Supreme Court reverses Second Circuit and enforces arbitration clause that includes waiver of class arbitration

by Saul Ewing Arnstein & Lehr LLP


The Supreme Court has issued another in a series of decisions that have revealed its desire to limit the impact of class actions. It held that under the Federal Arbitration Act, courts must vigorously enforce arbitration agreements according to their terms, and the fact that it would be prohibitively expensive for the individual plaintiffs to pursue their respective claims did not justify invalidating the parties’ arbitration agreement, including the waiver of class arbitrations.

In a 5-3 decision in which Justice Sotomayor did not participate, the United States Supreme Court held the Federal Arbitration Act (the “FAA”) does not permit courts to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim. In so doing, it reversed the Second Circuit Court of Appeals, which had held the waiver to be unenforceable in light of the fact that it would have been prohibitively expensive for the plaintiff to attempt to vindicate its rights under the federal antitrust laws by proceeding on its own. In a sharp dissent, the three judge minority called the majority’s opinion a “betrayal” of its precedents.

At issue in American Express v. Italian Colors Restaurant, 2013 WL 3064410 (June 20, 2013), was a dispute between certain merchants that accept American Express cards and American Express. Plaintiffs initiated a class action for alleged violation of the federal antitrust laws, contending that American Express had abused its monopoly power to force them to accept rates that were significantly higher than those charged by competing credit cards. They sought treble damages.

The agreement between the parties contained a clause requiring all disputes to be resolved through arbitration, and expressly providing that “there shall be no right or authority for any Claims to be arbitrated on a class action basis.” Citing to that language, American Express moved to compel individual arbitrations under the FAA. In countering that motion, the merchants submitted the declaration of an economist, who estimated that the expert report necessary to prove the antitrust claim would cost at least several hundred thousand, and possibly as much as one million dollars. By contrast, the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled. The district court granted American Express’s motion and dismissed the lawsuits. The Second Circuit reversed, finding that the class action waiver was not enforceable given the prohibitive costs the individual plaintiffs would be forced to incur in order to prove their respective cases in relation to the relatively small available recovery.

The Supreme Court vacated the Second Circuit’s decision and remanded the matter for further consideration in light of Stolt –Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 130 S. Ct. 1758 (2010), which held that a party cannot be compelled to submit to class arbitration absent an agreement to do so. After the remand, the Second Circuit confirmed its earlier decision, and noted that such decision did not compel class arbitration. On appeal, the Supreme Court reversed the Second Circuit. In so doing, the Court stated that under the FAA, courts must vigorously enforce arbitration agreements according to their terms. The Court further noted that nothing contained in the antitrust laws dictated a different result, and the fact that it would be prohibitively expensive for the individual plaintiffs to pursue their respective claims did not justify invalidating the parties’ arbitration agreement, including the waiver of class arbitrations. The Court cited to its earlier opinion in AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), stating that the earlier decision “all but resolves” the instant case. In AT&T Mobility, the Court struck down a California law that conditioned enforcement of arbitration on the availability of a class procedure. The American Express Court quoted language from AT&T Mobility that described a class arbitration procedure as sacrificing the efficiency and informality of a standard arbitration.

The vigorous dissent argued that the majority’s decision left the merchants in question unable to seek meaningful redress for their claimed antitrust injury. “The Court today mistakes what this case is about. To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of [Federal Rule of Civil Procedure 23 (governing class actions)] everything looks like a class action, ready to be dismantled.”

Recent Supreme Court cases have revealed the Court’s tendency to limit the impact of class actions. The American Express decision marks another step in that direction.

Written by:

Saul Ewing Arnstein & Lehr LLP

Saul Ewing Arnstein & Lehr LLP on:

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