Supreme Court Upholds Arbitration Agreement, Rejects Effective Vindication Of Federal Rights



The U.S. Supreme Court rejected another challenge to the enforceability of arbitration agreements under the Federal Arbitration Act (FAA), holding that a contractual waiver of class arbitration is enforceable even if the cost of arbitration exceeds the potential recovery.  See generally Am. Express Co. v. Italian Colors Rest., __ S. Ct. __, No. 12-133, 2013 WL 3064410 (June 20, 2013).  Justice Scalia, writing for the 5-3 majority with Justice Sotomayor having recused herself, emphasized two principles:

  • First, no congressional command compelled the availability of the class action vehicle to pursue antitrust claims under the Sherman Act.  See id. at *4.
  • Second, a judicially created exception to the enforcement of arbitration clauses, known as the “effective vindication” doctrine, concerned the “right to pursue” federal statutory remedies at the outset, not the cost of proving the merits of such claims.  See id. at *5. 

Referencing Concepcion, the Court reiterated that arbitration agreements cannot be invalidated based on public policy concerns that claims may “slip through the legal system” because their value is too small to prosecute absent the availability of class procedures.  See id. at *6-7.

Buildup to American Express

American Express is the latest in a number of Supreme Court decisions regarding the enforceability of arbitration agreements under the FAA.  In 2010, the Court held that class arbitration could not be compelled where the parties had stipulated that they had not reached an agreement on the issue.  See Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 130 S. Ct. 1758, 1775 (2010) (“[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”).  Later that term, the Court concluded that parties could agree to submit gateway questions of arbitrability to the arbitrator instead of the courts.  See Rent-A-Ctr., W., Inc. v. Jackson, 130 S. Ct. 2772, 2777-79 (2010) (observing that unless the delegation provision is specifically challenged, “any challenge to the validity of the Agreement as a whole [is] for the arbitrator”).  In 2011, the Court held that Section 2 of the FAA preempted California’s Discover Bank rule “classifying most collective-arbitration waivers in consumer contracts as unconscionable.” AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1746 (2011).  Citing the FAA’s purpose of promoting arbitration, the Court observed that California’s Discover Bank rule “interfered” with arbitration, and that “class arbitration, to the extent it is manufactured by Discover Bank rather than consensual, is inconsistent with the FAA.”  Id. at 1749-51.      

Since Concepcion, the Court has repeatedly emphasized that exceptions to enforcing arbitration clauses subject to the FAA are narrow.  See, e.g., Nitro-Lift Tech., LLC v. Howard, 133 S. Ct. 500, 503 (2012) (per curiam) (“The trial court found that the contract contained a valid arbitration clause, and the Oklahoma Supreme Court did not hold otherwise.  It nonetheless assumed the arbitrator’s role by declaring the noncompetition agreements null and void.”); Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1203-04 (2012) (per curiam) (“West Virginia’s prohibition against predispute agreements to arbitrate personal-injury or wrongful-death claims against nursing homes is a categorical rule prohibiting arbitration of a particular type of claim, and that rule is contrary to the terms and coverage of the FAA.”); KPMG LLP v. Cocchi, 132 S. Ct. 23, 25 (2011) (per curiam) (reiterating that “[t]he Federal Arbitration Act reflects an emphatic federal policy in favor of arbitral dispute resolution”) (internal citation and quotation marks omitted). 

Last term, the Court held that where a federal statute is silent regarding whether claims brought pursuant to it can be arbitrated, the FAA requires enforcement of an agreement to arbitrate such claims.  See CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 673 (2012) (addressing the Credit Repair Organizations Act).  And just last week, the Court stressed the limited nature of judicial review under the FAA, noting that “Oxford chose arbitration, and it must now live with that choice.  Oxford agreed with Sutter that an arbitrator should determine what their contract meant, including whether its terms approved class arbitration.”  Oxford Health Plans LLC v. Sutter, __ S. Ct. __, No. 12-135, 2013 WL 2459522, at *6 (June 10, 2013) (unanimously holding that courts cannot overturn arbitrator’s construction of the contract, even if it was mistaken).

