The Second Circuit recently ruled that a class action waiver in an arbitration agreement was unenforceable because, as a practical matter, it would have prevented the plaintiffs from enforcing their substantive rights under the Sherman Act, 15 U.S.C. § 1. See Italian Colors Rest. v. Am. Express Travel Related Servs. Co. (In re Am. Express Merchants’ Litig.), No. 06-1871-cv (2d Cir. Jan. 30, 2009). In so ruling, the court also held that whether a class action waiver in an arbitration agreement is enforceable was a question for the court, not the arbitrator.  

The plaintiffs in In re American Express Merchants sought to bring a class action on behalf of all merchants that accepted American Express charge cards. The plaintiffs maintained that the “Honor All Cards” provision of their agreements with American Express, under which merchants that accept American Express charge cards were required to accept all American Express credit cards as well, constituted an illegal “tying arrangement” in violation of Section 1 of the Sherman Act.  

The defendants moved to compel arbitration under an arbitration clause in the parties’ agreements. The plaintiffs objected, maintaining that the arbitration clause was unenforceable because its prohibition on class actions would prevent smaller merchants from enforcing their statutory rights. The District Court concluded that the dispute was subject to arbitration, and that the enforceability of specific contract provisions as well as any procedural questions involved in the dispute, must be submitted to the arbitrator. Accordingly, the District Court granted the defendants’ motion to compel arbitration and dismissed the plaintiffs’ claims.  

The Second Circuit reversed, ruling that the class action waiver was unenforceable because the plaintiffs had established that a class action was the only practical means of asserting their statutory rights. Specifically, the plaintiffs had provided an affidavit of an expert indicating that the expenses required to establish an antitrust claim are substantial, and that “even a relatively small economic antitrust study will cost at least several hundred thousand dollars, while a larger study can easily exceed $ 1 million.” The affiant further stated that the median recovery among the named plaintiffs in In re American Express Merchants would be approximately $5,252 when trebled, and that even the largest volume merchant among the named plaintiffs could expect damages of only about $38,549 when trebled.  

The court agreed that pursuing antitrust claims on an individual basis would be prohibitively expensive. The court held that the class action waiver at issue was therefore unenforceable as it pertained to antitrust claims, because giving effect to an agreement that effectively deprived the plaintiffs of protections provided by federal antitrust statutes would be “incompatible with the federal substantive law of arbitration.” Because the plaintiffs did not object to arbitration if they would not thereby be prevented from pursuing a class action, the court did not consider whether the class action waiver was severable from the remainder of the arbitration clause.  

At least two other Circuits have interpreted the Supreme Court’s decision in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), as holding that an arbitration clause is enforceable even if it precludes class actions. See Johnson v. West Suburban Bank, 225 F.3d 366 (3 Cir. 2000); Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294, 298 (5 Cir. 2004). In a case brought under the Age Discrimination in Employment Act (“ADEA”), 29 U.S.C. § 621 et seq., the Gilman Court noted that the arbitration rules applicable in that case did provide for collective proceedings, “[b]ut even if the arbitration could not go forward as a class action or class relief could not be granted by the arbitrator, the fact that the [ADEA] provides for the possibility of bringing a collective action does not mean that individual attempts at conciliation were intended to be barred.” Gilmer, 500 U.S. at 32 (citation and internal quotation marks omitted).  

The Second Circuit dismissed this statement in Gilman as “dicta that does not apply here” because the “plaintiffs do not proffer the argument rejected in Gilmer, namely that the class action waiver is unenforceable merely because the relevant statute allows class actions.” The court emphasized that it did not hold that class action waivers in arbitration agreements are unenforceable per se, either as a general matter or with respect to antitrust claims in particular. Similarly, the court distinguished cases in which plaintiffs had maintained that class action waivers were unenforceable because they were unconscionable under state law.  

The apparent circuit split on the enforceability of class action waivers in arbitration agreements suggests that the issue may be subject to further review by the Supreme Court. In the meantime, plaintiffs seeking to prevent enforcement of such waivers should seek to prove that enforcement of the waiver under the specific circumstances of a particular case would effectively deprive them of any remedy.