to allow class arbitration under the Rules 1 The court concluded that this along with other aspects of EDSI s rules created a structuml bias in favor of employers 1d at 926728 The Sixth Circuit af rmed but on different grounds In a footnote the Sixth Circuit rejected the argument that the bar on class arbitration rendered the a eement unenforceable relying upon federal precedent holding that that Congress did not intend to create a right to seek classwide relief for FLSA and 1742 Texas Law Review Vol 831715 because arbitration agreements are enforced according to their terms if the parties have not agreed to that procedure it is clearly unavailable in arbitration137 This does not require the courts to construe the agreement in the sense of resolving ambiguities or lling in gaps Rather the court simply must make assumptions that apply to all enforceable arbitration agreements A second but perhaps less viable approach is premised on the procedural safeguards designed to protect absent class members As discussed above the presumption in favor of the arbitrability of statutory claims assumes that arbitrators have the authority to fashion the same type of relief that would be available in court138 This assumption quickly breaks down in the conteXt of classwide relief because unlike individualized relief authority to bind absent class members requires as a matter of due process certain procedural safeguards designed to protect their interests These include adequate representation139 notice and an opportunity to be heard140 and in claims wholly or predominantly for monetary relief an opportunity to opt out 141 If these procedural safeguards are not observed neither an arbitrator nor a court can bind absent class members to the terms of the award142 Insofar as special procedures are necessary to implement these other federal statutory claims Walker 400 F3d at 387 n8 But for the purposes ofthis discussion it is signi cant that the Sixth Circuit did not criticize the lower court for inferring a prohibition on class arbitration despite that EDSI s rules Were silent on the issue On the other hand the district court probably would not have made this inference absent the modi cation by EDSI 137 A distinction should be made with respect to arbitration agreements that do not designate a particular set of arbitration rules Such was the case in Bazzle Although the arbitrator in the Lackey case which was consolidated with Bazzle on appeal certi ed the class for arbitration there is no indication that he did so pursuant to a particular set of arbitmtion rules Indeed although the arties vigorously disputed Whether classwide arbitration was permitted under the terms of the agreement iwelf the issue of Whether classwide arbitration was permitted under particular rules governing the arbitmtion if there Were any was not at issue Thus it appears likely that the arbitrator was not proceeding according to a particular code of arbitration procedure but rather local court rules or perhaps no particular set of procedural rules at all Under such circumstances courts will not be able to conclusively determine in the rst instance Whether class arbitration is available 138 See rwra notes 132735 and accompanying text 139 Hansberry v Lee 311 US 32 42745 1940 see also Phillips Petroleum Co v Shutts 472 US 797 812 1985 140 Mullane v Central Hanover Bank amp Trust 339 US 306 314 1950 see also Eisen v Carlisle amp Jacquelin 417 US 156 173774 1974 discussing the constitutional underpinnings of FED R CIv P 23c2 which requires notice to absent class members 141 Sl mttr 472US at812 ampn3 142 I do not purport to offer a comprehensive argument for Why these due process protections must be honored in arbitrationil assume and believe that they should be Others have offered a more detailed analysis See Sternlight rupra note 36 at 110717 surveying the due process issues arguing that arbitration agreemenw should not be deemed to Waive due process righw of absent class members and suggesting that some judicial participation in class arbitrations may be necessary to rotect due process rights of absent class members see also Note Clarrwide Arbitration Ef cient Adjudication or Procedrral Quagmire 67 VA L REV 787 800704 1981 discussing due process considerations implicated by class arbitration and arguing that certain procedural safeguards might be necessary to ensure that the arbitrator s decision would be enforced by a court Surely some will argue that by agreeing to arbitrate parties have Waived any due 2005 Beyond Unconscionability 1743 safeguards an arbitrator lacks the authority to bind absent class members unless he follows these procedures If the arbitration agreement requires that the arbitrator proceed according to a particular set of rules and those rules do not provide for procedures designed to protect absent class members then a court should not hesitate to conclude that the arbitrator lacks the authority to render an enforceable classwide award143 And if this means that consumers will not be able to meaningfully exercise their right to seek class certi cation from an authorized decisionmaker the court should refuse to compel arbitration on the ground that the forum lacks the authority to administer relief provided for by statute If however an authorized decisionmakerithe courtisubsequently determines that class treatment is not appropriate compelling arbitration might be appropriate at that point Thus a statutebased right to seek a certi cation decision from an authorized decisionmaker is almost certainly the strongestiand perhaps the onlyistatelaw weapon available to attack silent CAPs after Bazzle In the absence of such a right consumers facing arbitration in a forum that does not administer class proceedings probably must resort to the prohibitivecosts defense to arbitration established by Green Tree Financial Corp Alabama V process righw they would have had by virtue of membership in a class on Whose behalf