Employers often utilize arbitration provisions in their relationship with their employees to reduce the burden, expenditure, and potential exposure involved in future litigation. If your company does not currently use an arbitration provision, now might be the time to start thinking about doing so. The United States Supreme Court recently handed down a decision lending support to companies that seek to use and enforce such provisions, essentially making it easier for employers to compel arbitration of employment-related claims.

Historical Review of Arbitration Agreements

Arbitration agreements have become more common since the enactment of the Federal Arbitration Act (“FAA”) in 1925. The FAA was penned to respond to widespread hostility to arbitration agreements and demonstrates Congress' intent to establish an emphatic national policy favoring arbitration which is binding on all State and Federal courts. Moreover, the FAA embodies a liberal policy favoring arbitration agreements—championing streamlined proceedings and expeditious results. The cornerstone of the FAA is contained in section 2, which provides, in pertinent part, that “[a] written provision in...a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction or refusal, shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” This text reflects the overarching principle that arbitration is a matter of contract.

There are a number of advantages to arbitration. It is perceived to be quicker, more flexible, and more cost-efficient than its judicial counterpart. Additionally, arbitration proceedings are such that the parties may agree to keep the proceedings and terms of the final resolution confidential. This is especially significant if the subject matter of the dispute might cause embarrassment or expose private information.

AMERICAN EXPRESS COMPANY v. ITALIAN COLORS RESTAURANT 

In June of this year, the United States Supreme Court decided American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), in which it reiterated that arbitration is a matter of contract and that the FAA requires arbitration agreements to be “rigorously enforced” according to their terms, even for claims alleging a violation of a federal statutes, unless congressional intent proves otherwise. Likewise, the Court rejected a judge-made “effective vindication” exception to the FAA as a basis for invalidating class action waivers. The majority distinguished between arbitration provisions constituting a prospective waiver of a party's right to pursue statutory remedies (which might fall within the exception) and barriers to proving a statutory remedy (which do not). In that case, the plaintiffs filed a class action anti-trust lawsuit against American Express in the United States District Court for the Southern District of New York, claiming American Express used its monopoly power in the market for non-credit charge cards to force merchants to pay exaggerated fees. American Express sought an order compelling arbitration of the plaintiffs’ claim pursuant to a provision in the parties’ agreement which mandated that all disputes be resolved by arbitration on an individual basis. The Supreme Court ultimately granted certiorari to consider the question “[w]hether the Federal Arbitration Act permits courts ... to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”

In reaching its decision, the court noted that the FAA mandates the enforcement of an agreement to arbitrate according to its terms, absent a contrary congressional command—holding that the 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 and that no contrary congressional command required rejection of the class-arbitration waiver. Moreover, although the “effective vindication doctrine” could be used to invalidate a provision in an arbitration agreement forbidding the assertion of certain statutory rights, the Court held that the plaintiffs could not use the doctrine to invalidate class-action waiver provisions by showing that they had no economic incentive to pursue their claims individually in arbitration. In other words, “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.”

Bottom Line

The potential impact of the American Express decision is far reaching. In recent years, collective actions involving allegations of wage violations under the Fair Labor Standards Act have risen in popularity due primarily to the relative ease of obtaining conditional class certification in some jurisdictions, and the potential recovery of large awards. The ruling demonstrates the Supreme Court's continued willingness to enforce arbitration agreements, thereby providing employers with additional tools to fight costly class action litigation.