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Can A Mandatory Arbitration Clause
In A Consumer Contract Prohibit Arbitration On A Class-Wide Basis?
By E. Hutchinson Robbins, Jr.
Mandatory
arbitration provisions have become an increasingly common component of
many consumer contracts. Some arbitration clauses prohibit the use of
the class action procedure in arbitration while others are silent on
that issue. Either way, the ability of consumers to bring class action
arbitration is at the forefront of the dispute regarding the
enforceability of mandatory arbitration provisions in consumer
contracts. While no reported Maryland decision appears to address the
issue of whether an arbitration provision in a consumer contract may
prohibit the use of the class action procedure, there are reasons to
believe that the Court of Appeals would, sans other factual
circumstances amounting to unconscionability, uphold such a provision.
In Green
Tree Financial Corp. v. Bazzle, the Supreme Court was faced with
the issue of whether consumers may bring a class action arbitration
proceeding if the underlying arbitration agreement is silent on that
issue. In a plurality opinion, the Court held that the arbitrator,
applying state law, should make the decision. However, the Court’s
several opinions in Bazzle offer a somewhat muddled roadmap for
assessing how arbitration clauses that forbid class actions will be
treated in the future.
In Bazzle,
a commercial lender and its customers entered into a loan agreement
that included a clause stating that all “disputes, claims or
controversies” relating to the agreement would be resolved by binding
arbitration. The customers filed suit in South Carolina state court
against the lender, alleging that the lender failed to provide them
and other customers with a legally required form. The plaintiffs
requested that the court certify their claims as a class, and the
lender requested the court to compel arbitration on a non-class basis.
In response, the court both compelled arbitration and ordered that the
arbitration go forward as a class action. After the South Carolina
Supreme Court affirmed the class status, the lender appealed to the
United States Supreme Court.
The Supreme
Court’s four-justice plurality decision stated that it was up to the
arbitrator to decide whether an arbitration agreement allowed for
class-wide claims. Although they rejected the argument that class
action arbitration is unavailable whenever the agreement is silent on
the issue, it appears from the opinion that these justices would agree
that an arbitration provision could specifically and expressly forbid
class action arbitration and would uphold an arbitrator’s or state
court’s holding to that effect. The three dissenting justices stated
that the Federal Arbitration Act controlled the interpretation of the
arbitration agreement and that the Supreme Court could determine what
it meant. Consequently, they opined that the arbitration agreement was
not indeed silent on the issue, but in fact precluded the use of the
class action mechanism. In light of this precedent regarding
arbitration provisions that are silent as to the availability of a
class action, how would Maryland’s courts rule on the enforceability
of an arbitration provision that forbade class action arbitration?
One of the
principal arguments against the prohibition of class actions in the
arbitration process is that such provisions deny consumers access to
legal remedies afforded them under state law and are thus procedurally
and substantively unconscionable. The notion that a consumer contract
should not be interpreted to deprive consumers of the right to assert
claims as a class that would be too small or expensive to assert on an
individual basis, however, has been rejected by the Court of Appeals
of Maryland. In Gilman v. Wheat, First Securities, Inc., the
Court of Appeals enforced a forum selection clause in a securities
brokerage contract that required claims be litigated in a jurisdiction
(Virginia) that lacked a class action mechanism. The court rejected
the plaintiff’s argument that because Virginia did not have a class
action mechanism he would be denied an adequate remedy. The Court
noted that the unavailability of a class action mechanism does not
violate the public policy of Maryland and stated that “[w]e are
unaware of any case – and none has been cited to us – in which the
unavailability of a class action procedure, either generically or in a
particular case, has been regarded as sufficient to render an
otherwise valid forum-selection clause unenforceable.” The Court’s
reasoning in Gilman could readily be transferred from its
application to a forum selection clause that effectively deprived the
consumer of the procedural mechanism of a class action to an
arbitration provision that did the same. Whether an analogy to
Gilman would carry the day for a party seeking to enforce
arbitration on an individual basis, however, remains to be seen.
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