If you use arbitration clauses to protect your company against class actions, you can breathe a little easier. The U.S. Supreme Court held last week that class action arbitration waiver provisions are enforceable -- even where the cost of individual arbitration exceeds the potential recovery.  This decision is likely to have a substantial impact on retailers, distributors, credit card companies, franchisors, employers, and any other entities that use an arbitration clause in a contract. And you can use the ruling's lessons (more on that at the end of this alert) to draft stronger clauses for your own contracts and to defend yourself in any ongoing disputes.

The case

The case, American Express Co. et al. v. Italian Colors Restaurant et al., No. 12-133, arose when a group of merchants filed a class action lawsuit against American Express for violations of federal antitrust laws.  The merchants claimed that AmEx used its monopoly power to illegally force the merchants to accept excessive rates.  AmEx had an agreement with the merchants containing a provision requiring all disputes between the parties to be resolved by arbitration.  The agreement also provided that there "shall be no right or authority" to arbitrate "on a class action basis."  Nevertheless, the merchants filed a class action, arguing that an individual merchant's cost of arbitrating a claim was certain to exceed the potential recovery.

AmEx moved to compel individual arbitration of each dispute;  the merchants opposed the motion and submitted testimony from an economist who estimated that the cost of proving each of the merchants' antitrust claims, including expert reports, would be "at least several hundred thousand dollars, and might exceed $1 million," while the maximum recovery would be limited to $12,000-$38,000.  Because of the prohibitive costs the merchants would face if each had to arbitrate individually, the Second Circuit held that the waiver was unenforceable and that AmEx could not compel individual arbitration of the disputes. 

In a 5-3 decision, the Supreme Court reversed the judgment of the Second Circuit.  The high court held that the FAA bars courts from overturning a class action arbitration waiver on the basis that it would cost plaintiffs more to individually arbitrate a dispute than they could possibly recover.

The reasoning

Writing for the majority, Justice Scalia emphasized that the FAA reflects the congressional policy that arbitration is a matter of contract and, as such, the terms of arbitration provisions must be rigorously enforced.  "That 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," Justice Scalia wrote.  According to the Court, while Congress has taken some measures to make it easier to litigate antitrust claims, "the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim." 

Moreover, the Court rejected the application of the "effective vindication" exception to class action arbitration waivers.  That exception had been previously invoked to prevent parties from contracting to preclude effective vindication of a federal statutory right.  According to the Court, such an exception would "certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights.  And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable."  However, "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."

In dissent, Justice Kagan admonished the majority for refusing to apply the "effective vindication" rule in the case at hand, where AmEx's arbitration provision makes "pursuit of the antitrust claim a fool's errand."  In addition to the class action arbitration waiver, Justice Kagan noted that the agreement (1) disallows any kind of joinder or consolidation of claims or parties; (2) prevents the merchants from producing a common expert report as a result of its confidentiality provision; and (3) precludes any shifting of costs to AmEx.  "In short, the agreement as applied in this case cuts off not just class arbitration, but any avenue for sharing, shifting, or shrinking necessary costs," wrote Justice Kagan.  "AmEx has put Italian Colors to this choice: Spend way, way, way more than your claim is worth, or relinquish your (federal statutory rights)."

The lessons

Some lessons are clear from the American Express Co. decision.

  • Beneficiaries of arbitration agreements that include a clear class action arbitration waiver can breathe a sigh of relief, because such waivers will be enforced under the FAA.  Respondents should use American Express Co. to oppose motions seeking class-wide relief or, if class-wide arbitration has already been ordered, to request a reconsideration of the issue. In many cases, favorable resolution of the class issue will resolve the case. The economics of the arbitration process will force claimants to abandon their claims, since, absent aggregation, they cannot afford to litigate the issue. 
  • It is more important than ever for those who may be faced with arbitration claims from a large group of people to draft arbitration agreements that expressly preclude class or joint arbitration. Consideration should also be given to other constraints, such as prohibiting the claimants' use of the same expert in multiple arbitrations.