The Supreme Court today announced its decision in American Express Co. v. Italian Colors Restaurant. In a 5-3 decision authored by Justice Scalia, it found that an arbitration agreement’s class action waiver is enforceable even though the cost of individually prosecuting the claim exceeds the plaintiff’s potential recovery. A copy of the decision is available here.

Section 2 of the Federal Arbitration Act (FAA) provides that arbitration agreements must be enforced according to their terms “save upon such grounds as exist at law or in equity for the revocation of any contract.” Some have argued that one ground that “exist[s] at law or in equity” is the doctrine expressed in Mitsubishi Motors v. Soler Chrysler-Plymouth, Inc.[1] and Green Tree Financial Corp.-Alabama v. Randolph,[2] which suggested that an agreement might not be enforceable if a litigant could not “effectively vindicate” his federal rights in the arbitral forum. Others have argued that this doctrine was actually dicta or, alternatively, that it did not survive the Court’s decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011). In Concepcion, the Court held that California’s “Discover Bank rule”[3] was preempted by the FAA. The dissent voiced a concern that low-value claims could not be vindicated without class action proceedings, arguing that “class proceedings are necessary to prosecute small dollar claims that might otherwise slip through the legal system.” Id. at 1753. The majority rejected that argument, finding that states “cannot require a procedure that is inconsistent with the [FAA], even if it is desirable for unrelated reasons.” Id. The Court explained that Section 2 permits arbitration agreements to be invalidated by “generally applicable contract defenses,” but not by “defenses that apply only to arbitration or derive their meaning from the fact that an agreement to arbitrate is at issue.” Id. at 1746. The Court granted certiorari in AMEX to address the apparent conflict between Concepcion and the “effective vindication” doctrine.

The plaintiffs in AMEX alleged that the defendants’ “Honor All Cards” policy, which requires that merchants accept AMEX credit cards if they wish to accept its charge cards,[4] is an unlawful “tying” arrangement that violates Section 1 of the Sherman Act.[5] AMEX filed a motion to compel individual arbitration. The plaintiffs opposed that motion, citing expert evidence that their likely average recovery ($5,000) was dwarfed by their likely costs of prosecuting the case (hundreds of thousands if not millions of dollars). The trial court granted the motion to compel. The plaintiffs then took an appeal to the Second Circuit, which reversed the trial court’s order. Citing Green Tree, the Second Circuit found that the plaintiffs’ claims “cannot reasonably be pursued as individual actions, whether in federal court or in arbitration,” and therefore the class action waiver would “effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.”[6]

The Second Circuit would revisit the issue two more times, first after the Supreme Court issued its decision in Stolt-Nielsen,[7] and a second time after the Supreme Court issued its decision in Concepcion.[8] Both times, the court confirmed its original decision. With regard to the Concepcion decision, the Second Circuit found that Concepcion had merely “offered a path for analyzing whether a state contract law is preempted by the FAA,” and thus did not purport to alter “a vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability.”[9] AMEX petitioned for rehearing en banc, which the Second Circuit denied.[10] AMEX then petitioned for certiorari. The Supreme Court granted certiorari, heard argument on February 27, 2013, and issued its opinion today.

The Court’s decision rests on Justice Scalia’s clear distinction between the right to pursue a remedy, and whether pursuing a remedy would be worthwhile. Justice Scalia wrote:

No contrary congressional command requires us to reject the waiver of class arbitration here. Respondents argue that requiring them to litigate their claims individually—as they contracted to do—would contravene the policies of the antitrust laws. But the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim. Congress has taken some measures to facilitate the litigation of antitrust claims—for example, it enacted a multiplied-damages remedy. In enacting such measures, Congress has told us that it is willing to go, in certain respects, beyond the normal limits of law in advancing its goals of deterring and remedying unlawful trade practice. But to say that Congress must have intended whatever departures from those normal limits advance antitrust goals is simply irrational. “[N]o legislation pursues its purposes at all costs.”

Slip Op. at 4 (emphasis added) (citations omitted). The Court also found that Congress’ approval of the class-action structure does not entitle parties to avail themselves of its use:

Nor does congressional approval of Rule 23 establish an entitlement to class proceedings for the vindication of statutory rights. To begin with, it is likely that such an entitlement, invalidating private arbitration agreements denying class adjudication, would be an “abridg[ment]” or modif[ication]” of a “substantive right” forbidden to the Rules. But there is no evidence of such an entitlement in any event. The Rule imposes stringent requirements for certification that in practice exclude most claims. And we have specifically rejected the assertion that one of those requirements (the class-notice requirement) must be dispensed with because the “prohibitively high cost” of compliance would “frustrate [plaintiff’s] attempt to vindicate the policies underlying the antitrust” laws. One might respond, perhaps, that federal law secures a nonwaivable opportunity to vindicate federal policies by satisfying the procedural strictures of Rule 23 or invoking some other informal class mechanism in arbitration. But we have already rejected that proposition in AT&T Mobility.

Id. at 5 (citations omitted). In addressing the effect of the “effective vindication” doctrine articulated in Mitsubishi Motors, the Court stated:

[T]he exception finds its origin in the desire to prevent “prospec­tive waiver of a party’s right to pursue statutory reme­dies.” That 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. But 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. The class-action waiver merely limits arbitration to the two contracting parties. It no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938. Or, to put it differently, 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.

Id. at 6-7 (emphasis added) (citations omitted). In the end, the Court found that its holding in Concepcion applied directly to this case:

Truth to tell, our decision in AT&T Mobility all but resolves this case. There we invalidated a law conditioning enforcement of arbitration on the availability of class procedure because that law “interfere[d] with fundamental attributes of arbitration.” “[T]he switch from bilateral to class arbitration,” we said, “sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” We specifically rejected the argument that class arbitration was necessary to prosecute claims “that might otherwise slip through the legal system.”

Id. at 8-9 (emphasis added).

Justice Thomas concurred in the Court’s opinion, adding that, in his opinion, the analysis turns on whether the arbitration agreement was “properly made”; i.e., an arbitration agreement will be vitiated only if a party can successfully challenge the formation of the agreement. Slip Op. at 1 (Thomas, J., concurring).

In a lengthy dissent, Justice Kagan, joined by Justices Ginsburg and Breyer, argued that the majority erred in viewing the dispute too narrowly:

The effective-vindication rule asks whether an arbitration agreement as a whole precludes a claimant from enforcing federal statutory rights. No single provision is properly viewed in isolation, because an agreement can close off one avenue to pursue a claim while leaving others open. In this case, for example, the agreement could have prohibited class arbitration without offending the effective-vindication rule if it had provided an alternative mechanism to share, shift, or reduce the necessary costs. The agreement’s problem is that it bars not just class actions, but also all mechanisms—many existing long before the Sherman Act, if that matters—for joinder or consolidation of claims, informal coordination among individual claimants, or amelioration of arbitral expenses.

. . . .

The Court today mistakes what this case is about. To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled. So the Court does not consider that Amex’s agreement bars not just class actions, but “other forms of cost-sharing . . . that could provide effective vindication.” In short, the Court does not consider—and does not decide— Italian Colors’s (and similarly situated litigants’) actual argument about why the effective-vindication rule precludes this agreement’s enforcement.

Slip Op. at 11, 14-15 (Kagan, J., dissenting) (emphasis in original) (citations omitted).