Major arbitration firm won't enforce clauses barring class actions.

Judicial Arbitration and Mediation Services (JAMS), one of the nation's largest private alternative dispute resolution (ADR) companies, recently announced that it will no longer enforce provisions in consumer contracts that prohibit class action arbitration. In a statement announcing the policy, JAMS called on companies to remove class-action preclusion clauses from contracts, "understanding that the inclusion of such clauses is an unfair restriction on the rights of the consumer."

Plaintiff attorneys applauded the move, saying it would restore important legal rights to consumers. "It's a very principled, balanced, and fair rule," said Stuart Rossman, litigation director at the National Consumer Law Center in Boston.

"If you're going to apply arbitration rules, you should apply them consistently. I believe that the arbitrator--in this case JAMS--has the right to determine that access to the class action mechanism is a consumer right that can and should be vindicated in arbitration as well as in litigation."

F. Paul Bland Jr., an attorney with Trial Lawyers for Public Justice in Washington, D.C., called the JAMS policy "an extremely exciting and positive development."

Corporate lawyers--predicting that consumers who have a choice of arbitrators will now choose JAMS move often--are cautioning clients to review their contracts to determine whether JAMS is listed among the administrators available to arbitrate disputes, and, if so, to consider dropping it.

"It's fairly common" for companies to include a list of administrators that a consumer can choose from if they decide to bring a claim, said Kirk Jensen, a lawyer in Charlotte, North Carolina, who helps businesses draft and enforce arbitration agreements. His firm "is advising clients to consider very carefully whether or not they want to allow JAMS to be a possible arbitration administrator," he said.

The new JAMS policy includes in its definition of "consumer" those employees who are bound by mandatory predispute arbitration agreements.

Under the new policy, JAMS will require a consumer bringing an individual arbitration claim to waive objection to any class action preclusion clause in the agreement that is in dispute. If the consumer does not waive the preclusion, JAMS will not take the case. If the matter comes to JAMS as a class action arbitration based on a contract that has a preclusion clause, the company will not enforce the clause.

Jay Welsh, JAMS general counsel and vice president, said the company adopted the new rules in part to ensure uniformity and fairness in the arbitration process.

"We have always had minimum standards of fairness," Welsh said. "We felt it was appropriate for us to address this issue because we were seeing clauses that, frankly, were all over the place."

Welsh said the JAMS committee that issued the new arbitration rules also noted a lack of consistency among judicial opinions on the enforceability of class action preclusion clauses. "There are conflicting decisions in various jurisdictions with regard to preclusion clauses, and we thought it was appropriate to adopt a policy for us that we could be comfortable with on a nationwide basis." Welsh said.

Courts in several jurisdictions--including Florida, Ohio, West Virginia, and the federal Ninth Circuit--have voided class action preclusion clauses as "unconscionable." However, courts in other jurisdictions--including Texas and the Third and Eleventh Circuits--have enforced arbitration agreements that contained these clauses.

Also, the California Supreme Court is considering whether the Federal Arbitration Act preempts its courts from applying California law to strike agreements barring class action arbitration. (Discover Bank v. Super Court of Los Angeles County, 129 Cal. Rptr. 2d 393 (Ct. App.), review granted, 65 E3d 1285 (Cal. 2003).)

In 2003, the U.S. Supreme Court ruled that when an arbitration agreement is silent on whether class action relief is available, the decision should be left to the arbitrator. (Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003).) Welsh said the JAMS policy reflects that holding.

An addendum clarifying the policy notes that "under Bazzle, the arbitrator has the authority to determine whether the arbitration can proceed as a class action. Neither JAMS nor any other ADR administrator has the authority to dictate a result to the arbitrator."

The policy and the addendum are available on the JAMS Web site at www.jamsadr.com (click on "JAMS Policy Regarding Use of Class-Action Preclusion Clauses in Consumer Cases" on the left side of the page).