Opinion
Withdrawn from bound volume because a motion for reconsideration is pending.
MEMORANDUM OPINION AND ORDER
HART, District Judge.
This putative class action was brought by two named plaintiffs, Alvin Champ and Esther Perera. Defendants moved to compel arbitration and dismiss the complaint. On February 27, 1990, an order was entered compelling arbitration of Perera's claims and denying arbitration as to Champ's claims. A Rule 54(b) judgment was entered on the claims of Perera. The motions to dismiss Champ's claims were denied except as to one aspect of one count. Plaintiffs had moved for certification of a class action, but the filing of defendants' response to that motion had been held in abeyance pending resolution of the arbitration issue. However, since Perera was being dismissed from the case and since Champ obviously did not qualify as an adequate class representative for the claims alleged in the complaint, the motion for class certification was denied without prejudice. The pending motion for class certification did not request certification of a class for arbitration.
Perera's arbitration agreement subjects the parties, their officers, agents and employees to arbitration of customer disputes before (1) the contract market (i.e., the Chicago Mercantile Exchange); (2) the National Futures Association; or (3) the American Arbitration Association. Defendants demanded that arbitration be before the American Arbitration Association.
Plaintiffs timely moved for reconsideration, seeking clarification of the ruling on Perera's motion for class certification. The order, however, is clear. It expressly states " plaintiff s ' motion for class certification is denied." Plaintiffs were apparently confused by the fact there was no discussion of certifying a class for arbitration. As already stated, the reason there was no such discussion was because plaintiffs had not moved for certification of such a class. In moving for reconsideration, plaintiffs clearly make such a motion and briefs on the merits of that question have now been filed. The issue is now ripe for ruling.
Although the class certification motion did not seek certification of such a class, plaintiffs' brief in opposition to arbitration referred to such a possibility and plaintiffs had referred to that possibility orally in court.
The first question to address is whether this court can certify a class for arbitration. The courts of California appear to be the only courts to have reached this issue, holding that certification of a class for arbitration is proper in appropriate circumstances. See Keating v. Superior Court of Alameda County, 31 Cal.3d 584, 645 P.2d 1192, 1214-1218, 183 Cal.Rptr. 360 (1982), rev'd on other grounds sub nom., Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984); Izzy v. Mesquite Country Club, 186 Cal.App.3d 1309, 231 Cal.Rptr. 315, 320-22 (1986); Lewis v. Prudential Bache Securities, Inc., 179 Cal.App.3d 935, 225 Cal.Rptr. 69, 75-76 (1986). On a distinct, but related issue, a substantial number of federal and state courts have ordered the consolidation of proceedings for arbitration. See Stipanowich, Arbitration and the Multiparty Dispute: The Search for Workable Solutions, 72 Iowa L.Rev. 473, 490 n. 82 (1987) (collecting cases). A minority of cases, a number of which involve consolidating proceedings with parties who did not contract for arbitration, have denied motions to order consolidation of proceedings for arbitration. See id. at 493 n. 103 (collecting cases).
The issue has also been addressed in the legal journals. See, e.g., Note, Classwide Arbitration & 10b-5 Claims in the Wake of Shearson/American Express, Inc. v. McMahon, 74 Cornell L.Rev. 380 (1989) ( " 10b-5 Claims " ); Note, Classwide Arbitration: Efficient Adjudication or Procedural Quagmire?, 67 Va.L.Rev. 787 (1981) ( " Efficient Adjudication " ).
Rule 81(a)(3) of the Federal Rules of Civil Procedure grants this court authority to certify a class for arbitration. That Rule provides, " In proceedings under Title 9, U.S.C., relating to arbitration, ... these rules apply only to the extent that matters of procedure are not provided for in those statutes." Since the Federal Arbitration Act is silent on the question of class proceedings, Fed.R.Civ.P. 23 applies when a party moves to compel arbitration. That, however, does not decide the matter. Despite there being authority to apply Rule 23, that Rule would not be applied if there were prudential reasons for not certifying classes for arbitration. As discussed below, however, no such reasons exist.
Rule 81(a)(3) only applies to judicial proceedings regarding arbitration; it does not apply to the proceedings before the arbitrator. See C.A. Wright & A. Miller, FEDERAL PRACTICE & PROCEDURE § 1015 at 66-67 (2d ed. 1987).
