Court OKs Class Action Waiver in Arbitration, Even If Federal Statutory Claims Are Hindered

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By Kevin P. McGowan  

A class action waiver in a commercial arbitration agreement between American Express Co. and merchants that accept the company's credit cards is enforceable under the Federal Arbitration Act even if individual arbitration claims of alleged antitrust violations are too expensive to pursue, a divided U.S. Supreme Court ruled June 20 (American Express Co. v. Italian Colors Rest., U.S., No. 12-133, 6/20/13).

In a 5-3 decision with implications for employment agreements including similar arbitration clauses, the court said the Federal Arbitration Act does not permit a court to invalidate a contractual waiver of class arbitration because a plaintiff's costs in individually arbitrating a federal statutory claim would exceed any potential recovery.

The court reversed a U.S. Court of Appeals for the Second Circuit ruling that because the merchants established they would face “prohibitive costs” if compelled to arbitrate their federal antitrust claims individually against American Express, the class action waiver was unenforceable and the arbitration could not proceed ( 634 F.3d 187 (2d Cir. 2012)).

No 'Congressional Command' Bars Enforcement

Writing for the court, Justice Antonin Scalia said the FAA's text “reflects the overarching principle that arbitration is a matter of contract.” Absent a “contrary congressional command” that would require the court to reject an express waiver of class arbitration, Scalia said the contract must be enforced as written to bar class arbitration of merchants' statutory claims against American Express.

Respondent Italian Colors Restaurant and the other merchants in the lower courts presented an economist's declaration it would cost “at least several hundred thousand dollars and might exceed $1 million” to conduct the expert analysis necessary to prove their antitrust claims. But maximum recovery for an individual plaintiff would be $12,850, or $38,549 for treble damages, making pursuit of an individual antitrust claim in arbitration economically infeasible, the merchants said.

The Second Circuit said given such evidence, the class action waiver in the arbitration pact prevented the merchants' effective vindication of their rights under federal antitrust law.

But the Supreme Court said lack of an economic incentive to pursue individual statutory claims does not render the class arbitration waiver unenforceable.

The effective vindication doctrine would “certainly cover” an arbitration provision that forbade assertion of certain statutory rights or set filing or administrative fees so high they effectively barred access to the arbitration forum, Scalia wrote.

“But the fact that [individual arbitration] is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy,” Scalia wrote.

Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas, and Samuel Alito joined in the majority opinion.

In a concurring opinion, Thomas said the court's result is “required by the plain meaning” of the FAA, which he said mandates enforcement of an arbitration pact unless a party “successfully challenges the formation of the contract, such as by proving fraud or duress.”

No 'Effective Vindication' Possible, Dissent Says

In dissent, Justice Elena Kagan said the effective vindication doctrine bars enforcement of the arbitration's class action waiver because that agreement effectively insulates American Express from federal antitrust claims by merchants signing the pact.

The dissent disputed the FAA, which “conceived of arbitration as a 'method of resolving disputes,' ” requires the result reached by the majority.

“In the hands of today's majority, arbitration threatens to become more nearly the opposite--a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability,” Kagan wrote.

Justices Ruth Bader Ginsburg and Stephen Breyer joined in the dissent.

Justice Sonia Sotomayor recused herself, as she was part of the original Second Circuit panel in the American Express case prior to joining the Supreme Court in 2009.

Employers Welcome Favorable Ruling

Attorneys representing employers June 20 applauded the court's ruling, suggesting it puts to rest the argument that arbitration agreements with class action waivers cannot be enforced.

The Equal Employment Advisory Council, a Washington, D.C., association representing large employers, is “very pleased,” said Rae Vann, a partner with Norris, Tysse, Lampley & Lakis who is EEAC's general counsel.

The opinion “shuts the door” to any remaining argument a class action is a “substantive right” for employees that cannot be waived in arbitration, Vann told BNA.

Although the case arose in a commercial dispute, the decision is “likely to have an immediate, favorable impact” beyond that context, particularly for employers seeking to enforce arbitration pacts barring class actions, Vann said.

Gerald Maatman, a partner with Seyfarth Shaw in Chicago, called the decision welcome news for employers that want to manage their risk through agreements requiring “bilateral arbitration” of all employment disputes, including federal statutory claims.

Under recent Supreme Court rulings culminating in American Express, employers “certainly have a green light” to “configure risk management” in a way that precludes class arbitration of discrimination, wage and hour, and other employment claims, Maatman told BNA.

Meanwhile, Paul Bland, a senior attorney with Public Justice in Washington, D.C., called the decision “catastrophic” for employees covered by arbitration pacts who seek to enforce federal statutory rights.

The court seems to say as long as an arbitration agreement grants an employee the “formal right” to pursue a statutory claim, it “does not matter” if the agreement makes it impossible to pursue such claims effectively, Bland told BNA June 20.

The decision enables corporations to “opt out” of “big chunks” of federal statutory law through contract, a result “really harmful to workers,” who must sign such agreements to keep their jobs, Bland said.

Public Justice had submitted an amicus brief supporting the merchants in American Express.

 


Text of the opinion is available at http://op.bna.com/dlrcases.nsf/r?Open=kmgn-98uksu.