Today a divided Supreme Court held that courts must enforce class arbitration waivers even where a plaintiff shows that it is economically infeasible to arbitrate individually. The five-to-three decision (with one Justice recused) explained that under the Federal Arbitration Act (FAA), courts must “rigorously enforce” the terms of arbitration agreements that are freely entered into. Courts cannot avoid this obligation simply by finding that enforcing an arbitration agreement would make it impracticable for plaintiffs to bring claims enforcing federal statutory rights.

Background

The respondents — plaintiffs below — are merchants who claim that American Express used its monopoly power over charge cards to require merchants to accept its credit cards at rates approximately 30 percent higher than the market rate. Claiming that this “tying” arrangement violates the Sherman Act, plaintiffs filed a putative class action in federal court.

The merchants’ agreements with American Express contained an arbitration provision and a waiver of class arbitration. American Express accordingly moved to compel arbitration under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. The plaintiff merchants opposed the arbitration motion, contending that the class arbitration waiver effectively made it infeasible to bring antitrust claims against American Express. In support of their argument, the merchants submitted a declaration from an economist who estimated that the cost of an expert analysis necessary to prove their antitrust claims would be at least several hundred thousand dollars, while the maximum recovery for an individual plaintiff would be well short of that. The merchants argued that requiring them to arbitrate their claims individually in those circumstances would essentially confer on American Express immunity from an antitrust suit.

The district court agreed with American Express and dismissed the merchants’ lawsuit in favor of the individualized arbitration for which the parties had contracted. The Second Circuit reversed, holding that because the class arbitration waiver made it prohibitively costly to “effectively vindicate” federal statutory rights, the arbitration agreement was unenforceable. A long procedural intermezzo ensued: When American Express first sought certiorari, the Supreme Court granted the petition and remanded to the Second Circuit for reconsideration in light of Stolt-Nielsen v. Animal Feeds International (2010), which held that a party may not be compelled to submit to class arbitration absent a contractual basis for concluding that the party agreed to do so. But on remand the Second Circuit stood by its original ruling.

The Supreme Court then decided AT&T Mobility LLC v. Concepcion (2012), in which it held that the FAA preempted a state law barring enforcement of a class arbitration waiver. On sua sponte reconsideration of its ruling, the Second Circuit again declined to alter its view, concluding that Concepcion was inapplicable to the American Express case because it addressed preemption, which was not at issue in this case.

The opinion

American Express again sought certiorari. The Supreme Court again granted it. And in an opinion written by Justice Scalia and joined by four other Justices, the Supreme Court reversed. The Court began by rejecting the plaintiff merchants’ argument that the class arbitration waiver in the parties’ contract contravened the congressional policies behind the antitrust laws. As the majority explained, the antitrust laws do not themselves guarantee an affordable procedural path to vindication of every claim. The antitrust laws provide some plaintiff-friendly departures from common law, like the availability of treble damages, but those are the extent of the procedural protections the antitrust laws provide; they do not require — indeed they predate — the existence of class actions. Nor did Congress’s approval of Federal Rule of Civil Procedure 23 require that class-action procedures be available to vindicate statutory rights: The stringent requirements embedded in Rule 23 effectively ensure that class actions are not available for many statutory claims.

The Court next rejected the argument that judges can invalidate class arbitration waivers on public policy grounds when they prevent the “effective vindication” of federal statutory rights. While the “effective vindication” rule would invalidate a prospective waiver of the right to pursue specific statutory rights, the Court explained, it does not invalidate waivers that render it impracticable to prove a statutory remedy. The waiver in this case, the Court held, still gives contracting parties the right to pursue antitrust claims in individual arbitration and thus does not foreclose effective vindication of federal statutory rights. In other words, the class arbitration waiver essentially placed the parties into the situation they were in before the advent of class actions in 1938. And as the majority saw things, what was an effective procedure for vindication then cannot be “ineffective” today.

The Court concluded its opinion by emphasizing the lesson of Concepcion: that the “FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.” To hold otherwise, after all, would force a district court to analyze the legal requirements for success on the merits, the evidence needed and the costs of developing that evidence, and the damages available in the event of success all before deciding whether to grant a motion to compel arbitration. This process would disturb the FAA’s policy in favor of the speedy and efficient resolution of disputes according to the terms of parties’ contracts.

The concurrence

Justice Thomas, who joined the Court’s opinion in full, wrote a concurrence adding that the text of the FAA also compels the result in this case. In his view, courts can only invalidate arbitration agreements under 9 U.S.C. § 2 when there is a problem with formation — i.e., when the arbitration agreement is a product of fraud or was entered into under duress. Because the merchants had not made these arguments in this case, Justice Thomas would have found them to be required to arbitrate according to the terms of their agreement.

The dissent

Justice Kagan, joined by Justices Ginsburg and Breyer, dissented, lamenting what the dissenters viewed as the Court’s radical limiting of the “effective vindication” rule, which was meant to reconcile the FAA with other federal laws — like the antitrust laws — granting statutory rights. Before today, the dissent explained, one of the central tenets of prior Supreme Court precedent was that “an arbitration clause may not thwart federal law, irrespective of exactly how it does so.” But as the dissent saw today’s opinion, it limits the “effective vindication” rule to policing only those provisions that expressly waive the right to pursue specific statutory rights. The dissent also cautioned that the majority’s approach appears implicitly to endorse the ways in which federal rights can be thwarted indirectly using arbitration agreements, whether by imposing prohibitively high filing fees, authorizing only inadequate remedies, or mandating overly restrictive rules of evidence. According to the Dissent, the agreement’s terms and Plaintiffs’ proof should be enough to invalidate the arbitration agreement.

Practical implications of the decision

The Supreme Court’s decision reinforces Concepcion’s core holding that arbitration agreements must be enforced according to their terms. The decision will have a significant impact on companies with arbitration agreements that include class arbitration waivers. Plaintiffs now cannot evade such waivers, and potentially other arbitration procedures as well, based on the economic barriers individual claimants face in prosecuting individual arbitrations. Rather, unless plaintiffs show that their right to pursue a federal statutory claim — not just to prove it — has been thwarted, those plaintiffs will be held to the terms of the arbitration agreements they signed.