On June 20, 2013, the United States Supreme Court issued its decision in American Express Co. v. Italian Colors Restaurant, holding that the Federal Arbitration Act (“FAA”) “does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.”  This decision augments the Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion, in which the Court held that the overarching purpose of the FAA is to ensure the enforcement of arbitration agreements according to their terms, and when a state law stands as an obstacle to the accomplishment of this objective, it is preempted.   Now, with its decision in American Express, the Court has made clear that “arbitration is a matter of contract,” and “courts must ‘rigorously enforce’ arbitration agreements according to their terms” – even if that means low value claims will not be prosecuted.

Taken together, the Concepcion and American Express decisions provide businesses with a tremendous incentive to include arbitration provisions with class action waivers in their consumer contracts.   Businesses can utilize these provisions to ensure that individual disputes do not morph into class action disputes and avoid the exponential increase in risk and exposure that is inherent with the switch from a bilateral dispute to a class action.   Parties seeking to avoid enforcement of class action waivers contained in their consumer contracts and bring their claims as a class action instead of an individual action cannot rely on an argument that the costs of proceeding on an individual basis are prohibitive to do so.

The Supreme Court’s decision in American Express settles the question left open by Concepcion of whether a class action waiver provision in an arbitration agreement is enforceable under the FAA even if enforcement means individual plaintiffs will not have an effective means to vindicate their statutory rights.   Such provisions are enforceable.   Plaintiffs still have the right to pursue their claims; it just may not be worthwhile to do so.  Now, businesses that choose to include class action waivers in the arbitration provisions of their consumer contracts can do so and expect that the agreement will be enforced as written even if the effect of the provision is to insulate businesses from liability for small claims.

Indeed, businesses that implement class action waivers can expect to dramatically decrease the number of small claims they must defend against.  The low potential recovery for small claims simply cannot justify the costs to pursue them.  As the Seventh Circuit aptly observed years ago, “the realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”