Continuing its recent focus on issues involving class arbitration,1 including a decision issued just days earlier during this term,2 the US Supreme Court on June 20, 2013 held that "a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act [even] when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery." American Express Co. v. Italian Colors Restaurant, No. 12-133. While the 5–3 decision helps cement the enforceability of class arbitration waiver provisions, it may create the prospect that, as noted in a strong dissent by Justice Kagan, arbitration provisions can now be crafted with procedural bars that make the cost-effective assertion of certain claims all but impossible.
The plaintiff in American Express was a restaurant that accepted American Express cards. The restaurant contended that the terms of its merchant agreement with American Express concerning the use of those cards constituted an unlawful tying arrangement prohibited by § 1 of the Sherman Act. Although the agreement contained an arbitration provision that expressly provided that "[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis," the plaintiff brought a class action for treble damages against American Express in federal court on behalf of itself and other merchants who had similar agreements with American Express.
American Express moved to compel arbitration under the Federal Arbitration Act (FAA). After initial success at the district court level, it was rebuffed twice by the Court of Appeals for the Second Circuit, and the class action was permitted to go forward. The basis for these rulings was that the cost of proving the antitrust violation was so prohibitive that the plaintiffs could not effectively pursue individual cases in arbitration, and that arbitration therefore could not proceed. In reaching this conclusion, the Second Circuit distinguished the Supreme Court’s prior rulings in Stolt-Nielsen, which held that a party may not be compelled to submit to class arbitration absent an agreement to do so, and AT&T Mobility, which held that the FAA pre-empted state law doctrines purporting to bar enforcement of a class arbitration waiver on unconscionability grounds. American Express in turn sought relief from the Supreme Court.
The Supreme Court reversed. The Court began its analysis with "the overarching principle" under the FAA "that arbitration is a matter of contract," and therefore that "courts must ‘rigorously enforce’ arbitration agreements according to their terms," including terms establishing the parties permitted to participate in the arbitration and the rules by which the arbitration is to be conducted. These principles, said the Court, apply no less when the underlying claims involve an alleged violation of a federal statute, unless the statute expressly so provides.
As for the antitrust claim at issue here, the Court pointed out that "the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim," even in court. While the antitrust laws contain some provisions to facilitate the bringing of claims by plaintiffs (most notably the treble damage remedy), they make no mention of class action procedures. Indeed, the Sherman and Clayton Acts predated by decades the adoption of modern class action rules in the Federal Rules of Civil Procedure.
The Court also rejected the notion that there exists an established judge-made exception to the FAA that prevents enforcement of arbitration agreements when they serve to "prevent the ‘effective vindication’ of a federal right." The Court stated that while such a concept has been mentioned by the Court in dicta on several occasions, it has not in fact been applied to invalidate arbitration provisions. The Court stated that this claimed exception involves a complete "prospective waiver of a party’s right to pursue statutory remedies," but that was not the situation presented in American Express. The Court explained, "the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy." (Emphases in original.) Indeed, "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."
The Court concluded with the observation that "[t]ruth to tell, our decision in AT&T Mobility all but resolves this case." Asserting that forcing a switch from bilateral to class arbitration fundamentally changes the procedural nature of arbitration (by affecting its informality, cost and speed), the Court said that under AT&T Mobility respect for the arbitration agreement precludes conditioning its enforcement upon allowing class procedures in order to avoid having some cases "otherwise slip through the legal system."
Insight from the Dissent
The dissenting opinion of three of the Court’s judges was notable not only for its vigor but also because the arguments it made served to underscore the force and breadth of the majority opinion which had rejected them. The dissent’s primary point was that the majority opinion ignored a fundamental reality created by its holding—that a party could now use an aggressively-crafted arbitration provision to allow it to engage in certain federally-proscribed wrongs with impunity, because the provision could foreclose all economically feasible avenues for relief against that wrong. The dissent presented a series of hypothetical mechanisms, beyond just class arbitration waivers, by which such a result could be achieved. The dissent further argued that such a result was a particularly anomalous outcome when the underlying claims involved federal statutory causes of action that exist not just to provide private compensation but also to promote the public interest in having those federal laws vigorously enforced. Rather than being guided by cases like AT&T Mobility (in which class arbitration waivers were challenged on state-law grounds, thus presenting Supremacy Clause issues), the dissent argued that the "effective vindication" principle (which AT&T Mobility had not addressed) was in fact an established federal exception to enforcing arbitration terms under the FAA in contexts such as this where the policies of the FAA and another federal law were claimed to be in conflict. The majority, however, did not agree.
With the Supreme Court’s recent trio of Stolt-Nielsen, AT&T Mobility and now American Express, attempts to challenge class arbitration waivers are likely to face very high judicial hurdles. Absent situations like that in Oxford Health Plans, where the agreement was sufficiently non-specific that it left to the arbitrator to decide whether the parties had agreed to allow class arbitration or not, and the arbitrator determined that it did, the Court has mapped out a fairly effective route for parties who wish to avoid class arbitration to be able to do so with confidence. While it remains to be seen whether this principle is so absolute that it would prevail in even the extreme hypothetical situations posed by the dissenting opinion, a large measure of uncertainty has been removed for parties who seek to arbitrate without facing the risk of being thrust into class procedures of the kind that they had hoped to avoid by moving from the judicial to the arbitral forum.