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In reversing a lower court ruling that an arbitration agreement was unconscionable because of its silence on the availability of class-wide proceedings, the Oregon Court of Appeals held that the availability of class-wide proceedings is a question for the court if the agreement’s silence on the issue is the basis for an unconscionability challenge. Moreover, the Court found that the agreement permitted class-wide proceedings because the designated administrator, the American Arbitration Association, has implemented a policy whereby it will administer demands for class arbitration if an agreement is silent on the issue.
In Sprague v. Quality Restaurants Northwest, Inc., No. A131182, 2007 WL 1829401 (Or. Ct. App. June 27, 2007), Sprague brought a putative class action for unpaid wages against her former employer, Quality Restaurants. Quality Restaurants moved to compel arbitration pursuant to an arbitration agreement that was silent on the availability of class-wide proceedings. In opposing the motion, Sprague argued that the silence on class-wide proceedings rendered the arbitration agreement unconscionable and therefore unenforceable. The trial court denied the motion.
On appeal, the Court started with a discussion of Oregon’s case-by-case approach to unconscionability, explaining that “both procedural and substantive unconscionability are relevant” but “only substantive unconscionability is absolutely necessary.” In examining the arbitration agreement at issue, the Court found a modicum of procedural unconscionability – arising from the disparate bargaining power and “take-it-or-leave-it” nature of the agreement – and turned to the pivotal question of substantive unconscionability.
The trial court ruled that the arbitration agreement was substantively unconscionable because the agreement’s silence on the availability of class-wide proceedings gave rise to the possibility that the arbitrator would disallow class-wide proceedings, thus diminishing an attorney’s incentive to take the case. The Court viewed this ruling as an erroneous interpretation of Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), in which a plurality of the Supreme Court held that if an arbitration agreement is silent on the issue, the arbitrator, not the court, must decide whether the agreement forbids class-wide arbitration.
According to the Court in this case, Bazzle does not apply when a party is arguing that an arbitration agreement is unconscionable by virtue of its silence on class-wide proceedings, because under that scenario, the availability of class-wide proceedings is subsumed by the larger question of whether the arbitration agreement is unconscionable. The Court reasoned that under that scenario, where the validity of the arbitration agreement is at issue, the court must decide whether the agreement permits class-wide proceedings.
Thus turning to the question of whether the agreement permitted class-wide proceedings, the Court noted that the arbitration agreement designated an administrator, the American Arbitration Association (AAA), which has a policy on class-wide arbitration whereby it “will administer demands for class arbitration pursuant to its Supplementary Rules for Class Arbitrations if . . . the agreement is silent with respect to class claims, consolidation or joinder of claims.”
The Court relied on that policy in holding that the arbitration agreement permitted class-wide arbitration. Specifically, the Court stated: “We therefore conclude that the trial court could have reached only one legally correct conclusion: because the arbitration agreement invoked the rules of the AAA and was silent with respect to class claims, the arbitrator would have decided that class claims were permitted. That being the case, the arbitration agreement itself permitted class claims.”
This case is not the first instance in which the AAA’s promulgation of class arbitration rules has led to the conclusion that class-wide arbitration is permissible under an arbitration agreement silent on the issue. See In re Groves and Hemet Manufacturing Co., AAA Case No. 11 160 00194 05, Clause Construction Award, at 5 (Nov. 28, 2005) (“Because Respondent expressly provided for administration of its employment contract by AAA, it also must consent to the rules promulgated by AAA. Although the Agreement itself is silent on whether a class action may be maintained, the rules it incorporates allow such an action.”); In re Goldstein and Ibase Consulting of Fairfield County, LLC, AAA Reference No. 11 160 02760 03, Clause Construction Award, at 2 (Mar. 29, 2004) (“Therefore, although the employment contract itself is silent on whether a class or collective action may be maintained, the rules it incorporates allow such an action.”).
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