SUPREME COURT HOLDS THAT
CLASS ACTION WAIVERS IN
ARBITRATION AGREEMENTS
ARE ENFORCEABLE

Today, in one of the most important decisions to big business in years, the Supreme Court upheld the validity of an arbitration provision that prohibits “class arbitration.” The effect of this decision, American Express Co. v. Italian Colors Restaurant,,¹ is to effectively permit businesses to insulate themselves from class action lawsuits on behalf of individuals (including employees) or entities with whom they have a contract. The American Express decision will almost certainly lead to a flurry of contractual amendments by consumer-oriented businesses and large-scale employers to include arbitration provisions with class action waivers in their customer and employee agreements.

Background

The plaintiffs alleged that American Express’ practice of requiring merchants that accept American Express charge cards to also accept American Express credit cards (at rates approximately 30% higher than competing credit cards) is a violation of both the Sherman and Clayton Acts, federal statutes which bar certain anti-competitive practices in trade. The plaintiffs sought to bring their claim on behalf of a class comprised of “all merchants that have accepted American Express charge cards . . . and have thus been forced to agree to accept American Express credit and debit cards . . .”

Each of the purported members of the plaintiff class had signed an agreement with American Express that contained a broad arbitration provision that required arbitration of all disputes and provided “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.”

Procedural History

The plaintiffs commenced their action against American Express in the United State District Court for the Southern district of New York and sought class certification. American Express moved to compel arbitration of the dispute. The District Court determined that because the agreement of the parties contained an otherwise enforceable agreement to arbitrate, “[t]he enforceability of the collective action waivers is a claim for the arbitrator to resolve.” The District Court thus dismissed the action, leaving the substantive antitrust claims and the enforceability of the collective action waiver to the arbitrator.

The plaintiffs appealed the District Court’s decision to the Second Circuit Court of Appeals, which reversed on the basis that “the class action waiver in the Card Acceptance Agreement cannot be enforced in this case because to do so would grant Amex de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery” because of the relatively small amount of the plaintiffs’ individual claims (“Amex I”).

The Supreme Court granted certiorari, vacated the Second Circuit’s Amex I decision and remanded the case to the Second Circuit for further consideration in light of the Court’s decision in Stolt-Nielsen v. AnimalFeeds Int’l Corp. (holding that parties that had not signed an agreement to arbitrate could not be forced into class arbitration), which was released after issuance of Amex I. The Second Circuit reached the same conclusion on remand in “Amex II” as it had in Amex I, reasoning that the “record evidence before us establishe[d], as a matter of law, 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.”

Shortly after issuance of its decision in Amex II, the Supreme Court issued its decision in AT&T Mobility v. Concepcion (holding that a state law that invalidated class action waivers in arbitration agreements was preempted (and therefore made invalid) by the Federal Arbitration Act), thus compelling the Second Circuit to reconsider its decision in Amex II. Upon further consideration, the Second Circuit determined that the Concepcion decision was not applicable to the facts of Amex. The Second Circuit thus reached the same conclusion as it had in Amex I and Amex II.

The Supreme Court again granted American Express’ petition for certiorari.

The Supreme Court’s Decision

The Supreme Court’s analysis in its 5-3 decision (Justice Sotomayor recused herself) authored by Justice Scalia was simple and straightforward – arbitration is a matter of contract and courts must enforce arbitration agreements in accordance with their terms:

[The Federal Arbitration Act] reflects the overarching principle that arbitration is a matter of contract. And consistent with [the text of the FAA], courts must “rigorously enforce” arbitration agreements according to their terms, including terms that “specify with whom [the parties] choose to arbitrate their disputes,” and “the rules under which that arbitration will be conducted.” That holds true for claims that allege a violation of a federal statute, unless the FAA’s mandate has been “overridden by a contrary Congressional command.”

(citations omitted). In reaching this conclusion, the Court rejected the plaintiffs’ argument and Circuit Court’s holding that waiver of a right to proceed as a class would effectively eliminate the plaintiff’s remedy:

the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim . . . and the antitrust laws do not ‘evinc[e] an intention to preclude a waiver’ of class action procedure.

The Court also distinguished the class arbitration waiver from its earlier mandate that a prospective waiver of a party’s right to pursue a statutory remedy may not be enforced:

That [mandate] would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable. But 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.

Analysis and Potential Impact

The American Express decision, though technically addressing only the enforceability of class waivers in connection with arbitration of federal claims will almost certainly be applied with equal force in connection with arbitration of state-law claims and class action waivers of both state and federal law claims in court proceedings (as opposed to arbitration proceedings). Interestingly, the Court did not even find it relevant to discuss the clear difference in market power or relative bargaining positions of the parties. The Court’s reasoning should thus be equally persuasive in connection with consumer and employment litigation. This decision will almost certainly cause consumer-oriented businesses and large-scale employers to begin to insert class waivers into their “standard” forms of contract with customers and employees.