Second Circuit holds class action waiver in arbitration agreement not enforceable when precluding class proceedings would prevent plaintiffs from enforcing rights under federal antitrust statutes

In re American Express Merchants Litigation (“AmEx”), 2012 WL 284518 (2d Cir. February 1, 2012), is an action challenging the fees American Express charges to merchants who accept its charge and credit cards. Plaintiffs allege American Express is able to charge supra-competitive fees for its “up scale” charge card. American Express then requires merchants accepting its charge card to also accept American Express’s credit card at the same high fee. The Card Acceptance Agreement imposing these fees also contains a broad arbitration agreement containing a clause in which the parties waive the right to arbitrate on a class basis.

Several merchants filed a putative class action suit alleging that American Express’s fee arrangement was an illegal tying agreement under the federal antirust laws. American Express moved to compel arbitration and to enforce the class action waiver. The district court granted American Express’s motion to compel arbitration and enforced the class action waiver.

The Second Circuit reversed because precluding class proceedings would prevent plaintiffs from enforcing their rights under the federal antitrust statutes. Plaintiffs had presented uncontradicted expert evidence establishing that the plaintiff with the largest individual claim would, if successful, recover $38,549 after trebling. To establish a successful antitrust claim, however, that plaintiff would incur expert expenses of at least several hundred thousand dollars. Because experts’ fees are not recoverable costs, expenses would far exceed any potential recovery. Under these circumstances, no rational plaintiff would bring an individual case. Because enforcing the arbitration clause’s ban on class proceedings would effectively immunize American Express from antitrust liability, the Second Circuit refused to enforce the waiver.

Before its decision became final, the Second Circuit twice revisited its ruling in light of the Supreme Court’s subsequent decisions in Stolt-Nielsen S.A. v. Animal feeds Int’l Corp., 130 S.Ct. 1758 (2010), and AT & T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). In Stolt-Nielsen the Supreme Court held that a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding the party agreed to do so.” Id. at 1775 (emphasis in the original). In Concepcion the Court held that the Federal Arbitration Act precluded enforcement of California common law that held most class-action arbitration waivers to be unconscionable and unenforceable. AT & T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).

In separate opinions, the Second Circuit concluded that neither Supreme Court decision had any impact on its analysis because neither decision addressed the question before it: whether a mandatory class action waiver could be enforced even if the plaintiffs demonstrated that the practical effect of enforcing the waiver would be to preclude their bringing Sherman Act claims. In re American Express Merchants Litigation, 634 F.3d 187 (2d Cir. 2011); In re American Express Merchants Litigation (“AmEx”), 2012 WL 284518 (2d Cir. February 1, 2012). The court concluded that “Concepcion and Stolt–Nielsen, taken together, stand squarely for the principle that parties cannot be forced to arbitrate disputes in a class-action arbitration unless the parties agree to class action arbitration …. What Stolt–Nielsen and Concepcion do not do is require that all class-action waivers be deemed per se enforceable.” 2012 WL 284518 at *8.

The Second Circuit did find guidance in the Supreme Court’s decision in Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000). In Green Tree the Supreme Court acknowledged that an arbitration agreement would not be enforceable if “the existence of large arbitration costs could preclude a litigant ... from effectively vindicating her federal statutory rights in the arbitral forum.” Id. at 90. Applying Green Tree to the case before it, the court concluded that plaintiffs had carried their burden of establishing that enforcing the arbitration clause’s class action waiver would preclude them from enforcing their federal rights. Because Stolt precluded an order compelling class arbitration, the entire arbitration clause was unenforceable, and the Second Circuit remanded with instructions to deny the motion to compel arbitration.

While Amex does limit the enforceability of class action waivers, the decision has important limitations. It applies only where enforcing a class action waiver in an arbitration provision impacts federal statutory rights. Moreover, the court made clear that the case was limited to its facts. “We do not hold today that class action waivers in arbitration agreements are per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions. Rather … we hold that each waiver must be considered on its own merits, based on its own record” with a healthy regard for the liberal federal policy favoring arbitration agreements. Amex, 2012 WL 284518 at *14.