U.S. Supreme Court Issues New Decision Addressing Application of Class Arbitration Waivers to Claims Brought under Federal Law

by Wilson Sonsini Goodrich & Rosati
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On June 20, 2013, the United States Supreme Court issued an opinion in American Express Co. v. Italian Colors Restaurant that reaffirmed the Court's landmark decision in AT&T Mobility v. Concepcion, a case that upheld the enforceability of class action waivers in arbitration agreements. In Concepcion, the Court found that a state law invalidating class action waivers was preempted by the Federal Arbitration Act. The Court's decision in American Express, which addresses the applicability of a class action waiver to federal statutory claims, effectively answers the remaining question of whether the Court's holding in Concepcion applies equally to claims brought under state and federal law.

Background

Since the Supreme Court's decision in Concepcion, companies have inserted class action waivers into arbitration agreements more frequently, having grown increasingly confident that the waivers would be upheld in the event of a legal challenge. Because the Court premised the Concepcion decision on federal preemption of state law, Concepcion helps to shield class action waivers from attack by parties bringing claims under state law. But an open question after Concepcion was whether a plaintiff invoking rights under federal law could invalidate a class waiver provision on the grounds that the provision would undermine vindication of those federal rights.

AT&T Mobility v. Concepcion

In Concepcion, plaintiffs Vincent and Liza Concepcion brought a class action lawsuit against AT&T, alleging that AT&T's offer of a "free phone" to customers who signed a contract for cell phone service constituted fraud and false advertising because AT&T failed to disclose that customers would have to pay sales tax on the phone's retail value. AT&T moved to compel arbitration pursuant to the terms of its contract with the Concepcions, which required that all disputes be settled through arbitration and did not allow classwide procedures. The Concepcions opposed the motion, alleging that the class action waiver was unenforceable as unconscionable under California law.

The district and Ninth Circuit courts denied AT&T's motion to compel arbitration, agreeing that the class waiver provision was unconscionable under California law. The Supreme Court reversed, holding that the Federal Arbitration Act preempted California law and affirming the enforceability of the arbitration agreement's class waiver provision. The Concepcion ruling thus opened the door for companies to require aggrieved customers to pursue many of their legal disputes on an individual basis in arbitration. But the reach of the Concepcion decision has been a hotly contested issue.

American Express Co. v. Italian Colors Restaurant

In American Express, a small restaurant filed a putative class action lawsuit on behalf of all merchants that accepted American Express cards, alleging antitrust violations under the Sherman Act relating to American Express' discount merchant fees. However, the agreement between the merchants and American Express provided that all disputes would be resolved through bi-lateral arbitration, thereby prohibiting the merchants from bringing a class action. American Express moved to compel bi-lateral arbitration pursuant to the agreement. The merchants opposed the motion, claiming that enforcement of the class action waiver would prevent the effective vindication of their federal statutory rights because the enormous cost of hiring the expert economists necessary to prove their antitrust claims would far exceed their potential individual recovery. The merchants argued that by eliminating the economic incentive to pursue their claims, the class action waiver operated to thwart the Sherman Act's fundamental purpose of promoting "the public interest in vigilant enforcement of the antitrust laws" and allowed American Express to dodge liability for allegedly violating those laws.

The Supreme Court's Analysis

In a 5-3 decision, the Court rejected the argument that requiring the merchants to litigate their claims individually would undermine the policies underlying federal antitrust laws. Justice Antonin Scalia's opinion for the majority expressed the view that "the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim." The Court explained that the "effective vindication" exception, which allows for the invalidation of arbitration agreements that "operate as a prospective waiver of a party's right to pursue statutory remedies," did not apply to the arbitration agreement at issue because the merchants were not actually prevented from pursuing their claims. Rather, they were simply unwilling to accept the high cost of doing so as individual plaintiffs.

In its analysis of when the "effective vindication" exception would operate to invalidate an arbitration agreement, the Court distinguished between agreements that eliminate the right to pursue a statutory remedy and situations where the expense involved in proving a statutory remedy might dissuade an individual litigant from pursuing it. As the Court explained, "the 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."

Finally, the Court referred to Concepcion as a decision that "all but resolve[ed]" the case because the Court had already "specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system'"—the same argument upon which the merchants built their case.

Implications of the American Express Decision

Through its decision in American Express, the Supreme Court sends a strong signal that it intends to continue to "rigorously enforce arbitration agreements according to their terms." By choosing to address a case involving claims under federal law, where FAA preemption of state law is not at issue, the Court helps to reduce lingering doubt over the reach of Concepcion and clears up potential inconsistencies in its application. The Court's analysis of the "effective vindication" exception provides a clearer explanation of why an arbitration agreement might be invalidated for operating to preclude litigants from pursuing their claims. Companies can turn to the American Express case for reassurance that their arbitration agreements will not be invalidated solely because they might bar class arbitration of federal law claims.

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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