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Tuesday, September 23, 2014

Preclusion in Arbitration as a Replacement for Class Actions

Arbitration agreements often require individual, rather than class, adjudication.  This can make it harder for plaintiffs' lawyers to bring small claims cost-effectively.  Ideas for plaintiffs' lawyers are well articulated by Cardozo Law Professors Myriam E. Gilles & Anthony J. Sebok in their paper
Crowd-Classing Individual Arbitrations in a Post-Class Action Era.  I must say some of these ideas occurred to me (when I was an expert witness in a case involving arbitration agreement's effect on small claims) and others, but I don't think anyone explains them as well or as thoroughly as Gilles & Sebok do. Really useful scholarship.

Their Abstract:

Class actions are in decline, while arbitration is ascendant. This raises the question: will plaintiffs’ lawyers skilled in bringing small-value, large-scale litigation – the typical consumer, employment, and antitrust claims that have made up the bulk of class action litigation over the past forty years – hit upon a viable business model which would allow them to arbitrate one-on-one claims efficiently and profitably. The obstacles are tremendous: without some means of recreating the economies of scale and reaping the fees provided by the aggregative device of Rule 23, no rational lawyer would expend the resources to develop and arbitrate individual, small-value claims against well-heeled defendants. But despite these complications, we think there are at least two possible models that might allow for informal aggregation of like claims in at least some subset of cases.

One hybrid model would seek a judicial liability judgment upon which serial, individual arbitrations could later rely. This judgment could take a number of different forms – whether a declaratory class action judgment or a decision rendered in a public enforcement action – so long as it has preclusive force that can be leveraged in subsequent arbitration hearings. A second, complementary model envisions “arbitration entrepreneurs” (either lawyers or non-lawyers) purchasing legally-identical, individual claims which our legal capitalists believe to have value in the arbitral forum. Upon procuring as many discrete claims as the market will bear, the arbitration entrepreneur would seek to resolve the hundreds or even thousands of claims she has amassed in a single arbitral session. With one arbitration entrepreneur as the lawful owner of a multitude of claims, this form of aggregation implicates neither the prohibition against class arbitration nor the contractual definition of “a claim” subject to arbitration.

The hybrid model and the claims-buying model may work independently or synergistically, depending on the case, the form that the public declaration of liability takes, and the incentives of the lawyers and entrepreneurs involved. For example, in the appropriate case, claims-buying entrepreneurs may determine that a (b)(2) declaratory judgment class action creates more and better opportunities to bundle and capture claims than market forces alone. Similarly, lawyers who obtain a judgment under the hybrid approach may determine that the best way to monetize this victory is to buy up many claims for collective arbitration. Indeed, these models present a host of possibilities, and an equal number of potential challenges; this paper is but a first step in describing and analyzing the benefits and costs of these approaches.

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