Employment Class And Collective Action Insight: U.S. Supreme Court Holds That Arbitration Class-Action Waivers Are Valid, Even If Individual Claims Are Too Expensive To Pursue

On June 20, 2013, in American Express Co. v. Italian Colors Restaurant, the U.S. Supreme Court held that, under the Federal Arbitration Act, courts cannot invalidate a class arbitration waiver on the ground that the plaintiffs' cost to individually prove their claims would greatly exceed their potential recovery. This decision furthers the Court's trend of striking down legal bases for invalidating arbitration agreements, and will affect class arbitration in various contexts, including consumer and employment agreements.

In American Express, the agreement between the credit card company and merchants included an arbitration clause, and provided that "[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis." The merchants brought a putative class action alleging antitrust violations and submitted evidence that the expert analysis necessary to prove their antitrust claims would cost at least several hundred thousand dollars, while the maximum recovery for an individual plaintiff would be $12,850, and under $40,000 even if trebeled.

The Court stated that "the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim," nor do such laws "evince an intention to preclude a waiver of class-action procedure." The Court also explained that federal law does not secure a "nonwaivable opportunity to vindicate federal policies by satisfying the procedural strictures of Rule 23" or by invoking a class mechanism in arbitration.

The merchants argued that the class waiver barred "effective vindication" of their federal statutory rights, because they had no economic incentive to pursue their claims individually. The Court recognized its prior decisions indicating that arbitration agreements could be struck down if they prevented effective vindication of statutory rights, but explained that this exception applied only when parties' right to pursue a claim was affected. For example, the exception would apply if an agreement prohibited the assertion of certain claims, or if filing and administrative fees attached to arbitration made access to the forum impracticable. But financial impediments to proving a claim did not meet this exception. The Court noted that the class-action waiver "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." The Court also commented that its decision in Concepcion "all but resolve[d]" the case, because in that case, the Court "specifically rejected the argument that class arbitration was necessary to prosecute claims that might otherwise slip through the legal system."

Three dissenting justices focused on the practical impact of the case, explaining that under the majority's decision, "[t]he monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse." Because the agreement prohibited class actions, as well as consolidation or joinder and other potential avenues of reducing expense, the dissent concluded that the case fell squarely within the "effective vindication" exception.

This decision further emphasizes that entities wishing to avoid class claims should include specific class-action waivers in their arbitration agreements. The issues in American Express are particularly applicable to the employment context. For example, in wage-and-hour cases, plaintiff-employees frequently argue that the costs of pursuing small claims individually make such claims economically unfeasible. The Fair Labor Standards Act—unlike the antitrust statutes at issue in American Express—specifically authorizes collective actions. Plaintiffs may argue that the language of, and policy behind, federal employment statutes compels a different result. But note that, in reaching its decision, the Court stated that in Gilmer—a 1991 employment case under the Age Discrimination in Employment Act—the Court "had no qualms enforcing a class waiver in an arbitration agreement even though the federal statute at issue, the [ADEA], expressly permitted collective actions." It remains to be seen how this decision will affect class arbitration in the employment context.