With its recent decision in American Express Co. v. Italian Colors Restaurant, the Supreme Court has now made it crystal clear that arbitration agreements that expressly bar class action procedures will be enforced against state and federal claims, even where a particular plaintiff’s likely recovery is too small to warrant the litigation costs of pursuing the claim. American Express involved antitrust claims under the Sherman Act, but its reasoning applies broadly to all federal statutes. It is thus the federal law counterpart to the Court’s earlier decision preempting state law in AT&T Mobility v. Concepcion. The key takeaway from these two critical decisions is this: unless and until Congress (or, for some claims, the Consumer Financial Protection Bureau) takes further action, companies can expect courts to enforce their well-drafted arbitration provisions that expressly mandate individual arbitration and bar class actions.
The plaintiffs in American Express alleged that American Express used monopoly power in the market for charge cards to extract higher rates for processing American Express credit cards. When American Express moved to compel individual arbitration pursuant to the arbitration agreement, plaintiffs balked, alleging that a class action was essential because the costs of their expert reports alone would run into the hundreds of thousands of dollars, and each individual merchant could hope to recover only a fraction of that amount. A class action thus was essential, plaintiffs argued, to “effectively vindicate” their claims.
The Supreme Court disagreed. Writing for five members of the Court, Justice Scalia’s opinion states that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” The Court explained that while the Sherman and Clayton Acts do afford treble damages to encourage individuals to bring claims, these statutes “make no mention of class actions.” The Court also held that congressional approval of Rule 23 in 1938 did not establish an entitlement to class proceedings for the vindication of federal statutory rights.
Prior opinions had discussed the principle of effective vindication. But the Court has now limited that principle to situations where the arbitration agreement itself forecloses the particular claim. Thus, an arbitration agreement “forbidding the assertion of certain statutory rights” would “certainly” not be enforceable as against such a claim. Similarly, the Court suggested that “perhaps” if the “filing and administrative fees attached” to the use of arbitration were “so high as to make access to the forum impracticable” then this, too, might prevent the effective vindication of federal statutory claims.
Under this agreement, however, the plaintiffs retained the right to “pursue” an antitrust remedy in individual arbitration. Their argument was only that it was “not worth the expense involved” to pursue it. While that may be true, the Court refused to impose upon federal courts the burden of determining whether it is cost-effective for a given litigant to individually arbitrate a federal claim. Such a “preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in gen¬eral and bilateral arbitration in particular was meant to secure.”
What This Means for Business
Businesses concerned about the cost of litigating class action claims should strongly consider implementing or revisiting their arbitration agreements with customers and employees. In doing so, companies should ensure that the arbitration agreement is otherwise sound. For example, in AT&T Mobility v. Concepcion, the Court found that AT&T’s generous provisions with respect to administrative and filing costs and procedures precluded any argument that the arbitral forum was not reasonably available for the vindication of any state law claim.
The Court’s earlier decision this Term in Oxford Health Plans v. Sutter illustrates a mistake to avoid. There, the Court unanimously held that because the parties agreed to delegate all interpretation of the agreement to the arbitrator, the defendant could not escape the arbitrator’s conclusion that the agreement, though lacking any express reference to class actions, nonetheless could reasonably be construed as permitting class arbitration. In rejecting defendant’s argument, the Court noted that “convincing a court of an arbitrator’s error – even his grave error – is not enough.” A court may not reverse an arbitrator who is “arguably construing” an arbitration agreement, even if the arbitrator’s interpretation of the contract is wrong.
The Oxford Health Plans decision surprised some observers, because the Court had previously held, in Stolt-Nielsen S.A., et al. v. AnimalFeeds International Corp., that an arbitrator may not impose class arbitration on parties who had not agreed to class arbitration. There, however, the parties had stipulated that their arbitration agreement was silent on the issue of class arbitration, and so there was no agreement for the arbitrator to construe. In Oxford Health Plans, however, there was no such stipulation, which gave the arbitrator ample discretion to fill the gap, however improbably, by allowing class arbitration. A company seeking to avoid that outcome can do so by expressly precluding class action and collective action procedures in its arbitration agreement.
On The Horizon
Companies, especially those that provide consumer financial products or services, should be mindful that Congress has already given the Consumer Financial Protection Bureau authority, through Section 1028 of the Dodd-Frank Act, to issue regulations that “prohibit or impose conditions or limitations on the use” of arbitration provisions between consumers and those covered by Dodd-Frank in transactions involving a “consumer financial product or service.” The CFPB is currently studying the issue, and no regulations have yet been proposed. Companies may wish to consider the provisions of Section 1028 as they revisit their agreements.
Meanwhile, numerous cases pending in the federal and state appellate courts, involving a variety of consumer protection and employment statutes, will receive supplemental briefing on the impact of American Express. The impact is likely to be substantial. Few, if any, federal statutes mandate that litigants have access to class action procedures in order to vindicate their claims. The reasoning in American Express is thus likely to apply beyond the antitrust laws, and prompt courts to enforce otherwise valid individual arbitration agreements that expressly preclude class action procedures regardless of the individual amount in controversy under a wide variety of federal statutes governing the rights of consumers and employees.
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