Defendants argue that certifying a class for arbitration is contrary to the rule that a court is not to interfere with the merits of the dispute once it is determined there is an enforceable arbitration agreement. However, certification of a class for arbitration does not produce such a result. The certification process is a preliminary matter. If class proceedings are found to be appropriate, the case will be brought to the arbitrator already certified as a class and with the merits undecided. The principal due process issues, such as the adequacy of class representation, notice to the class, and the composition of the class will already have been decided. With limited exceptions, there will be no need for any action by the court during the pendency of the arbitration proceeding. If the named plaintiff withdraws from the case, it would be necessary to approve the substitution of a new class representative. If the case is settled during the pendency of arbitration proceedings, the court would have to approve the settlement. Approving a new class representative does not go to the merits of the dispute and therefore does not interfere with the arbitrator's actions. If the parties decide to settle, the proceedings before the arbitrator would not continue and the court would not be interfering with the arbitrator. If the settlement were not approved, then the merits of the case could continue before the arbitrator. Any other issues regarding the adequacy of class representation would await the conclusion of arbitration and any postarbitration judicial proceedings.
Relying on Sanders v. Robinson Humphrey/American Express, Inc., 634 F.Supp. 1048, 1065 (N.D.Ga.1986), aff'd in part, rev'd in part sub nom., Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 (11th Cir.1987), cert. denied, 485 U.S. 959, 108 S.Ct. 1220, 1221, 99 L.Ed.2d 421 (1988), defendants argue that certifying a class in this case would violate the Rules Enabling Act which provides, " Such rules shall not abridge, enlarge or modify any substantive right." 28 U.S.C. § 2072(b). Defendants argue that certifying a class would interfere with their substantive contractual rights. Sanders is inapposite. In that case the court would not certify a class for federal court proceedings, in part, because class certification would interfere with the defendants' contractual rights to proceed in arbitration with those plaintiffs who had signed arbitration agreements. In contrast, here certification is sought for proceedings before the arbitrator. Certification of the class would not deprive defendants in this case of the opportunity to proceed to arbitration with any customer. Additionally, the arbitration agreement involved in this case is silent regarding class proceedings. There is nothing in the contract inconsistent with certification of a class.
Another case cited by defendants, Harris v. Shearson Hayden Stone, Inc., 82 A.D.2d 87, 441 N.Y.S.2d 70, 75-76 (1981), aff'd, 56 N.Y.2d 627, 435 N.E.2d 1097, 450 N.Y.S.2d 482 (1982), is also inapposite. Similar to Sanders, the availability of class proceedings on nonarbitrable claims was found to be an insufficient basis for denying arbitration of claims to which the arbitration agreement applied.
Since any class that would be certified would be an opt-out class, see Fed.R.Civ.P. 23(c)(2), any class member could choose to opt out and enforce his or her contractual right to pursue relief in reparation proceedings before the CFTC or before a different arbitration forum than the one selected by the class.
Defendants argue that one of the policies favoring arbitration over court proceedings is that it is viewed as more expeditious and efficient and less expensive. They contend that certifying a class will take away these benefits. While arbitration is generally viewed as a more efficient and less expensive form of dispute resolution, it can often become just as protracted and expensive as litigation. There are many procedural avenues that can delay the proceedings and increase the costs. See Stipanowich, 72 Iowa L.Rev. at 475 n. 13. While class proceedings would likely be lengthier and more expensive than arbitrating a single customer's claims, certifying a class is likely to be far more efficient than arbitrating each customer's claim individually. Certifying a class for arbitration is consistent with policies of efficiency and economy that favor both arbitration and class proceedings. See Efficient Adjudication, 67 Va.L.Rev. at 787-96; 10b-5 Claims, 74 Cornell L.Rev. at 391-94.
The question still remains as to whether it is more appropriate to have the court certify the class or to leave the class certification question for the arbitrator. The California courts have determined that the court should decide the certification question. See Keating, supra; Izzy, supra; Lewis, supra. The scholars are divided. Efficient Adjudication, supra, argues the arbitrator should certify the class. 10b-5 Claims, supra, argues the court should certify the class. Under the present circumstances, it is the court that should decide the certification question.
The issue underlying all class certification questions is due process. Proper procedures must be followed to ensure that making the class action binding on the absent class members comports with due process. It has been argued that it is more appropriate to have a court, not the arbitrator, protect such interests. That argument, however, generally fails to recognize that the parties, including the absent class members, have agreed to have an arbitrator decide all the substantive issues related to their dispute. There is no rule that forbids parties from agreeing to arbitrate constitutional disputes. In this case, however, plaintiff has represented that the rules applicable to their arbitration do not provide the arbitrator with the procedural tools necessary to certify a class properly. It is also recognized that a class cannot be certified properly without any access to discovery. Since the arbitration proceedings do not provide for discovery, at least in this case, it is more appropriate to have the court determine the certification issue. Compare Izzy, 231 Cal.Rptr. at 322 n. 6 (at least until arbitrators have more experience with class actions, the court should determine certification issues). The principal arguments in favor of having the arbitrator determine certification are that the court's determination of the issue will delay proceedings and result in undue interference with the arbitration proceedings. See Efficient Adjudication, 67 Va.L.Rev. at 806. As already discussed, certification by the court does not cause such problems.
