Supreme Court Rules Class-Action Waivers Are Enforceable—Even If The Cost Of Individual Litigation Is Too High

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

This morning, with Justice Scalia writing for a 5-3 majority, the Supreme Court of the United States ruled that a waiver of class arbitration in a commercial contract is enforceable under the Federal Arbitration Act (FAA), even if the plaintiffs’ cost of individually arbitrating a federal statutory claim exceeds the potential recovery. The Court refused to invalidate the class-action waiver on the ground that pursuit of individual claims would be fiscally impractical. According to the Court, “The 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 for legal relief in 1938.” American Express Co. v. Italian Colors Restaurant, No. 12–133, U.S. Supreme Court (June 20, 2013).

Factual and Procedural Background

The case concerned the contract governing the relationship between American Express and a group of merchants that accepted American Express charge cards. Since 1999, this contract had contained a mandatory arbitration clause including the following provision: “There shall be no right or authority for any Claims to be arbitrated on a class action basis.” The merchants filed a class action accusing American Express of violating federal antitrust laws.

American Express moved to compel arbitration. In response, the merchants submitted an economist’s declaration stating that the cost of pursuing their claims individually would exceed the maximum recovery available to an individual plaintiff. The federal district court granted American Express’s motion to compel arbitration. The Second Circuit Court of Appeals reversed, finding that the merchants’ claims could not “reasonably be pursued as individual claims." According to the Second Circuit, enforcement of the class-action waiver "would grant Amex de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery.”

The Supreme Court of the United States agreed to review the case, vacated the Second Circuit’s decision, and remanded the case for consideration in light of its 2010 decision in Stolt-Nielsen S. A. v. AnimalFeeds International Corp., in which the Court held that parties cannot be forced to submit to class arbitration unless they contractually agreed to do so.

The Second Circuit reconsidered its ruling in light of another Supreme Court case, AT&T Mobility LLC v. Concepcion, in which the Court held that the FAA preempted a state law prohibiting enforcement of a contract’s waiver of class arbitration. The Court of Appeals then ruled in favor of the merchants again. The Supreme Court agreed to hear the case to decide whether the FAA permits courts to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim.

Legal Analysis

Justice Scalia began the majority opinion by rejecting the merchants’ argument that individual litigation of the claims would contravene the policies of antitrust laws. The Court found no “congressional command” contrary to the FAA's mandate that arbitration agreements must be enforced according to their terms.

The Court next considered, and rejected, the merchants’ argument that waiver of class arbitration prevents the “effective vindication” of their rights because they would have no economic incentive to pursue their claims individually. In this case, the Court found, the costs of litigation did not prevent the parties from pursuing relief under the antitrust laws but rather from proving a statutory remedy. The Court emphasized this critical distinction, reasoning that “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.” The Court thus reversed the Second Circuit’s ruling in favor of the merchants.

Practical Impact

According to Ron Chapman, Jr., a shareholder in the Dallas office of Ogletree Deakins and a member of the firm’s Board of Directors: “The Court’s ruling bodes extremely well for employers looking to class-action waivers as a line of defense against the onslaught of often wholly meritless class and collective actions, especially in the wage and hour arena.”

“While American Express is not an employment case, the Court adopted the exact same arguments raised by D.R. Horton in its appeal of the National Labor Relations Board’s highly controversial decision finding that class-action waivers violate the National Labor Relations Act,” stated Chapman, who represents D.R. Horton in its pending appeal of the Board’s decision. “In effect, while D.R. Horton's appeal remains pending with the Fifth Circuit Court of Appeals, the Supreme Court has given us the answer and validated the company’s position.”

Marc L. Zaken, the managing shareholder of the Stamford office of Ogletree Deakins, commented: “In the American Express case, the Supreme Court once again confirmed its long-standing rule that arbitration clauses under the FAA will be enforced as a matter of contract in accordance with the parties' agreement.” Zaken continued: “The lesson from this case and the case of Oxford Health Plans LLC v. Sutter, which the Court decided earlier this month, is that employers must carefully review their arbitration agreements to clearly state which claims may be subject to arbitration. An agreement to arbitrate will generally be enforced by courts as long as the agreement does not deprive a claimant from 'effectively vindicating' a federally protected right. The Supreme Court noted in American Express that an arbitration agreement that precluded assertion of certain federal claims or which imposed exorbitant administrative fees so as to effectively deny access to arbitration would be unenforceable. However, the fact that a claim may not be financially worthwhile to bring is not a basis to invalidate an arbitration agreement.”

Note: This article was published in the June 20, 2013 issue of the National eAuthority.

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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