On June 20, 2013, the U.S. Supreme Court ruled, by a 5-to-3 margin, that a group of merchants was bound by an arbitration agreement that prohibits them from bringing class action claims against American Express, even if the cost of arbitrating antitrust claims on an individual basis is prohibitive. American Express Co. v. Italian Colors Restaurant, No. 12–133 (June 20, 2013) ("American Express"). The Court, in an opinion penned by Justice Scalia, concluded that nothing in the Federal Arbitration Act (FAA) allows 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.
The case has been procedurally convoluted, and this round marked its third appearance before the U.S. Supreme Court. The case stemmed from a 2003 class action antitrust lawsuit filed in federal court by a group of merchants, led by Italian Colors Restaurant in Oakland, California, claiming the credit-card company violated the Sherman Act by forcing retailers to pay high swipe fees on Amex credit and debit cards as a condition of being able to accept Amex charge cards. The merchants’ contracts with Amex contained a clause that required that all disputes be subject to arbitration, and that all disputes be arbitrated on an individual basis.
In Amex I, 554 F.3d 300 (2d Cir. 2009), the Second Circuit determined that the enforcement of a mandatory arbitration clause in a commercial contract that also contained a class action waiver was unenforceable. The Supreme Court granted Amex’s petition for certiorari, and vacated and remanded in light of its decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), which held that parties could not be compelled to submit to class arbitration unless they agreed to it. In Amex II, the Second Circuit found that Stolt-Nielsen did not affect its original analysis because the court was not ordering the parties to participate in class arbitration. After Amex II, the court placed a hold on its mandate to allow Amex to file a petition for certiorari. While the mandate was on hold, the Supreme Court issued AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), which upheld AT&T’s right to compel consumers to submit to arbitration even though, under California common law, consumer class-action waivers were considered unconscionable. The ruling was widely viewed as an endorsement of mandatory arbitration clauses.
In Amex III, decided in February 2012, a two-judge panel of the Second Circuit ruled that neither Concepcion nor Stolt-Nielsen broadly stands for the proposition that class arbitrations may always be waived. Instead, the court looked to other Supreme Court decisions, such as Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614 (1985) and Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), which acknowledged the importance of class actions and arbitrations in vindicating statutory rights. In particular, in Green Tree, the Court conceded that the cost of an individual proceeding could stand in the way of a litigant exercising federal statutory rights through arbitration. The Second Circuit thus agreed with the plaintiffs, as it had twice before, that the Amex class action waiver was void because unless the restaurants could band together, it would not be feasible for the restaurants to exercise their rights. This conclusion was largely based on an economic analysis that demonstrated that the cost of an expert witness to prove the plaintiffs’ claims would far exceed the economic recovery that any one individual plaintiff could hope to obtain. The Second Circuit reasoned that the prohibitive cost of proceeding individually would "effectively preclude" plaintiffs from vindicating their rights under federal antitrust laws.
American Express again asked the Supreme Court to review the case. In this round, the question presented was "whether the Federal Arbitration Act permits courts, invoking the Federal substantive law of arbitrability, to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim." At its core, the question before the Court was whether an "effective vindication" exception should be created to the Supreme Court’s 2011 opinion in Concepcion that allows courts to ignore arbitration agreements and permit class-action lawsuits where individual plaintiffs’ claims are so small that no single plaintiff would rationally bring a bilateral, one-on-one arbitration to vindicate federal rights.
American Express argued that Concepcion rejected the Second Circuit’s "prohibitive cost" justification for allowing the class-action lawsuit to proceed and that courts must uphold agreements between parties to arbitrate rather than litigate unless the agreement contradicts substantive federal law.
The Supreme Court’s Decision: No Vindication of Rights Exception to Concepcion
Reversing the Second Circuit, a majority of the Supreme Court in American Express agreed with American Express, ruling that nothing in the FAA allowed the merchants out of their contractual obligation to resolve claims through individual arbitration. The Court explained:
The regime established by the Court of Appeals' decision would require—before a plaintiff can be held to contractually agreed bilateral arbitration—that a federal court determine (and the parties litigate) the legal requirements for success on the merits claim-by-claim and theory-by-theory, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success. Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure. The FAA does not sanction such a judicially created superstructure.
