Arbitration

Yesterday, in American Express Co. et al. v. Italian Colors Restaurant et al., the U.S. Supreme Court issued another opinion in a long line of decisions championing the federal policy favoring arbitration. Simultaneously, the Court dealt a blow to litigants who would attempt to circumvent contractual arbitration provisions and class-action waivers by filing a class action. By a vote of 5-3, the Court sustained a contractual provision that requires bilateral arbitration even where the associated costs dramatically exceed any potential recovery. Overall, the Court’s decision upholds the Federal Arbitration Act’s (FAA’s) principles that arbitration is a matter of contract and that courts must enforce arbitration agreements as written, unless there is a contrary congressional demand.

At issue before the Court was American Express’ attempt to enforce a provision that mandated arbitration for merchants who accepted American Express cards. The provision also barred arbitration on a classaction basis. In 2003, a disparate group of merchants brought a putative class action under the Sherman and Clayton Acts against American Express. The merchants alleged that American Express had improperly pressured them to accept its credit cards at rates that were 30-percent higher than competing credit card companies, in violation of federal antitrust provisions.

American Express moved to compel individual arbitration pursuant to the arbitration clause and under the FAA. In response, the merchants introduced evidence that an individual merchant would expend at least several hundred thousand dollars to prosecute an antitrust claim, while the maximum recovery would not exceed $40,000. On this evidence, the Second Circuit Court of Appeals held the arbitration provision was unenforceable. Underlying the appeals court ruling was its impression that a class action was the only economically feasible means for the merchants to protect their statutory rights. As the Second Circuit opined, enforcement of the waiver would “eradicate” the private enforcement component of the federal antitrust law scheme, a result fundamentally at odds with Congress’ intent when it enacted the Sherman and Clayton Acts.

Writing for the majority, Justice Antonin Scalia rejected the Second Circuit’s reasoning and enforced the bilateral arbitration provision. Importantly, the majority noted that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue a remedy.” The opinion cited a pair of cases to reach this conclusion, Vimar Seguros y Reaseguros, S. A. v. M/V Sky Reefer, 515 U.S. 528 (1995) and Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), finding that lower courts should not weigh the costs and burdens of particular plaintiffs in light of the size of their claims when deciding whether to enforce an arbitration provision. According to Justice Scalia, “[s]uch a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure.”

Impact of American Express

The Court’s decision impacts arbitration jurisprudence in the following ways:

  • Strengthens the Effectiveness of the FAA: American Express is a continuation of the Supreme Court’s pro-arbitration policy. Accordingly, the decision strengthens the validity of arbitration clauses and class waivers in written contracts. In so holding, the Court has cemented arbitration clauses as one of the more useful tools in corporate America’s contractual tool belt.
  • Access to Class Actions Is Waiveable: The Court reaffirmed its recent holding in AT&T Mobility LLC v. Concepcion, 563 U.S. ______ (2011) that federal class actions are the exception and not the “usual rule,” rejecting any argument that there exists a nonwaivable right to pursue a class action for vindicating federal rights.
  • Waiver of Class Arbitration Does Not Bar Vindication: The Court explicitly rejected the merchants’ argument that without class action, they have no effective redress. Specifically, in waiving class arbitration, the merchants did not waive any statutory rights to recovery. Further, no other procedural barriers, such as high arbitration fees, existed that would have rendered access to arbitration impracticable. The Court distinguished between a high cost of proving a remedy and the elimination of the right to pursue the remedy. Here, while the Court appears to take the merchants’ argument as to cost at face value, it found no evidence that the right to the remedy had been eliminated altogether.

There is some indication, in the opinion’s dicta, that the Court could envision unenforceable class arbitration waiver clauses. That said, parties that employ class arbitration waivers should continue to do their best to obtain their counterparts’ informed consent to said waivers.