Federal Arbitration Act (FAA) Compels Enforcement of Class Action Waiver in Contract Even if Cost of Pursuing Federal Claim will be Prohibitively Expensive to Arbitrate U.S. Supreme Court Holds

Plaintiffs – a group of merchants who accept American Express cards – filed a putative class action against American Express alleging of the Sherman Act and seeking treble damages under the Clayton Act; the class action complaint alleged that American Express violated federal antitrust laws by “us[ing] its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit cards.” American Express Co. v. Italian Colors Restaurant, __ U.S. __, __ S.Ct. __, 2013 WL 3064410, *1-2 (June 20, 2013). Plaintiffs’ contract with American Express “contains a clause that requires all disputes between the parties to be resolved by arbitration” and further provides that “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” Id., at *1 (citing In re American Express Merchants’ Litig., 667 F. 3d 204, 209 (2d Cir. 2012)). Accordingly, American Express moved under the Federal Arbitration Act (FAA) to compel arbitration of Plaintiffs’ individual claims, id., at *2. Plaintiffs opposed dismissal of their class action complaint, submitting an expert witness declaration that estimated the cost of proving Plaintiffs’ antitrust claims could “exceed $1 million,” while the maximum recovery for any individual plaintiff would be less than $40,000. Id. The district court rejected Plaintiffs’ argument, granted the motion to compel arbitration of the individual claims and dismissed the class action complaint. Id. The Second Circuit reversed, holding that because pursuit of Plaintiffs’ antitrust claims would be prohibitively expensive if pursued individually, the class action waiver was unenforceable. Id. (citing In re American Express Merchants’ Litig., 554 F. 3d 300, 315-16 (2d Cir. 2009)). The Supreme Court reversed.

The issue before the Supreme Court was “whether a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.” Italian Colors, at *1. More specifically, the Supreme Court granted certiorari to address “[w]hether the Federal Arbitration Act permits courts . . . to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim,” id., at *3.

The High Court found the case required little discussion. Arbitration is a matter of contract, and found no basis “to reject the waiver of class arbitration here.” Italian Colors, at *3-4. It rejected plaintiffs’ claim that “requiring them to litigate their claims individually—as they contracted to do—would contravene the policies of the antitrust laws.” Id., at *4. Put simply, “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” Id. Congress has not evidenced an intent to prohibit class action waivers in connection with antitrust laws; on the contrary, the antitrust laws were enacted long before Rule 23. Id. The Supreme Court also rejected the invitation to codify, as a judge-made exception, the “effective vindication” concept that had been raised in dictum in prior cases. Id., *5-6. Under this rule, plaintiffs argued, courts may “invalidate agreements that prevent the ‘effective vindication’ of a federal statutory right” and that “[e]nforcing the waiver of class arbitration bars effective vindication…because they have no economic incentive to pursue their antitrust claims individually in arbitration.” Id., at *5. The purpose of such an exception would be “to prevent ‘prospective waiver of a party’s right to pursue statutory remedies,’” such as “a provision in an arbitration agreement forbidding the assertion of certain statutory rights.” Id., at *6. But it would not extend to a situation where the cost of proving a statutory claim is prohibitively expensive. Id. As the High Court explained at page *7:

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 “effective vindication” of a federal right before adoption of class-action procedures did not suddenly become “ineffective vindication” upon their adoption. (Italics added. Citations and footnote omitted.)

Finally, the Supreme Court noted that its decision in AT&T Mobility v. Concepcion, 563 U.S. ___ (2011), “all but resolves this case,” as that opinion “specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’” Italian Colors, at *8-9 (citation and footnote omitted). Accordingly, the Supreme Court reversed the judgment of the Second Circuit. Id., at *9.

NOTE: It is disheartening that the Supreme Court had to note, yet again, that “Congress enacted the FAA in response to widespread judicial hostility to arbitration.” Italian Colors, at *3. The number of times the Supreme Court has had to grant certiorari and reverse illustrates that judicial hostility to arbitration remains rampant.

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