Arbitration firm withdraws controversial class action policy.

Judicial Arbitration and Mediation Services (JAMS), a major provider of alternative dispute resolution (ADR) services nationwide, has backed down from a decision it announced last November to no longer enforce provisions in consumer contracts that prohibit class action arbitration. In a recent statement, the California-based firm said it will revert to its original policy, which is to "apply the law on a case-by-case basis in each jurisdiction."

JAMS said it was withdrawing the policy because some people were concerned that it "had deviated from its core value of neutrality" and because of "confusion about how the policy would be applied."

Critics of the reversal argue that JAMS responded to economic pressure from corporations.

In a letter to JAMS, Janet Hill, president of the National Employment Lawyers Association (NELA), said, "We are deeply disturbed by your willingness to do something you did not think was right because of financial pressure from the corporate bar, and we are especially concerned about the way you have mischaracterized your policy reversal. The message and priorities you are conveying to your neutrals and the public are positively chilling."

Cliff Palefsky, a San Francisco employment lawyer, agreed. "The implications of this are profound because JAMS has historically been the best and most ethical provider," he said. "If even JAMS, who went so far as to issue a press release saying we think these clauses are unfair, was forced to cave into financial pressure, that has profound implications for the entire justice system because it means no one is safe."

But JAMS said it did not succumb to financial pressure when it made the change. According to JAMS spokesperson Michele Apostolos, consumer matters make up less than 3 percent of the thousands of cases JAMS hears every year, and the loss of this business would not have a significant financial impact.

Consumer advocates say class action waivers give businesses a form of immunity from small claims and most consumer claims. "What business can't achieve through legislation, it is trying to achieve through do-it-yourself tort 'reform,'" Palefsky said.

The law on class action preclusion clauses is unsettled. Some courts have voided the clauses as unconscionable, while others have enforced them. The U.S. Supreme Court has not addressed this issue directly, but in 2003 it ruled that an arbitrator--not the court--should decide whether class action relief is available if an arbitration agreement is silent about the matter (Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003).)

When JAMS made the policy change last November, it "anticipated that the courts would move in the direction of declaring these clauses unconscionable and therefore unenforceable," Apostolos said. "In fact, the courts have been moving in disparate directions on this issue. Therefore, it is not possible to administer these cases in a uniform manner throughout the country, and there are strong convictions on each side of the bar about whether these clauses are unfair and unconscionable."

Alan Kaplinsky, a Philadelphia lawyer who defends banks and other consumer financial services companies in class actions, believes "JAMS wisely recognized the error of its ways" when it retracted the class action policy. The new policy is much better, Kaplinsky says, but it still leaves questions unanswered: "JAMS is saying it will be bound by whatever the law is in a particular case with respect to class action waivers. Who is going to make the determination as to what the law is? It's very vague."

In light of the uncertainty, Kaplinsky said, he could not recommend that his clients name JAMS as a potential arbitration administrator. "The consumers aren't happy and the industry still isn't happy because clients don't want to risk using an administrator that doesn't have a clear rule," he said.

Palefsky said the JAMS reversal "is the best proof ever that mandatory arbitration is a flawed system of justice, and there is a desperate need for legislative intervention to protect the American public."

Apostolos said JAMS is in the process of responding to feedback from all sides and will meet with organizations to explain its actions further.