The U.S. Supreme Court rejected the contention that a class arbitration waiver was unenforceable under the Federal Arbitration Act (“FAA”) when the cost of arbitrating individually would be greater than any potential recovery. Writing for a 5-3 majority of the Court, Justice Antonin Scalia ruled in American Express v. Italian Colors Restaurant, that the merchants bringing anti-trust claims against American Express Co. (“AMEX”) must pursue them individually in arbitration. Thursday’s ruling is another victory for opponents of class actions and will have an impact in areas far beyond anti-trust law. Indeed, the Second Circuit decisions in AMEX and their rationale had been applied to class action waivers in employment litigation.
The Long History of AMEX
The Second Circuit refused three times to compel the parties to arbitrate in the AMEX litigation, despite their express agreement. Largely based upon the affidavit of an economist, Gary L. French, Ph.D., the appellate court concluded the costs of plaintiffs’ individually arbitrating their dispute with AMEX would be prohibitive, and the “only economically feasible means for the merchants to enforce their statutory rights is via class action.” See In Re American Express Merchants’ Litigation, 667 F.3d 204, 212 (2d Cir. 2012) (“AMEX III”). (We covered AMEX III on February 6, 2012 and again on June 5, 2012, after the Second Circuit’s denial of defendants’ petition for rehearing en banc).
The Second Circuit first heard the matter on December 10, 1007. In In re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009) (“AMEX I”), the court held the class action waiver unenforceable. The U.S. Supreme Court then vacated that decision and remanded it for reconsideration in light of its opinion in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 130 S. Ct. 1758 (2010). Stolt-Nielsen held that imposing class arbitration on parties that had not agreed to it conflicts with the FAA. The Second Circuit, however, found that Stolt-Nielsen did not affect its original analysis and again reversed the District Court’s decision and remanded the case. In Re American Express Merchants’ Litigation, 634 F.3d 187, 199-200 (2d Cir. 2011) (“AMEX II”). On April 11, 2011, the appellate court placed a hold on the mandate in AMEX II so that AMEX could seek a writ of certiorari.
During that time, the Supreme Court issued its opinion in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). The Concepcion decision held that the FAA preempted California law barring the enforcement of class action waivers in the consumer context. Id. The Second Circuit then received supplemental briefing on Concepcion’s potential impact on the case. On February 1, 2012, the Second Circuit issued an opinion in favor of the merchants. It held “that each waiver must be considered on its own merits based on its own record and governed with a healthy regard for the fact that the FAA is a congressional declaration of a liberal federal policy favoring arbitration agreements. In Re American Express Merchants’ Litigation, 667 F.3d 204 at 219 (2d Cir. 2012). On May 20, 2012 the Second Circuit denied rehearing en banc with three dissenters – some presaging concerns raised in the Supreme Court.
The Majority Opinion
Justice Scalia reiterated that the text of the FAA requires that courts “rigorously enforce” arbitration agreements according to their provisions even when a federal statutory claim is involved. Citing CompuCredit Corp. v. Greenwood, Justice Scalia stated that this general proposition holds unless the FAA has been “overridden by a contrary congressional command.” But, he found no congressional command that mandated the rejection of the class action waiver in the case. Justice Scalia found no evidence that the anti-trust laws reflected an intention to preclude a waiver of class actions. He noted that neither the Sherman nor Clayton Acts even mention class actions as they were “enacted decades before” Rule 23. And, the congressional approval of Rule 23 did not “establish an entitlement to class proceedings for the vindication of statutory rights.” Such an interpretation of Rule 23 likely would be an “abridgement” or “modification” of a “substantive right” beyond the authority of the Rules.
Finding no “contrary congressional command,” Justice Scalia turned to an analysis of the judge-made exception to the FAA which forecloses enforcement of agreements when they prevent the “effective vindication” of federal statutory rights. The merchants argued that enforcing the class action waiver would prevent effective vindication of their rights because they could not economically prosecute anti-trust tying claims individually in arbitration.
Justice Scalia found the origin of the “effective vindication” exception in dictum in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985). But, the exception was to prevent “prospective waiver of a party’s right to pursue statutory remedies” not when “proving a statutory remedy” was too expensive. The class action waiver does not foreclose a party’s right to pursue a statutory remedy any more than federal law did before the enactment of the class action rule in 1938.
According to Justice Scalia, the Court’s decision in Concepcion practically resolved the case. There the Court, “specifically rejected” the argument that class arbitration was required to pursue claims” that might otherwise slip through the legal system.”
Justice Scalia also recognized the unworkable threshold inquiry created by the Second Circuit decision. This “hurdle would undoubtedly destroy the prospect of speedy resolution” for which arbitration was designed. The FAA did not authorize such “a judicially created superstructure.”
Justice Elena Kagan filed a dissent that was joined by Justices Ruth Bader Ginsburg and Stephen Breyer. Justice Kagan delivered a succinct but biting summary of the majority opinion:
“So if the arbitration clause is enforceable, Amex has insulated itself from anti-trust liability . . . . [t]he monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse. And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.”
Justice Sonia Sotomayor did not participate in the decision as she was part of the original Second Circuit panel in this case prior to joining the Supreme Court.
The AMEX opinion appears to have finally cleared the obstacles to enforcement of class actions waivers based on federal law. It certainly eliminated arguments previously used to circumvent the Concepcion decision as being based solely on concepts of federal preemption. And, while AMEX arose from a commercial dispute, its impact will be far broader and assist employers and companies seeking to enforce arbitration agreements with class action waivers.
The battleground over arbitration agreements will likely shift to disputes regarding the formation of arbitration agreements under state law based on unconscionability, the employer’s ability to modify the agreement or that the agreements lack necessary clarity to achieve a meeting of the minds. Companies would be well advised to review their arbitration procedures to ensure that they have explicit class action waivers and that arbitrators are not charged with determining if class arbitration is available. Arbitration agreements should properly assign issues to the courts or arbitrators based on an assessment of their benefit or detriment to expeditious resolution of individual disputes in arbitration.
The Bottom Line:
The effective vindication exception does not render class action waivers unenforceable even when the cost of arbitrating individually surpasses potential recovery. Employers now can be assured of the enforcement of these waivers with fewer federal impediments. The next areas of challenge will likely shift back to state law based on contract formation and related issues.