On June 20, 2013, the Supreme Court issued its opinion in American Express Co. v. Italian Colors Restaurant (“Italian Colors”), significantly strengthening the application of arbitration clauses in class action cases.1 The Court held that arbitration clauses with class action waivers, including in antitrust cases, are enforceable regardless of whether the value of an individual plaintiff’s claim was exceeded by the cost to arbitrate. In the 5-3 decision, authored by Justice Scalia, the Court continued two trends its decisions have featured the last few years: constricting class action litigation2 and enforcing arbitration agreements, even those that prohibit class actions.

Background

The plaintiffs in this case – a number of small businesses – filed class action cases, which were consolidated in the Southern District of New York, alleging that American Express had violated the antitrust laws by illegally tying the small businesses’ acceptance of American Express charge cards to their acceptance of American Express credit cards.3 The plaintiffs alleged that through the tying arrangement, American Express was able to charge the plaintiffs a supracompetitive transaction fee.4

Each plaintiff, at the beginning of its business relationship with American Express, signed a form merchant contract that contained an arbitration provision.5 The provision required arbitration of any claims against American Express and prohibited litigation of those claims on a class basis.6 The arbitration provision was a standard term in American Express’s agreements and was not subject to individual negotiation by the plaintiffs.7

Notwithstanding the arbitration agreement, plaintiffs filed class action claims in federal court. In response to American Express’s motion to compel arbitration, plaintiffs argued that the arbitration clause was unenforceable because each plaintiff would be required to incur hundreds of thousands of dollars in discovery costs that would vastly outstrip the value of their claims, which they estimated to average only $5,000 per plaintiff.8 The Southern District of New York granted American Express’s motion to compel arbitration,9 and the plaintiffs appealed to the Second Circuit.10

In a series of decisions, the Second Circuit reversed the Southern District of New York and held that “each [class action] waiver [in an arbitration agreement] must be considered on its own merits,” and that on the facts of the claims at issue the waiver was unenforceable.11 The Second Circuit considered whether the Supreme Court’s recent opinions enforcing arbitration clauses – AT&T Mobility LLC v. Concepcion12 and Stolt-Nielsen S.A. v. AnimalFeeds International Corp.13 – required enforcement of the American Express provision, ultimately concluding that they did not.14 Instead, the Second Circuit framed the central issue in Italian Colors as “whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.”15 On this question, the Second Circuit found the arbitration provision unenforceable because “as a matter of law, … the cost of plaintiffs’ individually arbitrating their dispute with Amex would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws,”16 such that “the only economically feasible means for plaintiffs enforcing their statutory rights is via a class action.”17 The Supreme Court granted certiorari to consider the Second Circuit’s Italian Colors III decision.

The Supreme Court’s Decision

The Supreme Court rejected the Second Circuit’s reasoning, finding arbitration clauses enforceable even in situations where arbitration on an individual claim (i.e. non-class action) basis would make it uneconomical for plaintiffs to pursue their claims. Justice Scalia, writing for the majority, reasoned that the Federal Arbitration Act (“FAA”)18 “reflects the overarching principle that arbitration is a matter of contract,”19 and “courts must ‘rigorously enforce’”20 these provisions “unless the FAA’s mandate has been ‘overridden by a contrary congressional command.’”21 To the plaintiffs’ argument that a class action was the only economical way to pursue the claim, Justice Scalia found that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”22

The Court rejected the argument that Federal Rule of Civil Procedure 23 “establish[ed] an entitlement to class proceedings for the vindication of statutory rights,” noting that the Sherman Act and Clayton Act “were enacted decades before” Rule 23.23 Moreover, the Court reasoned that to conclude that Rule 23 did establish such a right would likely violate the Rules Enabling Act’s24 prohibition of “‘abridg[ment]’ or ‘modif[ication]’ of a ‘substantive right’” through means of the Federal Rules of Civil Procedure.25

Finally, the Supreme Court distinguished Italian Colors from the circumstances in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.26 In Mitsubishi Motors, the Court suggested that arbitration agreements might be invalidated as contrary to public policy where they “‘operat[e] … as a prospective waiver of a party’s right to pursue statutory remedies.’”27 In distinguishing the Mitsubishi Motors dicta from Italian Colors, Justice Scalia left open the possibility that “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable” could serve as the basis for invalidating an arbitration agreement.28 The Court concluded, however, that “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.”29

Conclusion

The Supreme Court’s decision in Italian Colors suggests that companies might essentially opt out of the class action procedure, at least for commercial and antitrust claims brought by direct purchasers, by making arbitration clauses with class action waivers a standard part of their distribution or sales contracts. Given the economic incentives created by the class action process, which act to increase the number and size of commercial and antitrust claims, the Court’s statement that it will “rigorously enforce” arbitration and waiver agreements should cause parties engaged in commercial transactions to consider carefully the omission of a class action waiver from its standard terms.