In an important and much anticipated decision, the U.S. Supreme Court rejected plaintiffs’ efforts to avoid arbitration by arguing that individual arbitration would prevent them from having an effective opportunity to vindicate their rights under federal antitrust law (the so‐called “effective vindication” doctrine) due to the expense and relatively low payoff in pursuing those claims on an individual basis. American Express Co. v. Italian Colors Restaurant, No. 12‐133 (U.S. June 20, 2013). The decision has several practical implications for companies using (or considering using) arbitration provisions, which are discussed below.
Second Circuit Ruled That Arbitration Provision Was Unenforceable
The plaintiffs are merchants who sued American Express under the antitrust laws. The merchants sought to avoid individual arbitration by arguing that the cost of an expert would be at least several hundred thousand dollars, and up to a million dollars, while their individual potential maximum recovery was less than $40,000. This, the merchants said, prevented them from vindicating their statutory rights under the federal antitrust laws and allowed the court not to enforce the parties’ arbitration agreement under the “effective vindication” exception to the Federal Arbitration Act (FAA). The Second Circuit agreed with the merchants, concluding that the arbitration provision was unenforceable because the plaintiffs would incur prohibitive costs if compelled to arbitrate.
Supreme Court Reverses, Holding That Effective‐Vindication Exception Does Not Apply
The Supreme Court disagreed. Calling the “effective vindication” exception “dictum,” the Court ruled (in an opinion authored by Justice Scalia) that it applied only where arbitration agreements act as a prospective waiver of a party’s right to pursue statutory remedies. “[A]n arbitration agreement forbidding the assertion of certain statutory rights” would fall within the exception, the Court said, and the exception could “perhaps” cover filing and administrative fees “that are so high as to make access to the forum impracticable. [T]he fact that it is not worth the expense involved in proving a statutory remedy is not,” in the Court’s view, “the same as eliminating the right to pursue that remedy.” Thus, the Court held that the effective vindication exception did not apply and reversed the decision invalidating the arbitration agreement.
Dissent Attempts to Limit Scope of Ruling
Calling the decision a “betrayal of our precedents, and of federal statutes like the antitrust laws,” the dissenting opinion (authored by Justice Kagan) said the effective vindication rule applied. "If the arbitration clause is enforceable, AmEx has insulated itself from antitrust liability — even if it has in fact violated the law." The effective vindication rule was, according to the dissent, designed for cases like this in which the defendant is alleged to have used its monopoly power to force an arbitration provision on merchants that would "make pursuit of the antitrust claim a fool's errand."
The key distinction, in the dissent’s view, was that the arbitration agreement did not just prevent class actions; it precluded any type of concerted action. The clause barred any kind of joinder or consolidation of claims or parties; it prevented cost shifting to American Express; and the confidentiality provision prevented the plaintiff from working with other merchants to arrange for a common expert report. Thus, the provision completely prevented the plaintiffs from sharing costs or finding another way to reduce costs. The dissent criticized the majority for not considering these aspects of the agreement and, in an attempt to limit the opinion, stated that the Court “does not decide” whether these features trigger the “effective‐vindication rule.”
Notably, in footnote four, the majority opinion does address these points, stating that the lower court’s decision held that other forms of cost sharing were “not economically feasible” (rather than unavailable), thus making a class action the only viable alternative. Arguably, this language leaves open whether a ban on other forms of cost sharing could be challenged based on the effective‐vindication exception.
Key Takeaways from Opinion
For companies interested in limiting their exposure to class actions, the American Express opinion provides at least four key takeaways:
- First, under the majority opinion, excessive filing or administrative fees still might trigger the effective vindication exception. Companies using an arbitration provision should consider ways to limit those fees by, for example, agreeing to pay any arbitration filing or administrative fees in excess of what would be charged to file in court.
- Secondly, American Express and the Concepcion decision of 2011 were decided under the FAA. To ensure that these opinions apply and to avoid the vagaries of state arbitration law, companies may want to consider expressly stating in their arbitration agreements that they are subject to the FAA. See Rent‐A‐Ctr., W., Inc. v. Jackson, 130 S. Ct. 2772, 2776, 177 L. Ed. 2d 403 (2010) (FAA applies to contract evidencing transaction involving commerce); see also Valencia v. Smyth, 185 Cal. App. 4th 153, 177 (2010) (declining to enforce arbitration provision where agreement did not expressly incorporate FAA, which meant trial court had discretion not to order arbitration where not all parties were bound by the arbitration agreement; "the FAA's procedural provisions do not apply in state court unless the parties expressly adopt them").
- Thirdly, although the dissent is not binding, lower courts may view it as a limit on the majority opinion and be willing to consider whether other aspects of an arbitration agreement (such as a prohibition on joinder or a confidentiality requirement) trigger the effective vindication exceptions. Companies may want to rethink whether to include these provisions. See also Lima v. Gateway, Inc., 886 F. Supp. 2d 1170, 1185 (C.D. Cal. 2012) (“confidentiality requirement contributes to the lack of mutuality that renders the arbitration agreement substantively unconscionable”).
- Fourthly, for companies that have taken a “wait and see” approach before modifying their form agreements, American Express now confirms the enforceability of an arbitration clause coupled with the express preclusion of “any right or authority for any claims to be arbitrated on a class action basis.” Now may be the time for businesses to consider updating their agreements to include a carefully crafted arbitration provision that takes advantage of the Supreme Court’s recent decisions.