Last week in American Express v. Italian Colors Restaurant, the Supreme Court held that a contractual provision prohibiting arbitration on a class action basis was enforceable, even if the plaintiff’s cost of individually arbitrating would exceed the plaintiff’s potential recovery. The decision is a victory for companies that include such provisions in contracts and significantly limits the ability of plaintiffs to seek class action arbitration where it has not been provided for by express contract.
Key Take Aways
- The Court strongly favors enforcement of arbitration agreements by their terms.
- The “effective vindication” exception to enforcing arbitration agreements has been significantly narrowed.
- Absent a procedural inability to assert a claim or an express congressional mandate favoring class proceedings, it will be difficult for plaintiffs to invalidate a class action arbitration waiver.
Merchants who accept American Express credit cards filed a class action against American Express (Amex) challenging a requirement that merchants accept all types of Amex charge cards as a form of illegal tying in violation of the Sherman Act. Amex’s agreement with the merchants provided that all disputes between the parties were to be resolved by arbitration. It also provided that “[t]here shall be no right or authority for any Claims to be arbitrated on a class basis.”
Amex moved to compel arbitration. The merchants submitted a declaration from an economist estimating that the necessary expert analysis to prove the claim would be at least several hundred thousand dollars whereas the maximum recovery any individual plaintiff could realize was approximately USD38,500. The merchants argued that because of these costs no one plaintiff could pursue its claim and therefore the class action waiver should be unenforceable.
The district court sided with Amex. On three separate occasions, the enforceability of the class action waiver came before the Second Circuit, and in each case, the Second Circuit struck down the waiver.1 On appeal the Supreme Court reversed.
The Court Upholds Class Arbitration Waiver
The Court held that the waiver of class arbitration was enforceable. It began noting that under the Federal Arbitration Act (FAA), arbitration is a matter of contract, and emphasized that courts must rigorously enforce arbitration agreements according to their terms. The Court found that there was no congressional mandate (including in the antitrust laws and federal class action rules) guaranteeing an affordable procedural path to vindicating a claim that required the Court to reject the waiver. The Court acknowledged that under the judicially-created “effective validation” exception, it will refuse to enforce an arbitration agreement that operates as a waiver of a party’s right to pursue statutory remedies. However, it refused to apply that exception because individual plaintiffs were not precluded from pursuing a remedy, even if it may not have been economical to do so. The Court also noted that, as a practical matter, if federal courts had to undertake an analysis of the economics of pursuing a given claim before allowing arbitration to proceed, it would undermine the speedy resolution of claims, a principal benefit of arbitration.
The Court’s Decision is a Further Limit on the Availability of Class Proceedings
The Court’s decision in Amex is the latest in a number of decisions placing limits on the use of class action arbitration. In AT&T Mobility v. Concepcion,2 a California rule invalidating arbitration proceedings that disallow class-wide proceedings was struck down by the Court on the grounds that it was preempted by the FAA.
The arbitration clause in AT&T’s agreement included some pro-consumer provisions, such as a requirement to pay double attorney’s fees and a minimum reward of several thousand dollars to successful plaintiffs in certain circumstances. Some had hoped the absence of such provisions in the Amex arbitration agreement would be a way for the Court to limit its ruling in Concepcion and invalidate the waiver in Amex. However, the Court was of the view that Concepcion “all but resolve[d]” the case before it because that ruling had “specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”
Similarly, the Court’s 2010 decision in Stolt-Nielsen v. AnimalFeeds Int’l Corp.3 limited the availability of class proceedings. The Court found that an arbitration panel exceeded its power under the FAA by imposing class procedures on the basis of policy considerations rather than a contractual interpretation of the arbitration agreement.
That said, class arbitration is not completely anathema to the Court. In fact, earlier this month, the Court issued another decision touching on the enforceability of class arbitration waivers. In Oxford Health Plans LLC v. Sutter,4 the plaintiff’s contract with the defendant required binding arbitration. The parties agreed that the arbitrator should determine whether that excluded class arbitration proceedings. The arbitrator found that the agreement evidenced an intent to allow class arbitration. The Court, noting the broad deference given to arbitral decisions, held the parties to the arbitrator’s decision, “however, good, bad or ugly.”
Following Amex, absent a procedural inability to assert a claim or an express congressional mandate favoring class proceedings, it will be difficult for plaintiffs to invalidate a class action arbitration waiver, even if that means, as a practical matter, the plaintiff will choose not to pursue its claim. Given that the time and expense of class action arbitration can undermine the benefits that bilateral arbitration offers, expect to see greater use of waivers of class proceedings going forward.
Readers should be reminded that the long-term effect of Concepcion and Amex – at least in the financial services context – may depend on the outcome of the Consumer Financial Production Bureau’s (CFPB) mandated review of arbitration clauses. The Dodd-Frank Act requires the CFPB to conduct a study on mandatory arbitration clauses for consumer financial products and services and present its findings to Congress. Notably, only a few weeks ago, on June 6, the CFPB released a notice and request for comment on its plan to conduct a new survey related to its ongoing study of arbitration clauses.