Class Arbitration Contractual Waivers Are Valid And Enforceable Even When Plaintiff’s Recovery Is Outweighed By Individual Arbitration Costs

by Pepper Hamilton LLP

On June 20, 2013, the United States Supreme Court, in a 5-3 opinion in American Express Co. v. Italian Colors Restaurant, 2013 U.S. LEXIS 4700 (June 20, 2013),1 dealt yet another blow to antitrust plaintiffs’ ability to seek relief on a class-wide basis. The Court held that under the Federal Arbitration Act (FAA), contractual waivers of class arbitration are valid and enforceable even when a plaintiff can show that his potential recovery is outweighed by the cost of arbitrating his claim individually. The decision follows several others by the Roberts Court that have mitigated antitrust risks for defendants and limited their potential exposure.

Case History

Plaintiffs filed suit in the Southern District of New York against American Express (Amex) for an alleged “tying arrangement,” in violation of Section 1 of the Sherman Act. According to the plaintiffs, Amex leveraged its market power in corporate and personal charge cards to compel merchants to accept its credit card products at the same elevated discount rate. The plaintiffs therefore sought to represent a class of merchants that have contracted with Amex. Amex moved to compel arbitration pursuant to the mandatory arbitration clause of the Card Acceptance Agreement. The district court granted Amex’s motion and dismissed the plaintiffs’ suit, holding that the arbitration clause applied and that any question regarding enforceability of the arbitration clause, and the class action waiver specifically, is for the arbitrator to resolve.2

In Amex I, the Second Circuit reversed the District Court’s judgment, finding that the plaintiffs met their burden under Green Tree Financial Corp.-Alabama v. Randolph3 by demonstrating that they would incur prohibitive costs if compelled to arbitrate under the class action waiver. Relying on an affidavit from plaintiffs’ economist describing “the fiscal impracticality of pursuing individual claims” against Amex, the court found that enforcing the class action waiver “would grant Amex de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery.”4 The court thus concluded that the class action waiver was not enforceable under Section 2 of the Federal Arbitration Act (FAA), which provides that arbitration agreements are valid “save upon such grounds as exist at law or in equity for the revocation of any contract.”5

The Supreme Court granted Amex’s petition for a writ for certiorari, then vacated and remanded for reconsideration in light of its decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.,6 in which the Court stated that “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.”7 The Court explained that class arbitration “changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”8

On remand, in Amex II, the Second Circuit found that Stolt-Nielsen did not alter its original analysis. The court concluded “that the only economically feasible means for enforcing their statutory rights is via a class action,” and remanded the case to the district court.9

Shortly after the decision in Amex II, the Supreme Court handed down its opinion in AT&T Mobility LLC v. Concepcion,10 which held that the FAA preempted California law barring the enforcement of class action waivers in consumer contracts. In light of Concepcion, the Second Circuit sua sponte reconsidered its ruling in Amex II. In Amex III, however, the Second Circuit declined to alter its ruling, finding that Concepcion, like Stolt-Nielsen, was inapplicable because it did not address “whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.”11 The court further distinguished the case, stating that while “Concepcion plainly offers a path for analyzing whether a state contract law is preempted by the FAA…. our holding rests squarely on ‘a vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability.’”12

The Supreme Court Reverses the Second Circuit

In Italian Colors, the Supreme Court disagreed with the Second Circuit and found that the class arbitration waiver was enforceable. The Court began with the premise that arbitration agreements are contracts that must be “rigorously enforce[d].”13 The Court rejected the merchants’ argument that enforcing their contractual obligation to litigate individually would “contravene the policies of the antitrust laws,” stating that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim” and finding further that “[t]he antitrust laws do not ‘evinc[e] an intention to preclude a wavier’ of class-action procedure.”14 The Court also noted that Federal Rule of Civil Procedure 23 did not “establish an entitlement to class proceedings for the vindication of statutory rights,”15 and subsequently held that “[n]o contrary congressional command requires us to reject the waiver of class arbitration here.”16

The thrust of the Court’s opinion, however, was aimed at rejecting the plaintiffs’ argument that the class arbitration waiver precluded the “effective vindication” of their rights. In making this argument, the plaintiffs claimed that because the costs associated with pursuing their claims individually overshadowed any damages that they might recover, it made no economic sense for them to pursue their claims pursuant to the terms of the arbitration agreement. The plaintiffs relied on language in Mitsubishi indicating that the Court could invalidate arbitration agreements that “operat[e] … as a prospective waiver of a party’s right to pursue statutory remedies.”17 In Italian Colors, the Court found that this language from Mitsubishi was mere dictum, and further stated that while it “would certainly cover 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,”18 there was a crucial distinction to be drawn between a scenario in which “it is not worth the expense involved in proving a statutory remedy” and “the elimination of the right to pursue that remedy.”19 The Court found that only this latter scenario precludes a plaintiff from “effectively vindicating his rights” and then went on to provide an additional example of the distinction, noting that it was “not a given” that, for example, an arbitration provision prohibiting a party from submitting economic testimony during a proceeding would constitute an impermissible waiver.20

The Court closed by discussing the applicability of Concepcion, going so far as to say that Concepcion “all but resolves this case”21 and noting that while Concepcion involved a question of preemption, it also established that “the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.”22 As a result, the Court found that the FAA “favor[s] the absence of litigation when that is the consequence of a class-action waiver.”23 To the extent that there existed any doubt about whether the Court’s holding in Concepcion was limited to the context of preemption, Italian Colors answered that question: it is not.

