In American Express, Supreme Court Confirms the Enforceability of Class Action Arbitration Waivers

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In a decision that significantly strengthens the ability of parties and employers to ensure that they will not be forced to arbitrate on a class basis, the U.S. Supreme Court has ruled that a waiver of the right to arbitrate on a class basis in an arbitration agreement is enforceable under the Federal Arbitration Act (FAA) even with respect to federal statutory claims — and a party cannot avoid such a class arbitration waiver by asserting that individual arbitration is too expensive or the party cannot vindicate its statutory rights in individual arbitration. American Express Co. v. Italian Colors Restaurant, No. 12–133 (June 20, 2013).

This decision allows parties to avoid the concerns created by the Court's recent decision in Oxford Health Plans LLC. v. Sutter, 569 U.S. ____ (2013), by expressly stating that the arbitration agreement does not permit class arbitration.

Background

An agreement between American Express and merchants who accept American Express cards re­quired all of their disputes to be resolved by arbitration. It further provided that there "shall be no right or authority for any Claims to be arbi­trated on a class action basis."

A group of merchants nonetheless filed a class action lawsuit in court, alleging that American Express had violated the antitrust laws and seeking treble damages on behalf of the class. American Express petitioned the court under the FAA to enforce the arbitration agreement and require each merchant to arbitrate its antitrust claims individually. The merchants countered, though, by asserting that the cost of ex­pert analysis necessary to prove the antitrust claims would greatly exceed the maximum recovery for an individual plaintiff, and that they would thus be unable to "effectively vindicate" their statutory rights under the antitrust laws in an individual arbitration. The dis­trict court agreed with American Express.

On appeal, the U.S. Court of Appeals for the Second Circuit sided with the merchants. It ruled that because of the prohibitive costs that the merchants would face if they had to arbitrate individually, the merchants could not effectively vindicate their statutory rights under the antitrust laws. Therefore, the class-action waiver was unenforceable, individual arbitration could not pro­ceed and the merchants were entitled to pursue their antitrust claims as a class action in court.

Justices Permit Class Action Waivers

A 5-3 majority of the Supreme Court agreed with American Express, ruling that the 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. It stated that the FAA reflects the overarching principle that arbitration is a matter of contract. According to the ruling, the courts must "rigorously enforce" arbitration agree­ments according to their terms, even for claims alleging a violation of a federal statute, unless the FAA's mandate has been "'overridden by a contra­ry congressional command.'"

The Court majority found no contrary congressional command that requires rejection of the class-arbitration waiver here. The antitrust laws do not guarantee an affordable procedural path to the vindication of every claim, or "evince an in­tention to preclude a waiver" of class-action procedure, the majority stated.It further concluded that Congress's approval of Federal Rule of Civil Procedure 23, which provides the rights to and procedures for class actions, does not establish a general entitlement to class proceedings for the vindication of statutory rights that warrants refusing to enforce a class action waiver. According to the majority, Rule 23 imposes stringent requirements for certi­fication that exclude most claims, and this Court rejects the as­sertion that 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.

The Court also stated more generally that the inability to "effectively vindicate" statutory rights in arbitration does not warrant refusing to enforce the class action waiver. The Court has ruled that it will not enforce arbitration agreements that do not allow a party to "effectively vindicate" its statutory rights, but it said that this principle comes from a desire to prevent "prospective waiver of a party’s right to pursue statutory remedies." Thus, the doctrine would make unenforceable a provision in an arbitration agreement forbidding the assertion of certain statutory rights, and it would perhaps preclude filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable. But, the court said, the fact that the terms of an arbitration agreement, such as a class action waiver, may make it not worth the expense involved in proving a statutory remedy, does not constitute the elimination of the right to pursue that remedy. According to the majority, a 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" procedure in 1938.  

According to the Court, its decisions in Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20 (1991) and AT&T Mobility LLC v. Concepcion, 563 U. S. ___, demonstrate that class action waivers in arbitration agreements are enforceable and do not preclude the effective vindication of statutory rights. The majority noted that in Gilmer, "we had no qualms in enforcing a class waiver in an arbitration agreement even though the federal statute at issue, the Age Discrimination in Employment Act, ex­pressly permitted collective actions." The Court said the collective action provision did "not mean that individual attempts at conciliation were intended to be barred." And the majority stated thatConcepcion, 563 U. S. ___ all but resolves this case. There, in finding that a law that conditioned enforcement of arbitration on the availability of class procedures violated the FAA, the Court specifically rejected the argument that class arbitration was neces­sary to prosecute claims "that might otherwise slip through the legal system."

A Big Win for Employers

The American Express decision is a big win for employers and others who believe arbitration is a more cost-effective way to resolve disputes but have been concerned about the risk of being forced to arbitrate on a class basis. Most parties are unwilling to arbitrate on a class basis because, as the Supreme Court's recent decision in Oxford Health Plans LLC. v. Sutter, 569 U.S. ____ (2013) shows, it is exceptionally difficult to overturn an arbitrator's decision. As a result, in class arbitration, a party essentially gives its fate to the arbitrator with virtually no chance of appeal from a bad decision. 

Parties that have attempted to address this problem using class action waivers have been forced with challenges that either a statute precludes class action waivers or the cost of individual arbitration means that class action waivers should not be enforced. The American Express decision broadly rejects these arguments and confirms the enforceability of class action waivers. It essentially means that a class action waiver will be enforceable unless there is a "contrary congressional command" in the statute, which is unlikely. Moreover the Court's specific reliance on Gilmer v. Interstate/Johnson Lane Corp., 500 U. S. 20 (1991) should significantly enhance employers' ability to enforce class action waivers in arbitration agreements relating to employment claims.

Employers should consider reviewing and revising their arbitration agreements in light of both the Oxford Health and American Express decisions.

Topics:  American Express, American Express v Italian Colors Restaurant, Arbitration, Arbitration Agreements, Class Action, Class Action Arbitration Waivers, Federal Arbitration Act, SCOTUS

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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