Once Again Limiting Collective Actions, Court Rules That High Cost of Pursuing Individual Claims is Not Enough to Override Private Arbitration Contract
In the latest Supreme Court decision addressing the intersection of antitrust and arbitration law, the Court held in American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013) that the Federal Arbitration Act does not permit courts to invalidate a contractual waiver of class arbitration on the ground that an individual plaintiff’s cost of individual arbitration would exceed the potential recovery. The decision is significant for two reasons. First, and most obviously, it directly allows businesses to require individual resolution of individual claims. Second, it continues the trend in Supreme Court decisions relating to collective actions generally, further limiting the ability of plaintiffs’ counsel to aggregate claims in class actions, in court or before arbitrators. Both are welcome developments to businesses that have been repeatedly victimized by lawyer-driven litigation. Both are equally likely to be decried by consumer advocates, who will be troubled that concern over unwarranted litigation is, in their view, foreclosing legitimate claims.
Plaintiffs were merchants who accepted American Express cards; they brought a tying claim, alleging that Amex used its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than fees for competing credit cards.
The district court granted Amex’s motion to compel arbitration, rejecting plaintiffs’ argument that the class action waiver would make arbitration prohibitively expensive because the cost of the expert analysis necessary to prove the antitrust claim would be many times more than the maximum potential recovery for the respective individual named plaintiffs. The Court of Appeals for the Second Circuit reversed and held the class waiver unenforceable because of the prohibitive cost of proceeding on an individual basis.
The Supreme Court reversed, emphasizing the “overarching principle that arbitration is a matter of contract,” and that “courts must ‘rigorously enforce’ arbitration agreements according to their terms.” Slip Op. at 3. The Court noted that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim,” nor do they “evince an intention to preclude a waiver of class-action procedure.” Slip Op. at 4. The Court acknowledged that certain arbitration provisions could go too far if they waive a party’s right to pursue a statutory remedy, such as a provision “forbidding the assertion of certain statutory rights,” an antitrust claim for instance, or assessing “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” Slip Op. at 6. However, found the Court, “the fact that it is not worth the expense of proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Slip Op. at 7. The Court noted that the Sherman and Clayton Acts were enacted decades before the advent of class actions in 1938, and that the class-action waiver “no more eliminates [the] right to pursue [a] statutory remedy than did federal law before its adoption of the class action.” Slip Op. at 7.
Although the majority focused solely on the class waiver provision, the dissent pointed out that other provisions in the Amex contract made the Court’s ruling particularly harsh: it prohibited any kind of joinder or consolidation of parties or claims (thus defendants in an antitrust conspiracy case could not be joined in a single arbitration); its confidentiality provisions prevented plaintiffs from informally working together to produce a common expert report (which is costly, yet essential, in an antitrust case); and it precluded any cost shifting to Amex, even if plaintiffs prevailed (thus gutting the attorneys fees provisions of the Sherman Act). Amex also “refused to enter into any stipulations that would obviate or mitigate the need for the economic analysis.” Slip Op. Dissent at 7-8. Because the decision explicitly addressed only the class waiver provision, some plaintiffs may still attempt to litigate the enforceability of those other arbitration provisions; however, with the exception of cost-shifting provisions, given the Court’s strict contractual approach to arbitration, this is unlikely to succeed absent a shift in the Court’s makeup. Plaintiffs may have some success in challenging provisions that preclude cost shifting, since the award of attorneys fees to prevailing plaintiffs is a statutory right under federal antitrust law.
As noted above, the Supreme Court’s ruling provides businesses with another powerful tool with which to reduce litigation. A class waiver can be added to arbitration provisions as long as the contract does not preclude a party from pursuing antitrust or other federal claims, or impose excessive filing and administrative fees. Contracts that are already the subject of litigation should be reviewed for arbitration and class waiver provisions that may not have been enforced in light of prior law holding such waivers unenforceable; a motion to compel arbitration may now be a viable strategy.
In deciding whether to enforce a class waiver in an arbitration provision, a defendant must also weigh the costs of proceeding in multiple fora rather than on a unified basis in a class action. Moreover, in antitrust conspiracy cases, a defendant must also consider issues of joint and several liability, particularly where an arbitration clause precludes joinder of other defendants, as a defendant could end up arbitrating on an individual basis, yet still remain liable on a joint and several basis for the conduct of co-conspirators. To mitigate claims that a bar on cost-shifting undermines a statutory right, a defendant could offer to waive any provisions barring the award of attorneys fees, and could offer to pay more of the administrative costs of arbitration than contractually required.