American Express Co. v. Italian Colors Restaurant: A class action waiver in an arbitration agreement will be strictly enforced under the Federal Arbitration Act

by Sheppard Mullin Richter & Hampton LLP

The Supreme Court on June 20 continued its recent trend of strictly enforcing the terms of arbitration agreements, holding that a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act (FAA) even if the cost of proving an individual claim in arbitration exceeds the potential recovery. The Court’s opinion likely makes such class action waivers ironclad in the absence of specific legislation to the contrary or evidence – such as unconscionability under state law – that would establish “grounds . . . for the revocation of any contract” under the FAA’s savings clause, 9 U.S.C. § 2.

American Express’s arbitration agreement with merchants contained a class arbitration waiver. The merchants brought an antitrust class action against American Express in federal court and opposed American Express’s motion to compel individual arbitration. The Court held that the class arbitration waiver was enforceable and could not be invalidated despite the high cost of individually proving the merchants’ antitrust claims against American Express. The Court’s broadly worded decision provides important guidance on how the FAA is applied to agreements to arbitrate all types of federal statutory claims, not just antitrust claims. The vote was five to three, with Justice Sotomayor recusing herself because she sat on the Second Circuit panel that originally decided the case.

Justice Scalia wrote the opinion for the majority. The majority’s opinion turned on three grounds: (1) there is no congressional command that trumps the FAA’s mandate that arbitration agreements must be “rigorously enforced” according to their terms; (2) the “effective vindication” exception doesn’t guarantee class arbitration simply because an individual claim is expensive to prove; and (3) to hold otherwise would destroy the prospect of speedy resolution of claims in arbitration because courts and parties would have to preliminarily determine the costs of proving each element of plaintiffs’ claims and the potential damages that could be recovered. The Court has repeatedly held that arbitration is a matter of contract and that the terms of arbitration agreements will be strictly enforced. It began its analysis here by reaffirming these principles. Citing its recent decision in CompuCredit Corp. v. Greenwood, the Court explained that these principles apply equally when federal statutory rights are involved, unless they are overridden by a contrary congressional command. In this instance, there was no contrary command. The Court considered the Sherman and Clayton Acts as well as Federal Rule of Civil Procedure 23, and found that neither the federal antitrust laws nor Rule 23 created an entitlement to class proceedings. Congress did not intend to pursue its antitrust goals at any cost, and already provides for treble antitrust damages under 15 U.S.C. § 15 to advance its antitrust goals. Furthermore, the antitrust laws predate the advent of class actions, and make no mention of class actions. Considering these factors leads to the conclusion that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” Similarly, Rule 23 does not “establish an entitlement to class proceedings for the vindication of statutory rights,” because it has stringent requirements that are often not met.

The majority’s message was loud and clear: Class proceedings are an exception to the usual rule, not an entitlement. It would be “remarkable” for a court to “erase” an agreement to arbitrate pursuant to the “usual” rule. This theme continued as the decision turned next to the “effective vindication” doctrine that the merchants had tried so hard to establish in their briefs and at oral argument. While the majority did recognize the existence of a “judge-made” “effective vindication exception,” it noted that this exception originated as mere dictum in the Supreme Court’s Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. opinion and had never been applied to invalidate an arbitration agreement. The Court further marginalized the exception through its analysis. Focusing on language in Mitsubishi Motors indicating that the exception was designed to protect the “right to pursue statutory remedies,” the Court held that the exception barred provisions “forbidding the assertion of certain statutory rights” but did not apply to class action waivers or other provisions that simply increase the cost of proving a claim, because “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.” If parties could effectively vindicate their individual federal antitrust rights before class actions ever existed, then the availability of class proceedings did not suddenly turn individual antitrust suits into an ineffective form of vindication. Even Green Tree Financial Corp.-Alabama v. Randolph was cast into doubt by the Court’s comment that the effective vindication exception would only “perhaps” cover the situation where high arbitration fees precluded access to arbitration. The Court’s view of the effective vindication exception is so narrow that it may not serve a useful purpose going forward. The only provision in an arbitration agreement that would clearly be barred by the exception is one that is easy to avoid or contract around – an express prohibition on the assertion of certain statutory rights.

In her dissent, which Justices Ginsburg and Breyer joined, Justice Kagan expressed serious concern that the majority’s approach would allow all kinds of de facto prohibitions to be inserted into arbitration agreements to prevent parties from effectively vindicating their rights. For instance, arbitration agreements might impose high filing fees, a one-day statute of limitations, or prohibit economic testimony in antitrust cases, among other things. In the dissent’s view, the effective vindication “rule,” based on what it viewed as a holding of Mitsubishi Motors, barred enforcement of any term in an arbitration agreement that would effectively “confer immunity from potentially meritorious federal claims,” not just “baldly exculpatory provisions.” The dissent feared that the majority’s opinion had rendered the effective vindication exception or rule or doctrine effectively toothless. The majority responded that these examples presented a false comparison because they purportedly made both class actions and individual actions impossible, not just class actions.

It did not matter to the majority that the practical reality was that many individual cases simply would not be brought because of class action waivers due to the high cost of proving certain individual claims. The Court noted that its recent decision in AT&T Mobility v. Concepcion addressed many of the same concerns regarding the supposed necessity of class proceedings where low value claims are involved. The Court rejected attempts by the merchants and the dissent to distinguish AT&T Mobility on the ground that it was a case involving preemption principles rather than the effective vindication exception. This time, the Court left no room for doubt about the reach of AT&T Mobility and its views on the enforceability of class action waivers: “[AT&T Mobility] established . . . that the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims,” even when “absence of litigation . . . is the consequence of a class-action waiver.”

The Court’s opinion closes with a brief, but important, glimpse into the policy concerns informing the statutory analysis of the relationship between the FAA and the Sherman Act that structures the rest of the Court’s opinion. It refused to establish what it called a “superstructure” that would force courts and parties to preliminarily litigate the costs associated with proving the elements of plaintiffs’ claims and the potential damages that might be recovered on those claims in order to determine whether a bilateral arbitration agreement could be enforced. The Court held that such a hurdle “would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure.”

There can be little doubt following this opinion that a waiver of class arbitration contained in an arbitration agreement will be enforced under the FAA. Aside from locating or obtaining a specific command from the legislature that certain federal claims come with an entitlement to class proceedings, a party seeking to challenge a class waiver would need to establish contract defenses such as fraud, duress or unconscionability. Indeed, Justice Thomas makes this very point in his concurrence, just as he did in AT&T Mobility: “Because Italian Colors has not furnished ‘grounds . . . for the revocation of any contract,’ 9 U.S.C. § 2, the arbitration agreement must be enforced.

In Plain English

If you sign an arbitration agreement that says you are waiving your right to class arbitration, that means you are waiving your right to class arbitration. A court cannot help you get out of your agreement just because individual arbitration is expensive or inconvenient, even if a federal statutory right is involved. The Federal Arbitration Act requires arbitration agreements to be strictly enforced according to their terms. If you want to undo a class arbitration waiver, you’ll need to do one of the following: (1) show that there was no actual agreement or that the terms are so unfair or one-sided that they will not be enforced under state law; (2) find a statute that guarantees your right to class proceedings for a particular claim; or (3) petition Congress.

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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