Supreme Court Decision Upholding Class Action Waivers is Good for Employers

by Cozen O'Connor

On June 20, 2013, in a 5-3 decision, the U.S. Supreme Court ruled that the Federal Arbitration Act (FAA) does not permit 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. In the case, American Express Company v. Italian Colors Restaurant, a group of merchants who accepted American Express cards brought a class action against the American Express Company for violations of the federal antitrust laws. The parties had an agreement that required all disputes be resolved by arbitration, and that “there shall be no right or authority for any Claims to be arbitrated on a class action basis.” Based upon the agreement, American Express moved to compel individual arbitration pursuant to the FAA. The merchants opposed the motion, and in support of their opposition, submitted a declaration from an economist who estimated that the cost of an expert analysis necessary to prove the antitrust claims would be at least several hundred thousand dollars, while the maximum recovery for any individual merchant would be $12,850, or $38,549 when trebled.

In holding that the class action waiver was enforceable, the Supreme Court explained that arbitration agreements will be enforced unless the FAA is overridden by a contrary congressional command. In this case, no congressional command required the waiver to be rejected. The antitrust laws do not guarantee an affordable path to the vindication of every claim, nor do they evince an intention to preclude a waiver of class action procedure. Moreover, the Federal Rules of Civil Procedure do not establish any entitlement to class proceedings for the vindication of statutory rights.

Moreover, the Court rejected the argument that class arbitration was necessary to prosecute claims that might otherwise slip through the legal system. The Court held that the so-called “effective vindication” exception was not applicable in this case. The exception permits courts to invalidate arbitration agreements that operate as a prospective waiver of a party’s right to pursue statutory remedies. The Supreme Court explained that the fact that it may not be worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy. As examples of agreements that would be covered by the “effective vindication” exception, the Court offered agreements that forbid the assertion of certain statutory rights, or filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.

Although American Express addresses class action waivers in the antitrust context, the decision also has significant implications in the labor and employment context. The Supreme Court’s decision suggests that employment agreements that contain similar class action waiver provisions are enforceable. American Express also raises doubts as to the validity of the 2012 decision by the National Labor Relations Board (NLRB) in, D.R. Horton, Inc. In D.R. Horton, holding that a provision in an arbitration agreement requiring all employment-related disputes be resolved through individual arbitration was an unfair labor practice because it restricted the right of employees to participate in concerted legal action addressing workplace grievances. Moreover, the NLRB determined that its holding was not contrary to the FAA because the FAA permits arbitration agreements to be invalidated for any legal or equitable grounds. D.R. Horton is currently on appeal to the 5th Circuit. The Supreme Court’s rationale in American Express Company raises serious questions regarding whether the NLRB properly held that its decision did not conflict with the FAA. The validity of D.R. Horton is also in question after the Courts of Appeals for both the D.C. Circuit and the 3rd Circuit have invalidated certain decisions by the NLRB based upon its lack of a quorum due to invalid recess appointments by President Obama. D.R. Horton was decided by an NLRB panel that also included a recess appointment. The Supreme Court recently decided to weigh in on the issue.

Ultimately, American Express is the most recent in a series of Supreme Court decisions that have made it harder for plaintiffs to bring class actions. Thus although the NLRB would hold otherwise, federal courts appear to be moving in the direction of enforcing class action waivers. Thus, such waivers may be a viable option for employers in combatting class action lawsuits.



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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