On June 20, 2013, the Supreme Court decided American Express Co. et al v. Italian Colors Restaurant et al, No. 12-133, reversing the Second Circuit and holding that the Federal Arbitration Act (FAA) does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff's cost of individually arbitrating a federal statutory claim exceeds the potential recovery.
Respondents in this case are merchants who signed a contract with American Express and its wholly owned subsidiary to allow them to accept American Express credit cards. The parties' contract contains an arbitration clause requiring that all disputes be resolved by arbitration and prohibiting arbitration on a class action basis. Nonetheless, Respondents filed a class action against American Express and its subsidiary in federal court, alleging anti-trust violations under the Sherman and Clayton Acts. Petitioners moved to compel individual arbitration under the FAA.
The District Court dismissed Respondents' claims, but the Second Circuit reversed, holding that the arbitration agreement was unenforceable because Respondents would incur prohibitive costs if compelled to arbitrate without a class action. The Second Circuit twice reconsidered and twice reaffirmed its ruling after the Supreme Court's decisions in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010), and AT&T Mobility LLC v. Concepcion, 563 U.S. ___ (2011).
The Supreme Court granted review and reversed, holding that the FAA stands for the principle that arbitration is a matter of contract that courts must "rigorously enforce." This principle 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. The Supreme Court found that the Sherman and Clayton Acts do not evince an intent to preclude a waiver of class-action procedure. Therefore, a court cannot invalidate the parties' agreement on arbitration.
The Court next considered whether the judge-made "effective vindication" exception should preclude enforcement of the arbitration provision. Respondents contended that, because they have no economic incentive to pursue their antitrust claims individually in arbitration, enforcing the waiver of class arbitration would serve as an effective bar to vindication. The Supreme Court affirmed the existence of the "effective vindication" exception, but disagreed that it applied. The effective vindication exception developed to prevent the prospective waiver of a party's right to pursue a statutory remedy. It bars outright waivers of federal claims in arbitration agreements, and it may "perhaps cover [arbitration-related] filing and administrative fees" that are so high as to make access to the forum prohibitive. But the exception does not guarantee that a plaintiff must be able to cost-effectively prove a claim. The fact that a statutory right may not be worth the expense to prove does not mean that arbitration has eliminated the right to pursue that statutory remedy. Consequently, even though the parties had stipulated that the expert costs of proving the plaintiff's antitrust claim would exceed any potential recovery, the arbitration clause and its class action waiver was enforceable.
Justice Scalia delivered the opinion for the Court, in which Chief Justice Roberts and Justices Kennedy, Thomas and Alito joined, and in which Justice Thomas filed a concurring opinion. Justice Kagan filed a dissenting opinion, in which Justices Ginsburg and Breyer joined. Justice Sotomayor took no part in the consideration or decision of the case.