Group, class and collective arbitration

Introduction

Group arbitration can offer certain advantages over class litigation (not least, the ability to enforce awards across multiple jurisdictions).  However the consent-based nature of arbitration can lead to jurisdictional obstacles for such claims. This article explores the U.S. line of authorities dealing with group arbitration of commercial disputes, one of the most developed globally.  It also compares the approach taken in investor-state arbitration – an increasingly hot topic particularly given the more permissive approach to group arbitration taken by tribunals in the reported cases to date.

Group arbitration – ‘class’ versus ‘collective’ and other foundational aspects

It is important to distinguish between two types of group arbitration. Collective arbitration (by which term we refer to any joint, consolidated or mass arbitration) is a procedure allowing a group of similarly-situated claimants to pursue identical or related claims in a single action. By contrast, class arbitration is an arbitration brought by a class representative asserting claims on its own behalf and on behalf of similarly-situated (absent) class members. Whereas collective arbitrations bind absent parties only if they opt in, class arbitrations bind absent parties unless they opt out.  

Group arbitration stems from the same economic imperative that drives class actions in the litigation context. When a party bound by an arbitration agreement has a claim of relatively low value that does not justify the cost or burden of commencing an individual arbitration, that party may benefit from joining others with similar claims to advance those claims in a single arbitration, thereby splitting the cost of the proceeding among all claimants instead of each claimant having to commence and pay for its own arbitration. Assuming that some of the individual claimants would have proceeded on an individual basis notwithstanding the costs, proceeding on a group basis may have additional benefits stemming from the avoidance of multiple parallel proceedings against the same defendant (such as avoiding duplicative discovery and briefing and inconsistent awards). Further, group arbitration may have advantages over class litigation, notably in respect of selecting a specialist neutral, tailoring procedure to the particularities of the case and enforcing the award across multiple jurisdictions. Group arbitration may therefore represent real and effective access to justice versus a theoretical or notional right to commence arbitration that cannot be exercised in any practical or realistic way.

Even so, the putative efficiencies of group arbitration often come up against a roadblock embedded in the very foundation of arbitration: the notion of consent. The issue of a collective or class arbitration is straightforward where parties have expressly consented to proceed as such:  there can be no objection by a respondent to a claimant bringing such a proceeding. More typically, however, claimants have attempted to bring a collective or class arbitration based on a standard arbitration clause, which is silent on the issue.  

Under the legal framework for arbitration, strictly speaking, the only parties who can take part in an arbitration are the parties who are bound by the same arbitration clause in the same agreement. Thus, in these circumstances, there is a tension between any efficiency rationale favoring group arbitrations and the consent-based framework governing arbitration.

In the commercial context, the United States has grappled with this tension the most and has adopted a relatively strict approach. By comparison, group arbitrations in the investor-state context have generally adopted a more permissive approach.  Recent developments in each of these contexts are described below.

Commercial class arbitration in the United States

U.S. courts have recognized that by consenting to arbitrate their disputes, parties to an arbitration agreement select the benefits of private dispute resolution by foregoing comprehensive judicial procedures and substantive appellate review. Under the U.S. Federal Arbitration Act (FAA), the United States’ primary arbitration statute, U.S. courts place arbitration agreements on an equal footing with other contracts and enforce them according to their terms.  The contractual requirements for class arbitration, however, have been subject to additional scrutiny.  

Historically, U.S. courts generally maintained a strict approach to interpreting arbitration clauses and rejected attempts by claimants to bring collective or class arbitrations unless the parties’ arbitration agreement expressly provided for it.  In the early 1980s, some courts began to favor class arbitrations, reasoning that economic efficiency and effective access to justice justified avoiding the unfair result of forcing numerous individual parties to litigate individually in separate arbitral fora. 

The pro-class arbitration trend arguably reached its pinnacle in 2003. In Green Tree Financial Corp. v. Bazzle 539 U.S. 444 (2003), the U.S. Supreme Court was asked to determine whether the FAA permitted class arbitrations when arbitration agreements were “silent” on the issue.  In a plurality opinion, the court held that absent express language to the contrary, whether an arbitration agreement authorizes class arbitration is an issue for an arbitrator to decide.  On the underlying facts of the case, the court vacated the state Supreme Court’s judgment and remanded the case so that the arbitrator could determine whether the parties’ arbitration agreement was actually “silent” on the availability of class arbitrations.

The Bazzle decision led to a substantial increase in class arbitrations in the U.S.  By remanding cases for further proceedings, courts were signaling that class arbitrations were not necessarily inconsistent with the FAA and that the availability of class arbitration depended on the terms of the parties’ arbitration agreement. Subsequent decisions from the U.S. Supreme Court, however, clarified and curtailed the availability of class arbitration.

In Stolt–Nielsen S.A. v. AnimalFeeds International Corp. 559 U.S. 662 (2010), the U.S. Supreme Court addressed the question it had not reached in Bazzle and held that a party may not be compelled to submit to class arbitration if the parties’ agreement is “silent” on the issue. The court reasoned that a shift from bilateral arbitration to class arbitration is a fundamental change to the “nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.” Thus, consent to arbitrate a dispute, without more, is not consent to arbitrate a dispute on a class basis, and the parties’ arbitration agreement must explicitly authorize class arbitration or class procedures.