an action has been led Professor Sternlight has offered a convincing rebuttal See Sternlight rupra note 36 at 11amp17 Courts have yet to face the more dif cult question of the validity of an explicit Waiver of these protections that appears in an arbitration provision contained in a form contract In addition to Waiver there is another potential argument that the procedural safeguards designed to protect absent class members need not be observed in arbitration Several courts have held that arbitration is private rather than state action and thus cannot be challenged for Want of the proceduml safeguards that due process requires of the judiciary See e g Davis v Prudential Sec Inc 59 F3d 1186 1191 11th Cir 1995 so holding cataloging similar conclusions reached by other courts and further rejecting the argument that a court s con rmation of an arbitration award constitutes state action But see Reuben rupra note 121 at 1006 positing that statutory schemes allocating the roles of courts and ADR providers can establish an inseverable and indispensable nexus between the seemingly private actors and their governmental partners such that private use of the procedure with the help of state of cials constitutes state actionm quoting Lugar v Edrnondson Oil Co 457 Us 922 933 1982 brackets in original 143 Once again a distinction must be made With respect to agreemenw that do not designate a particular set of rules to govern arbitration proceedings When the parties select an arbitrator Who is not constrained by a particular set of procedures the arbitmtor might devise classrelated procedures on an ad hoc basis As long as those procedures satisfy the requiremenw of due process any classwide relief the arbitrator awards may be conclusive as to absent class members Consider the following passage from Hamberry The Fourteenth Amendment does not compel state courts or legislatures to adopt any particular rule for establishing the conclusiveness of judgmenw in class suiw39 nor does it compel the adoption of the particukir rules thought by this court to be appropriate for the fedeml courts With a proper regard for divergent local institutions and interests this Court is justi ed in saying that there has been a failure of due process only in those cases Where it cannot be said that the procedure adopted fairly insures the protection ofthe interesw of absent parties Who are to be bound by it Hamberry 311 Us at 42 citations omitted emphasis added When however an arbitration agreement does specify that arbitration will proceed according to a particular set of procedural rules the arbitrator s latitude in devising ad hoc procedures is constrained if not eliminated 1744 Texas Law Review Vol 831715 Randolph144 As discussed above however this defense is difficult to estab lish and easily overcome by defendants145 Furthermore this defense focuses on the adequacy of the forum in relation to particular claims not the terms of a particular arbitration clause uniformly imposed upon a class of consumersm Accordingly while a plaintiff who successfully asserts a prohibitivecosts defense can proceed in litigation he likely could not bring class claims because unnamed class members would remain bound by the arbitration agreement until they could establish that arbitration would be cost prohibitive as to their particular claims All that wouldbe defendants need do to overcome this defense is agree to bear most or all of the costs associated with arbitration This businesssubsidized model may be the future of consumer arbitration unless state courts and legislatures recognize consumers right to utilize the class mechanism V Conclusion As one timeless songwriter lamented you don t know what you ve got til it s gone 147 Perhaps the use of arbitration as a class action shield will cause policymakers to seriously re ect upon what it is they value most about the class mechanism in the consumer conteXt If the utility of the class mechanism lies primarily in its ability to assure that ling fees will not prevent every injured consumer from seeking redress then the business subsidized arbitration that will likely emerge from the prohibitivecosts defense might be satisfying But many of the cases and statutes that I have discussed not to mention the preBazzle phenomenon of judicially compelled class arbitration demon strate that the consumer class arbitration issue has provoked an appreciation for the class mechanism that goes beyond ensuring that at least some individuals will vindicate their rights Recall that Connecticut s statute targets CAPs regardless of whether they are accompanied by other consumerbiased costallocation or remedystripping provisions Similarly Szetela did not condemn the CAPs in light of the costs of individual arbitration but rather out of a commitment to holding businesses accountable to their customers For policymakers who agree that the private attorney generally performs a valuable social function then defendantsubsidized individualized arbitration is an unsatisfying compromise The question remains whether consumerminded policymakers at the state level are willing to fashion what I have characterized as a statutory right 144 531 US 79 89792 2000 145 See 5147M notes 45746 and accompanying text See Randolph 531 Us at 89792 considering Whether the risk of high arbitration expenses precludes a plaintiff from pursuing her federal statutory claims in the arbitral forum 147 J ONI MITCHELL Big Yellow Taxi on LADIES OF THE CANYON Warner Bros 1970 2005 Beyond Unconscionability 1745 in consumers to obtain a certi cation decision from an authorized decision maker Without a doubt many legislators and judges would tend to equate this with a right to a class action This Note has attempted to demonstrate that such a right does nothing more than help to ensure that arbitration agreements cannot be used to eViscerate consumer protection laws iRobert S Safi


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