Court Rejects “EffectiveVindication” of Statutory Rights as Reason to Invalidate Consent to Individual Arbitration

Again applying the Federal Arbitration Act (“FAA”) to uphold agreements requiring parties to arbitrate their disputes rather than litigate them in court, the U.S Supreme Court has held that the FAA prohibits courts from invalidating a contractual waiver of class arbitration because the cost of arbitrating a federal statutory claim individually exceeds the potential recovery, even if the effect of enforcing the waiver is to prevent the claim from being brought. American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013).

Facts

A group of retail merchants who accept American Express personal and corporate charge cards alleged that American Express used its market power in corporate and personal charge cards to impose an “Honor All Cards” policy, pursuant to which merchants were required to accept the full range of American Express cards, including revolving credit cards and debit cards, as a condition to being able to accept the traditional American Express charge cards. The plaintiffs alleged that this requirement constituted an illegal tying agreement under Section 1 of the Sherman Antitrust Act. The merchants said this injured them as a result of the higher fees they had to pay on sales paid for with American Express credit and debit cards as compared to lower fees charged by “mass-market” credit cards, such as Visa and MasterCard.

A mandatory arbitration clause in the American Express Card Acceptance Agreement contained a class arbitration waiver, requiring all disputes to be arbitrated on an individual basis. The plaintiff merchants nevertheless brought a class action in federal district court. American Express moved to compel arbitration. Opposing this move, the plaintiffs argued that the class action waiver was unenforceable because the cost of prosecuting an individual antitrust action would be prohibitively expensive in light of the relatively small potential recovery to any individual merchant, and therefore, they could not “effectively vindicate” their statutory rights. The district court granted the motion to compel arbitration and dismissed the lawsuit, ruling the antitrust laws’ provision for treble damages and the recovery of attorneys’ fees provided sufficient incentive to pursue arbitration on an individual basis.

On appeal, the U.S. Court of Appeals for the Second Circuit reversed and, in three separate opinions issued over a four-year period, held the class action waiver was unenforceable. In its first opinion, the Second Circuit held that despite the strong federal policy in favor of arbitration, agreements to arbitrate federal statutory claims are enforceable only if the litigant may vindicate the statutory claim effectively in the arbitral forum. The Second Circuit ruled the plaintiffs had met their burden of showing that proceeding in individual arbitration would be cost-prohibitive. Its decision was based on the undisputed declaration of the plaintiffs’ economic expert witness that the cost of preparing an expert report and testimony necessary to prove the plaintiffs’ antitrust claims would be at least several hundred thousand dollars and could exceed $1 million, while the maximum damages any individual plaintiff could expect was less than $40,000 after trebling damages. Applying the effective-vindication rule, the Second Circuit held the class action waiver was unenforceable.

Following the Second Circuit’s decision, the U.S. Supreme Court handed down its decisions in two class arbitration cases, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), and AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). After each of those decisions, the Second Circuit ordered additional briefing from the parties on whether those decisions required a different outcome in the case before it. In each instance, the Second Circuit reaffirmed its initial decision that the class action waiver was unenforceable by reason of the effective-vindication rule, which the court held was unaffected by and consistent with the Stolt-Nielsen and Concepcion decisions.

Supreme Court’s Decision

The Supreme Court reversed in a 5-3 opinion written by Justice Antonin Scalia. (Justice Sonya Sotomayor did not participate.) The Court reiterated that arbitration is a matter of contract and that the FAA requires arbitration agreements be “rigorously enforced” according to their terms, even for claims alleging a violation of a federal statute, unless Congress has provided otherwise. Applying this precept, the Court analyzed two grounds the Second Circuit had relied on to invalidate the class action waiver.

First, the Court rejected the argument that enforcing the class action waiver would contravene the policies of the antitrust laws. The antitrust laws, it said, contain certain provisions to encourage plaintiffs to bring such claims (primarily, the provision for the recovery of treble damages), but they do not evince any intention to preclude class action waivers. Indeed, the Court noted, the Sherman and Clayton Acts were enacted decades before the adoption of Rule 23 of the Federal Rules of Civil Procedure, which made the class action procedure generally available. In short, the Court stated, “[T]he antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”

Second, the Court rejected the effective-vindication rule as a basis to invalidate class action waivers. It characterized the rule as a “judge-made exception to the FAA” crafted to prevent a “prospective waiver of a party’s right to pursue statutory remedies.” Mitsubishi Motors Corp. v. Soler-Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985) (emphasis added). In the Court’s view, a class action waiver did not eliminate the right to pursue statutory remedies, even if the cost of proving entitlement to such remedies was prohibitive. The Court stated, “The class action waiver merely limits arbitration to the two contracting parties. It no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938 . . . . Or to put it differently, the individual suit that was considered adequate to assure the ‘effective vindication’ of a federal right before adoption of class-action procedures did not suddenly become ‘ineffective vindication’ upon their adoption.” Citing Concepcion, the Court rejected the proposition that class proceedings were necessary to prosecute claims “that might otherwise slip through the legal system.”

The Court recognized that an arbitration agreement expressly waiving federal statutory remedies would constitute a prospective waiver of “the right to pursue” such remedies (and therefore, presumably, would be invalid), as “perhaps” would be prohibitively expensive arbitration fees.

The Court concluded by observing that adopting the effective-vindication rule would require courts to analyze the enforceability of class action waivers on a case-by-case basis. The parties would have to litigate what evidence was necessary to meet the legal requirements of each claim and the cost of developing that evidence, and then compare those costs to the damages that could be recovered if the plaintiffs were to prevail on the issue of liability. The FAA foreclosed the imposition of such a “hurdle” to the enforcement of class action waivers, the Court said.

Justice Elena Kagan, joined by two other Justices, dissented. The dissent argued that enforcing the arbitration agreement would effectively immunize American Express from antitrust liability, because no individual merchant could afford to challenge the complained-of practice. The dissent argued Supreme Court precedent had established that “[a]n arbitration clause will not be enforced if it prevents the effective vindication of federal statutory rights, however it achieves that result.” At bottom, a majority of the Court disagreed with this position, at least as it applied to class action waivers.

Implications

Despite the Supreme Court’s previous strong pronouncements in favor of enforcing arbitration agreements according to their terms, a significant limitation on the enforcement of class action waivers remained: the effective-vindication rule. With American Express, that limitation largely has been eliminated. Challenges to the enforceability of arbitration agreements will continue to be made, but most likely on narrower grounds, such as those mentioned by the Court: lack of contract formation, excessive arbitration fees, and other unfair or overreaching provisions, and improper limitations on the right to pursue statutory rights or remedies otherwise available in litigation.