In a lengthy dissent joined by Justices Breyer and Ginsburg, Justice Kagan stressed that “the rule against prospective waivers of federal rights can work only if it applies not just to a contract clause explicitly barring a claim, but to others that operate to do so.”24 The dissent noted that the agreement between the parties in this action also barred joinder or consolidation of claims, coordination or cost-sharing among claimants, and the shifting of expenses to the defendant if the plaintiff prevailed.25 Remarking that “[w]hat the FAA prefers to litigation is arbitration, not de facto immunity,”26 the dissent accused the majority of perverting the FAA for the purpose of simply blocking plaintiffs’ ability to pursue their claims, cautioning that as a result of the Court’s opinion, “arbitration threatens to become … a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability.”27

Pointing a finger back at the dissent and the Second Circuit, however, the majority remarked that allowing class-wide arbitration to proceed under the circumstances alleged by the plaintiffs would require a district court to determine “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.”28

Another Win for Antitrust Defendants

Following its March 27, 2013 opinion in Comcast v. Behrend,29 and, less recently, its 2007 opinions in, Bell Atlantic Corp. v. Twombly,30 and Leegin Creative Leather Products, Inc. v. PSKS, Inc.,31 the Roberts Court has now released yet another opinion that limits or curtails recovery against defendants in antitrust actions.32

In Twombly, the Court made the path to surviving a motion to dismiss more difficult for antitrust plaintiffs. The Court required that a complaint include “actual allegations [that] must be enough to raise a right to relief above the speculative level,” which in the Section 1 context “requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made … Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.”33 Motions to dismiss – often seen by antitrust defendants as the greatest of longshots – suddenly seemingly became viable opportunities to end litigation in advance of burdensome discovery.

In Leegin, the Court held that resale price maintenance agreements – which had been considered to be per se illegal since 1911 – were now subject to a rule of reason analysis. In so holding, the Court noted that such agreements can have both procompetitive and anticompetitive effects, and that as a result “it cannot be stated with any degree of confidence that resale price maintenance ‘always or almost always tend[s] to restrict competition and decrease output.’”34 Plaintiffs who sought to assert an RPM claim now faced the prospect of needing to demonstrate harm to competition in a relevant market and antitrust impact if they hoped to emerge victorious.

And earlier this year, in Comcast, the Court heightened plaintiffs’ burden in seeking class certification, finding that a district court must “‘tie each theory of antitrust impact’ to a calculation of damages,”35 even when doing so necessitates an inquiry into the merits of the plaintiff’s claim. Specific to the antitrust context, the Court’s opinion in Comcast requires plaintiffs to link an expert’s damages model with an appropriate theory of antitrust impact at the class certification stage.

Italian Colors creates another challenge for class action antitrust litigation. Parties can take comfort in the validity and enforceability of class waiver arbitration provisions in their contractual agreements with vendors or customers, a key component of reducing litigation exposure in the antitrust context and beyond. Given the Court’s suggestion that anything that falls short of precluding a plaintiff’s right to sue may pass muster, companies may push this envelope even farther and attempt to limit the types of proof that can be introduced against them, or setting forth a hyperbolically short statute of limitations – all suggested by the dissent as examples of terms that do not explicitly bar a claim, but nonetheless do so in practice.36 Only time will tell how the district and circuit courts apply Italian Colors and what, if any, limitations are read into the Supreme Court’s opinion.

As the dissent poetically noted, “[t]o 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.”37 Whether this is the Roberts Court’s true purpose cannot be known, but one thing is certain: antitrust defendants find themselves in a far more favorable position today than they did a mere decade ago.


1 Justice Sotomayor, who sat on prior Second Circuit panels that heard this matter, recused herself from the case.

2 In re Am. Express Merchants’ Litig., 2006 U.S. Dist. LEXIS 11742, at *26 (S.D.N.Y. 2006).

3 531 U.S. 79 (2000).

4 554 F.3d 300, 320 (2d Cir. 2009).

5 Id.

6 130 S. Ct. 1758 (2010).

7 Id. at 1775.

8 Id.

9 634 F.3d 187, 198 (2d Cir. 2011).

10 131 S. Ct. 1740 (2011).

11 667 F.3d 204, 212 (2012).

12 Id. at 213.

13 Am. Express Co. v. Italian Colors Rest., 2013 U.S. LEXIS 4700 (June 20, 2013) at *8 (quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985)).

14 Id. at *9 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)).

15 Id. at *10.

16 Id. at *8.

17 473 U.S. at 637 n.19.

18 2013 U.S. LEXIS 4700 at *13.

19 Id. (emphasis in original).

20 Id. at *13 n.3.

21 Id. at *16.

22 Id. at *17 n.5.

23 Id.

24 Id. at *24 (Kagan, J., dissenting).

25 Id. at *37 (Kagan, J., dissenting).

26 Id. at *27 (Kagan, J., dissenting).

27 Id. at *43 (Kagan, J., dissenting).

28 Id. at *17.

29 133 S. Ct. 1426 (2013).

30 550 U.S. 544 (2007).

31 551 U.S. 877 (2007).

32 The Roberts Court has ruled in defendants’ favor in all but three antitrust cases. The cases decided for defendants include: Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555 U.S. (2009); Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312 (2007); Credit Suisse Sec. (USA) LLC v. Billing, 551 U.S. 264 (2007); Volvo Trucks N. Am., Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006); Texaco Inc. v. Dagher, 547 U.S. 1 (2006); and Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006). The cases decided in plaintiffs’ favor include: FTC v. Actavis, No. 12-416 (Mar. 22, 2013), FTC v. Phoebe Putney Health System, Inc., 133 S.Ct. 1003 (2013); and American Needle, Inc. v. National Football League, 130 S.Ct. 2201 (2010).

33 550 U.S. at 557.

34 551 U.S. at 894.

35 133 S. Ct. at 1431.

36 Italian Colors, 2013 U.S. LEXIS 4700 at *23 (Kagan, J., dissenting).

37 Id. at *42 (Kagan, J., dissenting).

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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