On June 20, 2013, the U.S. Supreme Court in American Express Co. v. Italian Colors Restaurant upheld a provision in an arbitration agreement that barred class actions, even where litigation of individual claims would be economically infeasible.

Several merchants who accept American Express credit cards sued American Express and a subsidiary, alleging that American Express used its monopoly power in the charge card market to force merchants to agree to pay excessive rates for transactions in violation of the Sherman Antitrust Act. The agreement between American Express and each of the merchants contained an arbitration clause, which provided that "there shall be no right or authority for any Claims to be arbitrated on a class action basis."

American Express sought to enforce the agreement and compel individual arbitrations. In opposing the motion, the merchants submitted a declaration from an economist who estimated that the expert analysis necessary to prove the antitrust claims could exceed $1 million, while the maximum recovery for an individual plaintiff would be less than $40,000, even when damages were trebled.

The Second Circuit Court of Appeals had previously held that because the merchants had established that they would incur prohibitive costs if compelled to arbitrate individually, the class action waiver was unenforceable and the arbitration could not proceed. American Express sought review by the Supreme Court.

In a 5-3 decision authored by Justice Scalia, the Court upheld the class action waiver despite the high cost incident to litigating the individual claims separately. The Court began its analysis by recognizing the Federal Arbitration Act's (FAA) "overarching" principle that arbitration is a matter of contract and that, absent contrary congressional command, courts must rigorously enforce arbitration agreements according to their terms, including the rules under which arbitration will be conducted. The Court held that antitrust laws do not guarantee an affordable path to vindicate every claim and do not preclude a waiver of the class action. In fact, the Sherman Act predates by decades the class action rule (Fed. R. Civ. P. 23) invoked in the case. The Court further held that Rule 23 does not create an entitlement to a class proceeding.

The Court next addressed, and rejected, the main argument urged by the plaintiffs—that if enforcement of the class action waiver prevents the "effective vindication" of substantive federal rights, the class action waiver is contrary to public policy and cannot be enforced. The majority acknowledged that prior cases suggested that there was an "effective vindication exception" to the FAA. The Court reasoned, however, that this judge-made exception originated as non-binding dictum in Mitsubishi Motors Corp. v. Soler-Chrysler-Plymouth, Inc. opinion (a 1985 Supreme Court case). Although acknowledged in several subsequent cases, the effective vindication rule had never been applied to invalidate an arbitration agreement.

The Court focused on the language in Mitsubishi Motors indicating that the exception identified in that case was designed to protect the "right to pursue statutory remedies." This language from Mitsubishi Motors, the majority concluded, barred contract provisions "forbidding the assertion of certain statutory rights" but did not apply to class action waivers or other provisions that simply increase the cost of proving a claim. In other words, an arbitration agreement cannot eliminate substantive rights (e.g., a limitation on the right to recover attorneys' fees where the statute provides for the recovery of attorneys' fees), but the arbitration agreement can alter procedural rules that adversely affect the economics of pursuing a claim as long as the right to pursue the claim is not eliminated.

The Court suggests that a contrary rule would be unworkable. Courts and parties would be forced to preliminarily litigate the costs associated with proving the elements of plaintiffs' claims and the potential damages that might be recovered on those claims in order to assess the resulting economic feasibility of the claim and determine whether an arbitration agreement could be enforced. The Court held that such a regimen "would undoubtedly destroy the prospect of speedy resolution that arbitration . . . was meant to secure" and chided the dissent for seeking to impose that burden on federal courts.

In a dissenting opinion, Justice Kagan (joined by two justices) expressed concern that the majority's approach was a green light to future litigants to create impediments to the effective vindication of rights through artful drafting of limitations in arbitration agreements. For instance, arbitration agreements might (a) impose high filing fees; (b) provide a one-day statute of limitations; or (c) prohibit economic testimony in antitrust cases, among other things. Justice Kagan argued that the effective vindication rule barred not only limitations of substantive rights in arbitration agreements, but also enforcement of any term in an arbitration agreement that would effectively "confer immunity from potentially meritorious federal claims."

The decision in American Express continues the Court's recent trend of giving parties to an arbitration agreement great latitude in limiting procedural rights and strictly enforcing the terms of arbitration agreements, regardless of the disparity in bargaining power and regardless of the practical effect such procedural limitations may have on the economics of litigating low-value claims. The Court's view of the effective vindication exception is so narrow that it may no longer serve any meaningful purpose. The only provision in an arbitration agreement that would plainly be barred by the exception is an express prohibition on the assertion of substantive statutory rights.

One might think from at least some of the majority's language that, where a party is litigating a claim under a statute that provides for collective litigation (e.g., the Fair labor Standards Act), a class action waiver would be unenforceable. An agreement containing a class action waiver would confront a "contrary congressional command"—a situation where the majority indicated that courts should reject and refrain from enforcing the class action waiver. However, that door was closed long ago by the Supreme Court's decision in Gilmer v. Interstate/Johnson Lane Corp., a 1991 case where the Supreme Court enforced a class action waiver in an arbitration agreement even though it was applied to an age discrimination claim. The Age Discrimination in Employment Act, like the FLSA, allows for collective actions. That case held, and American Express repeats, that class action waivers will survive even where collective litigation is authorized by the same statute creating the right being litigated. A class action waiver must be expressly barred before the courts can disregard the waiver.

The Court's opinion appears to make class action waivers virtually unassailable absent specific federal legislation to the contrary or evidence that such contracts are unconscionable under general principles of unconscionability. (The FAA prohibits state-created rules that impose requirements on arbitration agreements not imposed on contracts generally.) Unconscionability still exists as a defense to a class action waiver if one can show that the agreement is unconscionable for reasons other than the existence of the class action waiver and a finding of unconscionability would in no way hinder the primary purposes of the FAA. Companies should be able to craft arbitration agreements that will survive such challenges, although the arbitration agreement should indicate that class arbitration is not permitted. Ambiguous language has been held to constitute an agreement to engage in class arbitration.

What This Means for Employers

In sum, as a result of the decision in American Express, a court will provide no relief from an arbitration agreement just because individual arbitration is expensive or inconvenient, even if federal statutory rights are involved. However, a class action waiver will not provide de facto immunity from the law. The class action waiver will offer American Express no protection from an enforcement action on behalf of a class by the Federal Trade Commission or the Department of Justice. Similarly, a class action waiver in an employment agreement will provide employers no protection from an enforcement action on behalf of a class by the Department of Labor, the Equal Employment Opportunity Commission or the National Labor Relations Board (although liability can be substantially limited through careful drafting). Moreover, in a 2012 decision, D.R. Horton v. NLRB, the NLRB ruled that class action waivers in employment agreements are unlawful under the National Labor Relations Act because they prevent employees from engaging in protected concerted activity. Several courts have rejected the NLRB's position and refused to enjoin use of arbitration agreements containing class action waivers. In view of the Supreme Court's apparent pro arbitration and anti-class action leanings, the judicial resistance to the NLRB's efforts to restrain use of class action waivers in employment agreements ultimately is likely to be resolved against the NLRB and in favor of the employer. To enjoy the benefit of the Supreme Court's ruling and potentially avoid costly class action litigation, employers may want to review their arbitration agreements with employment counsel or consider instituting a mandatory arbitration program for all or certain classes of employees.