American Express Procedural History

In an antitrust case involving claims under the Sherman Act, 15 U.S.C. § 1, the Second Circuit declined to enforce an arbitration agreement on the grounds that doing so would preclude the plaintiffs from vindicating their federal statutory rights.  See In re Am. Express Merchs.’ Litig., 667 F.3d 204, 208, 219 (2d Cir. 2012) (Amex III), rev’d, American Express, 2013 WL 3064410.  In 2009—before Stolt-Nielsen and Concepcion—the Second Circuit had held that “the class action waiver in the Card Acceptance Agreement cannot be enforced in this case because to do so would grant Amex de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery.”  In re Am. Express Merchs.’ Litig., 554 F.3d 300, 320 (2d Cir. 2009), vacated, Am. Express Co. v. Italian Colors Rest., 130 S. Ct. 2401 (2010).  The Second Circuit maintained that view after the Supreme Court granted American Express’ petition for certiorari and subsequently remanded the case for reconsideration in light of Stolt-NielsenSee In re Am. Express Merchants’ Litig., 634 F.3d 187, 200 (2d Cir. 2011) (refusing to alter original opinion while noting that “Stolt-Nielsen plainly precludes us from ordering class-wide arbitration, but we did not do so earlier”).  And after Concepcion, the Second Circuit stayed the course, again finding that the class action waiver was not enforceable and concluding “Concepcion does not alter our analysis.”  Amex III, 667 F.3d at 206.   

Supreme Court’s American Express Decision

Having authored Rent-A-Center, Concepcion, and CompuCredit, it comes as no surprise that Justice Scalia would once again head the pro-arbitration majority.  Considering the Sherman Antitrust Act and the treble damages available under the Clayton Act, the Court observed that while Congress “has taken some measures to facilitate the litigation of antitrust claims,” it never “guarantee[d] an affordable procedural path to the vindication of every claim.”  American Express, 2013 WL 3064410 at *4.  The Court further observed that the “Sherman and Clayton Acts make no mention of class actions.  In fact, they were enacted decades before the advent of Federal Rule of Civil Procedure 23.”  Id.   Absent “contrary congressional command” within the statute that provided for class procedures, the arbitration agreement and associated waiver of class arbitration should be enforced.  See id.

Concluding that there was no statutory requirement for class proceedings, the Court considered the judicially created “effective vindication” exception to the enforcement of arbitration agreements, designed to “prevent ‘prospective waiver of a party’s right to pursue statutory remedies.’”  Id. at *5 (quoting Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985).  Under the “effective vindication” doctrine, arbitration agreements clearly cannot exclude certain statutory claims from prosecution.  Id..  The doctrine may cover prohibitive filing and administrative fees that render the arbitral forum inaccessible.  Id.  But the doctrine does not cover the scenario where a statutory claim is simply too expensive to prove in bilateral arbitration.  Id.  (“[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”).  For Justice Scalia, the “effective vindication” argument was simply a veiled public policy argument that the Court had already rejected in ConcepcionId. at *6. 

Finally, the Court noted the untenable framework created by the Second Circuit’s rule applying “effective vindication” to proving a claim:  parties would have to litigate and courts would have to determine the cost of developing evidence necessary to pursue claims, as well as the recoverable damages, before an arbitration agreement could be enforced.  Id. at *7.  Such a “judicially created superstructure” is clearly contrary to the purpose of the FAA.  See id. 

In a powerful dissent, Justice Kagan, with whom Justices Ginsberg and Breyer joined, concluded, “To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled. . . . In the hands of today’s majority, arbitration threatens to become . . . a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability.”  Id. at *15. 

Practice Pointers

  • Absent contrary congressional command overriding the mandate of the Federal Arbitration Act, courts will not read a right to pursue claims as a class into federal statutes.
  • “Effective vindication” of federal statutory rights is not a viable challenge to the enforceability of an arbitration agreement with a class action waiver—even if, as a practical matter, enforcement means meritorious claims will not be pursued because the cost of doing so as an individual is prohibitive.
  • The Supreme Court continues to reject challenges to enforcing arbitration agreements based on public policy arguments.

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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