The United States Supreme Court Further Cements the Enforceability of Class Action Waivers in Arbitration Agreements

07/09/2013

Recently, the United States Supreme Court issued its decision in American Express Co. v. Italian Colors Restaurant, a third opinion in what is now a trilogy of cases upholding the validity of class action waiver clauses in contracts containing arbitration agreements. In a 5-3 opinion authored by Justice Scalia1, the Court held that arbitration agreements containing class action waivers are enforceable even if the result is that it becomes economically unfeasible for a plaintiff to assert a federal statutory claim such as one under U.S. antitrust laws.

Background and Procedural History
The plaintiffs were merchants who accepted American Express cards. According to plaintiffs, American Express used its alleged monopoly power in the charge card market to force merchants to accept credit cards at excessive rates in violation of the antitrust laws.

The plaintiffs sued in federal district court and American Express moved to compel arbitration pursuant to an arbitration clause in its form merchant contract. The contract contained a class action waiver stating that the merchant would “not have the right to participate in a representative capacity or as a member of any class of claimants pertaining to any claim subject to arbitration.” The plaintiffs presented evidence that the cost of an economic study to prove an antitrust violation would vastly exceed the recovery sought by any individual plaintiff.

After the district court granted the motion to compel, the Court of Appeals for the Second Circuit reversed, concluding that “the cost of plaintiffs’ individually arbitrating their dispute with Amex would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws.” Accordingly, the Second Circuit held that “as the class action waiver in this case precludes plaintiffs from enforcing their statutory rights, we find the arbitration provision unenforceable.”

The Opinion
The Supreme Court reversed, holding that the arbitration agreement was enforceable even if the cost of proving a claim in individual arbitration exceeded its potential recovery. The Court emphasized that arbitration is a matter of contract and, therefore, that the courts must “rigorously enforce” arbitration agreements according to their terms. Against this baseline, the Court’s holding turned on three rationales.

First, the Court concluded that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” While Congress has facilitated antitrust lawsuits by provisions such as treble damages, the Court reasoned that no legislation “pursues its purpose at all costs” and noted that the antitrust statutes were originally enacted before the advent of the class device.

Second, the Court rejected the application of an “effective vindication” exception to the enforceability of arbitration agreements. It noted that several of its prior decisions had indicated a willingness, in dictum, to invalidate on public policy grounds arbitration agreements that operate as a prospective waiver of a party’s right to pursue statutory remedies. However, the Court concluded 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.”

Finally, the Court concluded on a practical note, observing that the process of weighing, on a case-by-case basis, the costs of proving each claim against the damages recoverable would “destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure.” It observed that the Federal Arbitration Act would not “sanction such a judicially created superstructure.”

Overall, the Court believed that its decision extended the law only slightly from its recent decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). The Court admonished that it had already “specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

Implications of the Decision
The decision in Italian Colors confirms that companies may avoid class arbitration through waiver provisions—even if the cost of proving a claim in individual arbitration exceeds its potential recovery. It gives companies that include class action waiver clauses in their standard arbitration agreement additional assurance that those agreements will be strictly enforced.

If you would like more information about the Italian Colors decision or the firm’s Appellate and Class Action practices, please contact one of the attorneys below.

Thad Behrens
214.651.5668
thad.behrens@haynesboone.com

Mark Trachtenberg
713.547.2528
mark.trachtenberg@haynesboone.com

Nicholas Even
214.651.5045
nick.even@haynesboone.com

Daniel H. Gold
214.651.5154
daniel.gold@haynesboone.com

Polly Graham
713.547.2570
polly.graham@haynesboone.com

 

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1Justice Sotomayor, who was originally a member of the panel that heard the case in the Second Circuit, took no part in consideration of the case.

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