Protecting Nonparty Class Members in Class Arbitrations

By Thomas A. Doyle

This article focuses on the implications for nonparty class members when class claims are arbitrated rather than litigated. Given that class cases require substantial investments of time and money—even in arbitration—plaintiffs, defendants, and arbitrators need to understand whether a class arbitration can lead to a binding, classwide resolution of the matter in dispute.

Composition of the class. The class definition in a class arbitration should be narrowly drawn to include only those who are bound by the arbitration clause. Arbitration clauses should expressly state whether the participants will be bound by class arbitration awards in proceedings where they are non­party class members. When drafting an arbitration clause or implementing an arbitration program, remember that disputes over the scope of the arbitration clause may turn on the language and history of the clause.

The manner in which the class is assembled can complicate class arbitration. Wage and hour claims brought under the Fair Labor Standards Act (FLSA) use an opt-in approach, requiring employees to file a consent to sue in order to be part of a collective action that will decide the workplace pay issues. Courts cannot certify an FLSA claim as an opt-out class under Rule 23(b)(3). But what if an FLSA claim is included in a demand for arbitration? The American Arbitration Association (AAA) rules do not provide for opt-in treatment of claims. Instead, they are patterned after the Rule 23 opt-out scheme. Thus, a dilemma: An FLSA claim cannot be handled on an opt-out basis, but if it is to be arbitrated under the AAA class rules, those rules only allow for opt-out classes. One court has addressed this issue, holding that the AAA rules trump the statutory procedure, even for FLSA claims.

Potentially difficult moments for class arbitrators. In federal class action litigation, the judge serves as a fiduciary for the class and may need to decide at important moments whether absent class members have been adequately represented. On occasion, judges overrule class counsel on matters that relate to the best interests of the nonparty class members. In a class arbitration, the arbitrator may face those same difficulties. These difficulties may give the arbitrator pause, precisely because the arbitrator has a different relationship to the parties. A few examples illustrate.

In litigation, when multiple parties file separate class actions involving the same subject matter, the presiding trial judge may have to decide which lawyer will serve as lead counsel for the plaintiffs. Imagine an arbitrator facing a similar contest over who will be class counsel—after adding the complicating facts that one of the candidates for class counsel helped select the arbitrator and has advanced arbitrator fees for the proceeding. The situation is rife with potential conflicts of interest.

As part of class certification, trial judges must make a finding on whether the plaintiff’s counsel is adequate to represent the absent class members. Sometimes that issue is contested. When an arbitrator makes a similar finding on the adequacy of plaintiff’s counsel, that finding could be attacked on the ground that the arbitrator has a conflict of interest because the arbitrator was appointed (in part) by the very same lawyer whom the arbitrator concluded is the best choice to serve as class counsel.

When a class action lawsuit settles, the trial judge plays a heightened role as guardian to make sure that class counsel are behaving as honest fiduciaries for the class as a whole. An arbitrator who has been retained and paid by the parties may find the role of guardian especially awkward.

Even after a settlement has been approved, the arbitrator may have to award fees to class counsel out of a common fund. Or the arbitrator may have to decide whether the fund should reimburse class counsel for arbitration expenses (including the arbitrator’s fees). These situations may give an arbitrator pause and prompt questions or objections from nonparty class members.

Independent (or uncooperative) nonparty class members. Practical problems arise if the nonparty class members do not automatically accede to the authority of the arbitrator. For example, an arbitrator may discover that another class proceeding has been filed involving the same or overlapping subject matter. An arbitrator does not possess all of the tools available to federal judges facing the same situation. That is, a federal judge may be able to use the transfer provisions from the multidistrict litigation rules or issue an injunction to bar the parallel proceeding.

A non-opt-out case presents another version of the same problem: Some classwide claims are best suited for resolution in a non-opt-out proceeding. Class litigation under Federal Rule of Civil Procedure 23(b)(1)(B), for example, is used to solve “limited fund” problems, in which a conflict arises because multiple claimants have a right to collect from a single fund, but the fund is insufficient to satisfy all claims against it. In such cases, a class action is used to prevent an unfair “first-come, first-served” payment scheme. Opt-outs are not allowed because the very nature of the legal problem requires a collective solution. If such a problem is arbitrated, it is unclear how an arbitrator can prevent nonparty class members from filing their own lawsuits (or arbitrations) to seek individualized relief.

Possible safeguards to consider. Although no single strategy will respond to these situations, there are a few steps that may help alleviate problems. First, consider foregoing arbitration. Sometimes, class action litigation may be a better alternative for a dispute. Second, engage an arbitrator with complex litigation experience. Insist on a written award, which may have greater legitimacy and more weight with nonparty class members who did not participate in the proceedings. Third, consider early judicial review of whether the class arbitration is proper. Fourth, consider expanding the scope of the notice campaign so that coverage is as broad as is practicable. Also, consider extending the length of time allowed for any response to a notice. Fifth, for due process concerns, the parties and counsel should make a record that the nonparty class members have been adequately represented. Guard against any suggestion of collusion. Some arbitration cases are more private and collaborative than federal litigation. That collegial approach is a strength in many arbitrations, but it can raise questions about a classwide settlement. The taint of collusion can doom a classwide settlement, and a precertification settlement in a class arbitration might be especially vulnerable to such accusations. Sixth, the final award should be narrowly tailored to reach only class claims that arise from the same factual predicate that formed the core of the named plaintiff’s claim. By thinking about these issues in advance, parties and arbitrators may be able to avoid problems.


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