Recent Second Circuit Opinion Invalidates Class Action Waiver Provision in a Commercial Contract

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In an effort to avoid class action litigation, many businesses include a waiver of class action claims in their contracts, limiting dispute resolution to arbitration of claims on an individual rather than class action or collective basis. This is consistent with Section 2 of the Federal Arbitration Act (“FAA”), which provides that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Although the waiver of class action claims may be freely negotiated, the allegedly injured party still may seek to evade that waiver by asserting a contract defense to its enforcement, such as that the waiver is unconscionable or procured by fraud or duress. Courts will evaluate the proposed waiver on a case-by-case basis depending on the claims asserted and whether relief can be achieved in an economically feasible way through arbitration of individual claims.

The U.S. Court of Appeals for the Second Circuit recently invalidated a class action waiver included as part of an arbitration clause in a contract between American Express and certain of its merchants because arbitration of plaintiffs’ antitrust claims on an individual (as opposed to class action) basis would be prohibitively expensive. In re: American Express Merchants’ Litigation, (Docket No. 06-1871) (Decided March 8, 2011). The district court had granted American Express’ motion to compel arbitration pursuant to the FAA, leaving it to the arbitrator to decide if the waiver was enforceable. In reversing that decision, the Second Circuit first observed that the issue of enforceability of the waiver is for a court to determine, not an arbitrator. The Second Circuit then recognized the “firm principle of antitrust law that an agreement which in practice acts as a waiver of future liability under the federal antitrust statutes is void as a matter of public policy.” According to the Second Circuit, “[o]ther Circuits also have observed that a plaintiff could challenge a class action waiver clause on the grounds that it would be a cost prohibitive method of enforcing a statutory right, provided that a plaintiff set forth sufficient proof to support such a finding.” “[W]hen a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, [that] party bears the burden of showing the likelihood of incurring such costs.”

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