The US Supreme Court recently issued two key decisions regarding the enforceability of class arbitration waivers and arbitrators’ powers to interpret arbitration agreements. InAmerican Express Co. v Italian Colors Restaurant, the Court found that a class arbitration waiver was enforceable even though it thwarted a claimant from pursuing a federal claim due to prohibitive costs. In Oxford Health Plans LLC v Sutter, the Court permitted class arbitration without addressing whether the arbitrator’s interpretation of the arbitration clause was correct. These rulings continue the pro-arbitration federal policy and emphasise that careful drafting of arbitration provisions remains of paramount importance to ensure that arbitrators and the courts effectuate the parties’ intent.
American Express Co. v Italian Colors Restaurant
In American Express, a group of merchants brought class action proceedings accusing the credit card provider of violating federal anti-trust law by abusing its dominant position to impose significantly higher credit card processing fees. The agreements between American Express and the merchants provided for arbitration of all disputes and stated: “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” American Express moved to compel individual arbitration under the Federal Arbitration Act (FAA) based on this provision. The merchants argued, relying on an economist’s expert opinion, that the costs of the expert analysis needed to establish their claim would be several hundred thousand dollars and might exceed US$1 million, while the maximum recovery of an individual claimant would be just US$12,850 (US$38,549 when trebled under anti-trust law). The merchants contended that the class action waiver was unenforceable because the costs of bringing individual claims were prohibitive.
The 5-3 majority cited its pro-arbitration decisions holding that courts must “rigorously enforce” arbitration agreements according to their terms. The majority reasoned that this “holds true for claims that allege a violation of a federal statute, unless the FAA’s mandate has been overridden by a contrary congressional command“. The majority noted that there was no Congressional legislation that required the Court to reject the waiver of class arbitration here, and that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim“.
The merchants argued that this case fell under an exception to the FAA arising fromMitsubishi Motors Corp v Soler Chrysler-Plymouth Inc. which allows courts to invalidate agreements that prevent “effective vindication” of a federal statutory right. The majority distinguished that case, reasoning that the rule might well invalidate arbitration agreements forbidding the assertion of statutory rights, or imposing exorbitant administrative fees such that the arbitral forum becomes practically inaccessible, but that “the expense of proving a statutory remedy does not constitute the elimination of the right to pursue that remedy…“.
Finally, the majority cited its decision in AT&T Mobility v Concepcion as a rejection of the argument “that class arbitration was necessary to prosecute claims that might otherwise slip though the legal system.” There, the Court held that the FAA pre-empted state law that precluded class arbitration waivers, noting that the terms of arbitration agreements must be enforced unless the agreement is procured by fraud or duress.
A coruscating dissent
The minority issued a coruscating dissent which highlighted the inequities of the result, the effective vindication rule, and criticised the majority’s narrow focus on the efficacy of the class action waiver. In the dissent’s opinion, the agreement imposed “a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand“, allowing Amex to “insulat[e] itself from antitrust liability“. The minority condemned the majority’s distinction between prohibitive administrative costs on the one hand, and the prohibitive costs of proving the claims on the other: what mattered, the minority contended, was that “an arbitration clause may not thwart federal law, irrespective of exactly how it does so.” The minority said that this case was not about the class action waiver but the arbitration agreement as a whole. The agreement disallowed all forms of cost sharing among claimants, there were no consolidation and joinder provisions, the confidentiality obligations precluded sharing of expert testimony, and recovery of costs from Amex was barred should the claimant prevail. The dissent commented, “the agreement could have prohibited class arbitration without offending the effective-vindication rule if it had provided an alternative mechanism to share, shift or reduce the necessary costs.”
In the same vein, the minority dismissed the applicability of AT&T Mobility, because the arbitration provision there was not nearly as onerous and “contained a host of features” that enabled aggrieved customers who filed claims to be made whole.
Oxford Health Plans LLC v Sutter
The plaintiff, a physician, brought proceedings in state court on behalf of a group of doctors alleging that Oxford, an insurance company, had breached contractual payment terms and state law concerning payment for medical services. Oxford applied successfully to compel arbitration of the claims based on the following provision:
“No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.”
Crucially, the parties agreed that the sole arbitrator should decide whether the agreement authorized class arbitration. In construing the agreement, the arbitrator reasoned that the “intent of the clause was to vest in the arbitration process everything that is prohibited from the court process” and that a class action “is plainly one of the possible forms of civil action that could be brought in a court“. Thus, he held that “on its face, the arbitration clause…expresses the parties’ intent that class arbitration can be maintained.”
Oxford sought to vacate the arbitrators’ decision under section 10(a)(4) of the FAA on the ground that the arbitrator had exceeded his powers. The question was eventually transferred to the US Supreme Court. In the interim, the case of Stolt-Nielsen SA v AnimalFeeds Int’l Corp was handed down, which held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” In Stolt-Nielsen, the parties had expressly stated that they had never reached agreement on class arbitration, and so the Supreme Court vacated the decision under its limited review powers in the FAA.
The arbitrator’s construction holds, however good, bad, or ugly
The case was transferred to the Supreme Court, which framed the question as “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” The court found that the parties had delegated this interpretive function to the arbitrator, and the arbitrator had sought to determine the parties’ intent. “The arbitrator’s construction holds, however good, bad, or ugly.” This differed from the circumstances inStolt-Nielsen where the arbitrators had “abandoned their interpretive role” and imposed their own views of public policy.
The court took care to point out that it did not disagree with Oxford’s interpretation of the arbitration clause, but that Oxford had brought the wrong question before the court. In a footnote, the court indicated that if the appeal had arisen as a “question of arbitrability“, it may well have been able to undertake de novo review of the construction of the arbitration agreement.
A number of courts have already applied the American Express ruling, some showing overt disagreement with the Supreme Court’s decision. For example, in August 2013, the Second Circuit upheld two class arbitration waivers in employment disputes in Raniere et al v Citigroup Inc. et al, and Sutherland v Ernst & Young. The Massachusetts Supreme Judicial Court in Feeney v Dell Inc., overturned its previous decision that a class arbitration waiver invalidated an arbitration agreement by effectively precluding the claimants’ pursuit of their remedies, stating that “[a]lthough we regard as untenable the Supreme Court’s view that the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low value claims…we are bound to accept that view as a controlling statement of Federal law.”
The Supreme Court’s decisions evidence a pro-arbitration stance in the US in which parties are held to the terms of their arbitration agreements, emphasising the importance of careful drafting. American Express is welcome news for companies seeking to avoid class arbitration, and also appears to allow significant leeway in imposing potentially onerous terms.