Yesterday, the U.S. Supreme Court delivered a resounding victory for businesses that prefer individual arbitration as a way to resolve disputes. In American Express Company v. Italian Colors Restaurant, No. 12-133, the Court held that a contractual waiver of class arbitration must be enforced even when the cost of individually arbitrating the claim exceeds the potential recovery. Although the opinion acknowledges that an arbitration agreement must not work a waiver of a party’s right to pursue statutory remedies, such agreements will not be invalidated based on whether individual arbitration is cost-effective.
The decision arises out of a federal antitrust lawsuit brought against American Express by a class of merchants. American Express moved to enforce the parties’ contractual arbitration clause, which included a waiver of class treatment. The merchants submitted evidence tending to show that they would need to spend several hundred thousand dollars on expert testimony to prove their claims—well over the maximum individual recovery for each merchant. Thus, the merchants argued that they could not effectively vindicate their federal statutory rights without a class action. The district court enforced the clause anyway, but the Second Circuit disagreed, ruling that the merchants "would incur prohibitive costs if compelled to arbitrate" individually.
The Second Circuit later revisited that decision twice, each time coming to the same conclusion. The first time was on remand from the Supreme Court for further consideration in light of Stolt-Nielson S.A. v. AnimalFeeds Int’l Corp. The second was after the issuance of the Court’s decision in AT&T Mobility v. Concepcion, which held that the Federal Arbitration Act ("FAA") did not permit a court to refuse to enforce a class action waiver as unconscionable under state law. This time too, the Second Circuit held to its original conclusion, reading Concepcion as a decision about the FAA’s preemption of state law
The Supreme Court reversed. Writing for a five-justice majority, Justice Scalia first discussed Congress’s clear instruction in the FAA that an arbitration clause is a contract like any other and must be enforced. He then concluded that there is nothing in the federal antitrust laws—or in the rule of civil procedure about class actions—that shows that Congress intended to limit the application of the FAA in this context. To the contrary, the fact that the Sherman and Clayton Acts were enacted before Rule 23 defeats any suggestion that Congress believed that class actions were essential to their enforcement.
Most importantly, the majority held that a class action waiver must be enforced even if pursuing an individual claim would not be cost-effective. In the Court’s view, the FAA requires enforcement of the arbitration agreement as long as it preserves the right to pursue the claim— and here, the agreement did just that. According to the majority, "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 that remedy" (emphasis in original). Buttressing this conclusion was the Court’s prior decision in Concepcion, which the majority said was not only about preemption. That decision rejected the argument that class arbitration was necessary for small-dollar claims.
Justice Kagan dissented, joined by Justices Ginsburg and Breyer. She wrote that the cost of bringing an individual claim in this case was prohibitive—not excessive or extravagant, but prohibitive. So, without a class action, it was effectively impossible for the merchants to vindicate their statutory rights. Further, she emphasized that the agreement also prohibited other forms of cost control, like cost shifting and coordination among claimants. (The majority took issue with this in a footnote, noting that American Express had denied this was the case.)
The majority opinion represents the Supreme Court’s clearest statement yet on the enforceability of arbitration agreements with class action waivers. Such waivers will be invalidated only if they interfere with the right to pursue a statutory remedy. Still, the Justices’ disagreement about whether the clause here barred all forms of cost sharing may leave the door open just a crack to further challenges in the context of small-dollar claims, if the class action waiver truly does rule out any form of cost control.
Winston & Strawn filed an amicus brief in this case in support of American Express. A copy of the brief is available here.