Class action, accepted as an extraordinary but acceptable procedure in the US, still instils a touch of fear in European lawyers. Over the past 20 years, the US has developed a system of class arbitration whereas, in Europe, class arbitration provisions are rare. Is it time for this to change?
Roman Khodykin considers class arbitration and whether it has a place in Europe as a mechanism for determining mass claims. A fuller version of this article appeared in Contemporary Issues in International Arbitration and Mediation: The Fordham Papers 2013 edited by Arthur W. Rovine.
The concept of class action has its roots in the “Bill of Peace”, a procedural device first employed by the Courts of Chancery in 17th century England. The Bill of Peace was used for legal disputes involving multiple parties that shared common aspects. It allowed the English Court of Chancery to settle the rights of parties, a group known as the “multitude”, in one suit, in equity court. If the equity court allowed the matter to proceed as a Bill of Peace, the results of the suit would bind all members of the “multitude,” whether they actually appeared in the case or not. In England, the procedure has been replaced with representative action. In the US, the procedure was used in development of class action litigation.
Europe is a huge market, benefiting from free movement of goods and services, with close to half a billion customers. As business becomes increasingly international, it becomes more and more important to have an efficient system in place for resolving mass claims. However, the approach taken to collective redress differs across the EU member states and, whilst the EU Commission has been working for several years on developing European standards of collective redress, these are yet to be implemented.
Could class arbitration offer an effective alternative to class litigation?
The advantage of class arbitration is that a procedure could be designed free from interference from Member States. If that procedure were more efficient and user-friendly than class litigation, it could attract considerable support.
Class Arbitration has already been introduced, and is gaining momentum, in the US. The American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Services (JAMS) have both introduced rules allowing class arbitrations and, to date, the AAA has administered more than 300 class arbitrations.
In Germany, a leading arbitral institution has adopted class arbitration rules for corporate disputes. The DIS Supplementary Rules for Corporate Law Disputes 2009 give all concerned shareholders the right to join the proceedings whilst providing for the binding effect of the award on the shareholders.
What form should class arbitration proceedings take?
European efforts to introduce class action have proceeded on the premise that any European system of collective redress should be based on an “opt-in” model as opposed to the US style “opt-out” model. The majority of commentators believe that it is against European principles of individualized justice to allow “opt-out” procedures in Europe. It is argued that an “opt-in” procedure is necessary to ensure that all participants in the action are aware of, and have consented to, having their rights bound by the class representatives.
Some commentators believe that a hybrid system for class arbitration should be designed and introduced in Europe to avoid the problems that have arisen in US-style class actions. That system would ideally require:
- An express agreement to arbitrate and an “opt-in” mechanism to ensure consensual proceedings;
- Flexible discovery procedures;
- Approval by an external agency before filing to prevent frivolous actions;
- Procedural bifurcation between class certification stage and the hearing of the merits with different arbitrators for each stage to prevent bias in favour of certifying a class;
- Fee-shifting provisions to deter the filing of meritless claims; and
- Capped punitive damages for intentional or reckless infliction of harm to deter potential wrongdoers and to provide an incentive for small claims claimants to opt-in to class arbitration.
There are significant challenges in designing an effective class arbitration procedure. However, the US experience demonstrates that it is possible to introduce rules allowing class arbitrations and there is no reason why this could not be achieved in Europe. The concept of class action has its roots in Europe and, with the continued growth of the European market, now may be the time to overcome the traditionally hostility to class actions and to introduce a European system of class arbitration.