U.S. Supreme Court to settle split over class arbitration

Dispute Resolution Journal, Feb-Apr 2003

ADR News

A split between state and federal courts over the pursuit of class arbitrations under arbitration agreements that are silent on the matter will be resolved by the U.S. Supreme Court.

In January the high court said it would review the South Carolina Supreme Court's decision to allow a class arbitration to proceed against Green Tree Financial Corp., despite the absence of any authorizing provision in the arbitration agreement. The opinion followed the reasoning of the Supreme Court of California, to the effect that a court has inherent authority to order a classwide arbitration.

Four federal courts of appeals have ruled otherwise, concluding that the Federal Arbitration Act prohibits a judge from ordering a class arbitration when the parties' agreement is silent on the matter.

The case before the Supreme Court, Green Tree Financial Corp. v. Bazzle, arose from two sets of claims against Green Tree that related to home-financing contracts. In the first case, led by Lynn and Burt Bazzle, the Georgia trial court simultaneously certified a class action against Green Tree and granted the company's motion to compel arbitration on a class basis. Potential claimants could opt out of the proceeding. The arbitrator found in favor of the class and ordered Green Tree to pay 1,899 individuals a total of $14 million for damages and fees. An appeals court affirmed the award in September 2000.

In the second case, led by Daniel Lackey, the trial court refused to enforce the arbitration agreement, but the parties later entered into a consent agreement appointing the same arbitrator that heard the Bazzle's case. The arbitrator subsequently issued an order permitting class-action arbitration and ultimately ordered Green Tree to pay $12 million in damages and fees.

Green Tree appealed both awards, arguing that the trial court and the arbitrator did not enforce the arbitration agreement according to its terms, since it did not include any reference to class actions. According to the company, Section 4 of the FAA strictly requires arbitration according to the terms of the governing agreement.

But the South Carolina Supreme Court said there is disagreement whether Section 4 of the FAA applies to state courts because that provision specifically refers to petitioning a federal district court for enforcement of an arbitration agreement. The court then concluded that a state court may rely on other law to find in favor of class actions in arbitration, and "may order consolidation of claims subject to mandatory arbitration without any contractual or statutory directive to do so." It went on to say that since appropriate claims may be consolidated even where the arbitration agreement is silent, "it follows that this Court would permit class-wide arbitration." In its view, "ordering classwide arbitration calls for considerably less intrusion upon the contractual aspects of the relationship."