More recently, the U.S. Supreme Court has restricted access to class arbitration even further.  In Lamps Plus, Inc. v. Varela 139 S. Ct. 1407 (2019), the court held that “ambiguous” arbitration agreements do not provide the necessary contractual basis to compel class arbitration.  Relying on Stolt-Nielsen, the Court found that “[l]ike silence, ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice[ ] the principal advantage of arbitration’” by agreeing to class arbitration.

Recent cases point to at least one way in which parties might access class arbitration: incorporation into their arbitration agreement of arbitration rules that give judges a basis to determine that it is up to the arbitrator to decide, in what seems like a throwback to the approach adopted in Bazzle.  In Blanton v. Domino’s Pizza Franchising LLC,¹  the Sixth Circuit held that incorporation of the AAA National Rules for the Resolution of Employment Disputes (AAA Employment Rules), which provide that an arbitrator shall have the power to rule on his or her own jurisdiction, “clearly and unmistakably” demonstrated that the parties agreed to arbitrate “arbitrability.” (962 F.3d 842 (6th Cir. June 17, 2020), cert. denied sub nom. Piersing v. Domino’s Pizza, No. 20-695, 2021 WL 231566 (U.S. Jan. 25, 2021).  To the same effect, see also Sun Coast Resources, Inc. v. Conrad, 956 F.3d 335 (5th Cir. April 16, 2020)).  The Sixth Circuit also found that the AAA Employment Rules, by extension, empowered the arbitrator to decide whether the arbitration would proceed as a class arbitration, which the Court ruled was an issue of arbitrability.

Group arbitration in Investor-State Dispute Settlement

In the investor-state context, four group arbitrations have been initiated under the ICSID Rules: the three “Argentine Bondholder Cases” (Abaclat v. Argentina, Ambiente Ufficio S.p.A. v. Argentina, and Alemanni v. Argentina) and the more recent Adamakopoulos v. Cyprus.

The Argentine Bondholder Cases arose from Argentina’s default on its foreign sovereign debt during its 2001 financial crisis and involved claims brought by Italian nationals under the Argentina-Italy BIT. In each arbitration, Argentina raised preliminary objections to the tribunal’s jurisdiction and admissibility of mass claims. It argued that its consent to arbitrate under the Argentina-Italy BIT did not encompass mass claims and that each tribunal lacked the power under the ICSID Convention and Rules (ICSID Framework) to adopt procedural measures addressing the mass nature of the proceedings while preserving the parties’ due process rights.  

With respect to jurisdiction, the Abaclat and Ambiente tribunals concluded (each by majority) that Argentina’s specific consent to mass claims was unnecessary because the ICSID Framework contemplated multi-party claims, a respondent’s specific consent was not necessary in multi-party proceedings and a tribunal’s jurisdiction over multi-party claims was not lost when the number of claimants surpassed a certain threshold. Diverging in its reasoning from the Abaclat and Ambiente majorities, the Alemanni tribunal held that a single “dispute” must be found to exist for the mass claims to proceed.

With respect to admissibility, the Abaclat majority found that under the ICSID Framework, a tribunal possesses the necessary powers to adapt existing procedures to ensure that mass claims proceed efficiently and preserve the parties’ due process rights.  It held that a mass claim was acceptable where the claims raised by multiple claimants were identical or sufficiently “homogeneous.” The Ambiente majority, as well as the Alemanni tribunal, agreed that the ICSID Framework allowed them to devise a procedure to accommodate the mass claims but deferred finding whether the underlying claims were “homogenous” or “sufficiently comparable” until a later stage in their respective proceedings.  Before having an opportunity to determine the admissibility of the claims, both the Ambiente and Alemanni arbitrations were discontinued.

More recently, in Adamakopoulos v. Cyprus, a majority of the ICSID tribunal held that it had jurisdiction to hear a mass claim by 956 Claimants against Cyprus. The Claimants, holders of financial assets in Cypriot banks, alleged that they incurred losses from their exposure to the Greek economic downturn and that Cyprus’s measures in response to the downturn violated its obligations under applicable BITs.  In response, Cyprus argued, in relevant part, that proceeding as a mass arbitration was (i) outside the Tribunal’s jurisdiction, (ii) inadmissible and (iii) unsupported by party consent.  

Regarding jurisdiction, the Tribunal found that that the large number of claimants did not preclude jurisdiction because it had jurisdiction over “a dispute” under the ICSID Convention and BITs. Following Alemanni, the Tribunal found that the core issue was whether the individual claims constituted a “single dispute.” It found that there was “substantial unity” in the claims and harms alleged. It reasoned that the BITs under which the claims were brought invoked almost identical broad expressions of consent, the claims were based on the same substantive allegations of illegality, the relief requested was a common declaration of liability, and the factual background among the claims was “identical or essentially the same.”

Regarding admissibility, the Tribunal concluded that the case was manageable under the ICSID Rules, that the parties’ due process rights would be preserved, and that the mass claims were admissible. After considering certain procedural issues, the Tribunal concluded that the claims were admissible as a mass claim, subject to certain conditions being implemented to preserve the parties’ due process rights, such as potentially fixing the claimant pool, bifurcating the proceedings, and awarding security for costs to Cyprus.

Regarding consent, again following Alemanni, the Tribunal found that Cyprus’s consent to the consolidation of claims was unnecessary for the mass claim to proceed. It noted that there was no consolidation of claims in this case because a plurality of claimants agreed to proceed jointly as a single claimant party and that neither BIT contained language requiring additional party consent for the consolidation of claims.  

In short, while there exist substantial barriers to group arbitration in both the commercial and investor-state contexts, the mechanism may be available in the right circumstances.