For the foregoing reasons, a court can certify class actions for arbitration. The question still remains as to whether the requirements of Rule 23 are satisfied. Defendants do not argue that those requirements are not satisfied. Nevertheless, this court has an independent duty to ensure that they are satisfied.
Plaintiffs seek certification of a class consisting of all persons who opened customer accounts and traded commodity options through The Siegel Trading Company, Inc. (" Siegel Trading" ) during the period beginning January 1, 1984 and ending September 20, 1989 and who had enforceable arbitration agreements with Siegel Trading. Defendants and parties related to them are to be excluded from the class. Certification is sought pursuant to Rule 23(b)(3).
The requirement of numerosity is satisfied. Approximately 7000 persons opened accounts during the class period and most of them are believed to have signed enforceable arbitration agreements. Joinder of all members of the class is impracticable. It is also clear that the claims of Perera are typical of the class. She is also found to be an adequate class representative. The proceedings that have already occurred show that with her as named plaintiff, the class will have highly qualified counsel to represent it.
Plaintiffs also claim there are common questions of law or fact that predominate over questions affecting only individual members of the class. The alleged common questions are:
(a) Whether Defendants omitted and failed to disclose to the Class material facts about the Defendants' method of operations and higher than industry average commission charges that were required to be disclosed in order to avoid cheating and defrauding each and every person who traded through Siegel [Trading];
(b) Whether Defendants engaged in manipulative practices in violation of the Commodity Exchange laws by participating in, aiding and abetting or acting recklessly in the dissemination of materially false and misleading statements;
(c) Whether Defendants charged excessive commissions;
(d) Whether Defendants cheated or defrauded Plaintiffs and the members of the Class; (e) Whether Defendants were negligent in the supervision of their brokers;
(f) Whether Defendants have violated RICO;
(g) Whether Defendants violated state, common law and statutory duties to the Class members;
(h) Whether Plaintiffs and Class members sustained damages and the measure of the damages;
(i) Whether Plaintiffs and Class members are entitled to an award of punitive damages; and
(j) Whether Defendants Frank Mazza and Howard Siegel are liable to the Class under Section 13(a) or 13(b) of the Act, 7 U.S.C. Section 13c(a) or 13c(b).
Similar allegations are also set forth in detail in a complaint filed before the Commodities Futures Trading Commission. See CFTC v. The Siegel Trading Co., No. 89-5364 (Sept. 8, 1989) (available on Westlaw, FSEC-CFTC database).
In determining whether common questions of law or fact predominate, it must be considered in the first instance whether the putative class seeks to remedy a common legal grievance. Riordan v. Smith Barney, 113 F.R.D. 60, 65 (N.D.Ill.1986). " The common issues need not be dispositive of the entire litigation. The fact that questions peculiar to each individual member of the class may remain after the common questions have been resolved does not dictate the conclusion that a class action is not permissible." Id.
It is alleged in the complaint, and supporting evidence was submitted during the evidentiary hearing regarding arbitration, that employees of Siegel Trading followed scripted procedures in soliciting and processing new customers. Plaintiffs' claims are based on alleged common practices of Siegel Trading. Therefore, the facts regarding a substantial majority of the class are likely to be very similar. There will also be a substantial number of common questions of law. While, as to some plaintiffs, individual questions of reliance may arise, this clearly appears to be a case where common questions will predominate over individual questions. Resolving plaintiffs' claims in a class arbitration proceeding would be superior to individual suits or individual arbitration proceedings. This is an appropriate case for certification of a class for arbitration.
The parties shall submit a joint proposed notice to the class. Pending approval and the mailing of the class notice, the Rule 54(b) judgment is vacated. The notice must contain opt out provisions and fully advise the putative class members of their various options under their customer agreements. Procedures must be set up to screen out persons who did not sign arbitration agreements. If defendants have not already provided plaintiffs with the necessary customer and address lists, they should comply promptly with any such request of plaintiffs.
If the parties cannot reach agreement on a proposal, they shall simultaneously submit plaintiffs' proposal and defendants' objections. Plaintiffs shall submit a draft proposal to defendants no later than June 22, 1990.
IT IS THEREFORE ORDERED that:
(1) Plaintiffs' motion for reconsideration is granted. The judgment previously entered is vacated and plaintiff Perera's motion for certification of a class for arbitration is granted.
(2) A class is hereby certified consisting of " all persons who opened customer accounts and traded commodity options through The Siegel Trading Company, Inc. (" Siegel Trading" ) during the period beginning January 1, 1984 and ending September 20, 1989 and who had enforceable arbitration agreements with Siegel Trading." Excluded from the class are the defendants, their employees, any relatives of the individual defendants, any companies owned or controlled by defendants, and any affiliates or subsidiaries of Siegel Trading.
(3) The parties shall submit a proposed notice to the class to the court on June 29, 1990 at 9:15 a.m.