More broadly, the Court rejected the argument that the judicially created "effective vindication" exception to the enforcement of arbitration agreements warranted refusing to enforce the class action waiver. According to the majority ruling, the courts must "rigorously enforce" arbitration agreements in keeping with 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. Justice Scalia wrote "[t]he 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. Further, the Court reasoned, the "effective vindication" exemption, which originated in dicta of a 1985 case, only applies when the contract outright denies a remedy – not when it prices it out of reach, because the principle comes from a desire to prevent "prospective waiver of a party’s right to pursue statutory remedies."
Justice Scalia clarified that the doctrine would certainly render unenforceable "a provision in an arbitration agreement forbidding the assertion of certain statutory rights" and "would perhaps cover 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 not make it "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.
Justice Scalia was joined by Chief Justice John G. Roberts, Jr., and Justices Anthony M. Kennedy, and Samuel A. Alito, Jr. Justice Clarence Thomas filed a concurring opinion. Justice Elena Kagan filed a dissenting opinion, joined by Justices Ruth Bader Ginsburg and Stephen Breyer. Kagan argues that the majority opinion, "prevents the effective vindication of federal statutory rights." Justice Sonia Sotomayor recused herself from the case because she was on the panel in the original Second Circuit case.
The Supreme Court's message in American Express is unequivocal: Courts are required to enforce arbitration agreements in accordance with their terms, including class action waivers. Although appellate courts had split over whether the Supreme Court's 2011 ruling in Concepcion left open the viability of the "effective vindication" argument, American Express clarified that this doctrine applies only in very limited circumstances where, for example, an arbitration agreement forbids a federal statutory claim, and otherwise fails as a matter of law. While plaintiffs also have other avenues to attack the enforceability of class action waivers, the American Express decision means that most efforts to assert an "effective vindication" argument should be rejected out of hand without the need for time-consuming and expensive discovery related to the cost of pursuing an individual claim.
Future Enforceability of Mandatory Arbitration Agreements – Questions Remain
The subject of class arbitration continues to be of significant interest to the Supreme Court. It has now decided four class arbitration classes since 2010. Further, the Court’s focus on arbitration law will continue into the next term. On June 10, 2013, the Court granted certiorari in BG Group PLC v. Argentina, which will give the Court an opportunity to determine how much power U.S. courts have over international arbitration proceedings linked to bilateral investment treaties handled by U.S.-based arbitration panels.
Among the questions remaining after American Express is whether a company can mandate arbitration through the use of arbitration agreements in its corporate articles of incorporation or by-laws. This issue recently was highlighted by the Carlyle Group, when, in preparing for its IPO, specified in its partnership agreement that all limited partners would be required to submit any claims to binding arbitration. It also is unclear whether, as a matter of state law, shareholders can be bound by an arbitration clause in articles of incorporation or by-laws. In Carlyle’s case, the SEC ultimately intervened based on its control of the registration process to prevent Carlyle from including this clause in its contracts.
Indeed, it is unlikely the Supreme Court will have the last word on the enforceability of these and similar arbitration agreements. The SEC, for example, has the right under Dodd-Frank to issue a regulation banning the use of arbitration in broker-dealer contracts. Moreover, Congress gave the Consumer Financial Protection Bureau ("CFPB") the authority to decide whether class waivers should be banned in consumer finance contracts. The CFPB is currently conducting a study on mandatory consumer arbitration in connection with the offering of consumer financial products and services. As part of the study, earlier this month, the CFPB asked the Office of Management and Budget to approve the CFPB’s plans to conduct a national telephone survey of 1,000 credit card holders. The CFPB also requested comments on its approval request, which must be submitted by August 6, 2013.