The United States Supreme Court recently ruled that under the Federal Arbitration Act (FAA) courts could not invalidate class waivers in arbitration agreements merely because the cost of an individual’s claim would exceed any potential recovery.
In American Express Company v. Italian Colors Restaurant, et al., the respondents were merchants that accept American Express cards. The parties had entered into an agreement that any claims would be subject to arbitration and specifically provided that there would be no right to bring a class action claim. Despite this, respondents brought a class action in the Southern District of New York against American Express, claiming a violation of antitrust laws due to the allegedly excessive fees the company charged.
Because of the arbitration clause, American Express moved to compel arbitration and the court granted its motion. The Second Circuit, however, reversed and ruled that the class waiver was unenforceable. The Circuit Court found that enforcing the clause would prevent these merchants from “vindicating [their] statutory rights” due to the high cost of bringing individual claims.
On appeal, the Supreme Court emphasized that arbitration is contractually based and parties must agree to submit to arbitration. The Court declined to carve out an exception for federal antitrust legislation and also declined to invalidate the arbitration agreement based on public policy considerations. Instead, the Court ruled the merchants must submit to individual arbitration, as the parties had previously agreed.
Though the specific law at issue was federal antitrust legislation, the Court’s broad ruling will potentially be useful for employers seeking to enforce arbitration agreements that include class action waivers. This decision follows others from the Supreme Court in support of arbitration as a means to resolving disputes. However, as the Supreme Court made clear in its recent ruling in Oxford Health Plans LLC v. Sutter, employers that wish to prohibit class arbitrations should explicitly include such waivers within their arbitration agreements with employees.