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In the face of an unconscionability challenge, a Kentucky federal court upheld an arbitrator’s determination that an arbitration agreement, though silent on the issue, did not permit class-wide proceedings where the arbitration rules would not allow him to exercise jurisdiction over unnamed persons.
In Lockman v. J.K. Harris & Co., No. 3:06-CV-258-H, 2007 WL 734951 (W.D. Ky. Mar. 6, 2007), Paul and Karen Lockman went to J.K. Harris for advice and assistance on resolving their IRS tax liability. The parties’ contract contained an arbitration agreement whereby any disputes would be resolved through binding arbitration in accordance with the National Arbitration Forum Code of Procedure.
The Lockmans were dissatisfied with the service provided and thus filed a claim against J.K. Harris with the National Arbitration Forum (FORUM). During arbitration, the Lockmans sought to amend their claim to add class-wide allegations. The arbitrator denied that request on the ground that the FORUM Code of Procedure did not authorize him to exercise jurisdiction over unnamed persons.
After the arbitrator denied their request, the Lockmans brought a putative class action in court. J.K. Harris moved for dismissal pursuant to the arbitration agreement. In opposing dismissal, the Lockmans argued that the arbitration agreement, as construed by the arbitrator, was unconscionable and therefore unenforceable.
As an initial matter, J.K. Harris argued that the Lockmans waived any right to challenge the validity of the arbitration agreement by pursuing their claim in arbitration. In rejecting this argument, the Court explained that a court ruling “on the issue of unconscionability would have been premature prior to an arbitrator’s finding that the [arbitration agreement] prohibits class action proceedings.”
On the unconscionability issue, the Lockmans argued that since the arbitration agreement was silent on the issue, the bar on class-wide proceedings was concealed and thus procedurally unconscionable. The Court rejected this argument by observing that “silence regarding the availability of class arbitration is best construed as a prohibition of it.”
Turning to the issue of substantive unconscionability, the Court found that the dollar amount of the Lockmans’ claim – anywhere from $3,500 to $150,000 depending on the applicability of the contract’s liability limitations – gave them sufficient incentive to arbitrate the claim on an individual basis. Accordingly, the Court held that the bar on class-wide proceedings was not unconscionable.
As the Court noted, other ADR service providers, including the American Arbitration Association (AAA), have adopted procedural rules governing class-wide arbitrations. The adoption of such rules invariably leads to the conclusion that class-wide arbitration is permissible regardless of any caveat to the contrary.
For example, Rule 3 of AAA’s Supplementary Rules for Class Arbitrations contains the following caveat: “In construing the applicable arbitration clause, the arbitrator shall not consider the existence of these Supplementary Rules, or any other AAA rules, to be a factor either in favor of or against permitting the arbitration to proceed on a class basis.”
However, in a recent AAA arbitration, the arbitrator construed an arbitration agreement as permitting class-wide arbitration based largely on AAA’s provision of rules for class-wide arbitration. Specifically, the arbitrator explained: “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 Groves and Hemet Manufacturing Co., AAA Case No. 11 160 00194 05, Clause Construction Award, at 5 (Nov. 28, 2005); see also 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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