The Changing Landscape for the Effectiveness Of Class Action Waivers in Arbitration Agreements

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By Elizabeth B. Sandza, David M. Ross, and Samuel I. Reich, Wilson Elser

Arbitration has become a favored means for companies to resolve disputes. Businesses are wary of the often detrimental effects of forum and judge shopping by plaintiffs, the burdens and costs associated with litigating cases that may drag on for years and include oppressive discovery demands, and an anti-business bias that may be present in jury pools.

Arbitration is generally more affordable, more predictable and speedier than the court system. Arbitration also permits disputes to be decided by individuals who are knowledgeable about the matters in question. Therefore, many companies have inserted arbitration clauses into their consumer, employment and supplier contracts to contractually bind the parties to this method of dispute resolution.

Companies also disfavor class actions. Businesses that provide goods or services to consumers are uniquely exposed to class action lawsuits. Class certification requirements such as numerosity, typicality and commonality are often easily met in consumer class actions.

The uniformity that companies may justifiably employ as a sound economic and business strategy for their consumer communications is frequently cited as a rationale to certify a consumer class action. Further, class action litigation is typically accompanied by substantial legal and settlement costs, results in unwanted negative publicity, and may trigger increased scrutiny by regulators and shareholders.

Therefore, to avoid an undesirable court system and class actions, companies incorporate class action waivers into their arbitration agreements.

Are class action waivers in arbitration agreements enforceable? This article examines the legal landscape surrounding class action waivers in arbitration agreements, and the future viability of these waivers, in light of upcoming U.S. Supreme Court review.

Avoiding Class Arbitrations

In an effort to limit their exposure to class actions, companies often include in their agreements arbitration clauses that require a claimant to resolve a dispute in an individual capacity and not as a plaintiff or member of a class in a class action suit.

Historically, many state courts found class action waivers to be unconscionable and unenforceable. An example of this is the “Discover Bank Rule,” as coined by the U.S. Supreme Court. In Discover Bank v. Superior Court,1 the California Supreme Court held in 2005 that:

[W]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then … the waiver becomes in practice the exemption of the party ‘from responsibility for [its] own fraud, or willful injury to the person or property of another.’ Under these circumstances, such waivers are unconscionable under California law and should not be enforced.2

Other state courts have similarly applied prohibitions on class action waivers. Courtesy of the U.S. Supreme Court, state rulings such as Discover Bank have since been held preempted by the Federal Arbitration Act (FAA). In the seminal case AT&T Mobility LLC v. Concepcion,3 the Supreme Court held in 2011 that California's Discover Bank Rule is an obstacle to the achievement of congressional intent, and is preempted by the FAA, which mandates enforcement of arbitration agreements pursuant to their terms.4

In re American Express
Merchants' Litigation

The Second Circuit addressed class action waivers in mandatory arbitration clauses in In re American Express Merchants' Litigation. In August 2003 a group of merchants filed a class action against American Express. The merchants alleged that American Express charges a supra-competitive 3 percent merchant discount fee that exceeds the fee charged by other credit card companies. The merchants alleged that this fee can be sustained only through enforcement of a provision included in every merchant contract that unlawfully ties American Express's charge and credit card services in violation of Sherman Act§1. The action, filed in the U.S. District Court for the Northern District of California, was transferred with another class action to the Southern District of New York.

The contractual agreement between American Express and the merchants contained a provision providing:

American Express issues card products to its cardmembers, which cardmembers then use in making purchases from participating merchants. Participating merchants with annual charge volume expected to be less than $10 million agree that, by submitting charges for payment by American Express, their relationship will be governed by the ‘Terms and Conditions for American Express©Card Acceptance' (‘the Card Acceptance Agreement’).5

The Card Acceptance Agreement contained a mandatory arbitration clause prohibiting the merchants from bringing a class action. The agreement also required the merchants to arbitrate disputes on an individual basis.6

The Second Circuit found that the class action waiver in the Card Acceptance Agreement cannot be enforced because, under §2 of the FAA, a valid ground exists for the revocation of the class action waiver. The Second Circuit held that enforcement of the waiver would grant American Express de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery.7 The U.S. Supreme Court vacated this ruling8 and remanded to the Second Circuit for further consideration in light of the Supreme Court's 2010 Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. decision.9

In Stolt-Nielsen, the Supreme Court was asked to decide whether parties can be compelled to participate in class arbitration when the arbitration agreement is silent on this issue. The Supreme Court held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”10

On remand, the Second Circuit held that their original analysis was unaffected by Stolt-Nielsen.11 Shortly after this decision, the Supreme Court decided Concepcion. The Second Circuit was asked to reconsider their opinion after the ruling in Concepcion. The Second Circuit held in February 2012:

[W]e find neither Stolt-Nielsen nor Concepcion counsels us to alter our original analysis, we again conclude that (1) the question of the enforceability of the class action waiver provision is properly decided by the court and (2) the class action waiver provision is unenforceable under the Federal Arbitration Act.12

In November 2012, the Supreme Court granted certiorari13 and oral argument was held Feb. 27, 2013. American Express argued that the Second Circuit's rulings impaired the FAA's federal policy favoring the enforcement of arbitration agreements.

American Express also argued that the Second Circuit's decision creates a split between the circuits. In Coneff v. AT&T Corp.,14 the Ninth Circuit enforced an arbitration agreement that contained a class arbitration waiver, expressly disagreeing with the Second Circuit's holding. The plaintiffs in Coneff are customers of New Cingular Wireless Services Inc. and AT&T Mobility LLC. The defendants sought to enforce an arbitration agreement contained in its contracts with plaintiffs. The district court refused to enforce the arbitration agreement on state-law unconscionability grounds, relying primarily on the agreement's class-action waiver provision.15 The Ninth Circuit found that the waiver was not substantively unconscionable.

In Carter v. Countrywide Credit Indus.,16 the Fifth Circuit held that arbitration agreements that contain class action waivers can be enforced absent congressional intent to preclude them. The Second Circuit's decision is therefore inconsistent with these circuits' interpretation of class action waivers.

Certiorari Granted in
Oxford Health Plans LLC v. Sutter
In December 2012, the U.S. Supreme Court granted certiorari in Oxford Health Plans LLC v. Sutter,17 and scheduled oral argument for March 25, 2013.

The issue presented in that case is whether the FAA empowers an arbitrator to determine that the parties to an arbitration settlement agreed to authorize class arbitration based only on the inclusion of broad language in the agreement precluding litigation and requiring arbitration of any dispute. The Third Circuit held that the FAA does so empower arbitrators (supported by Second Circuit precedent), whereas the Fifth Circuit has held that it does not.

Significantly, the agreement in Sutter did not contain an express carve-out for class actions, which reinforced the Third Circuit's (and the arbitrator's) decision. The agreement did not mention class arbitration, but required all disputes to be submitted to arbitration and precluded the filing of a civil action in any court. The Third Circuit agreed with the arbitrator that this language was broad enough to permit class arbitrations, and that it contained the contractual basis required to compel a party under the FAA to submit to class arbitration as mandated by Stolt-Nielsen.18

The Future of Class Action Waivers
in Arbitration Agreements
The U.S. Supreme Court's rulings on the Second Circuit and Third Circuit decisions, which are expected to be issued close to the end of the Court's term in June 2013, should shape the enforcement of class action waivers in arbitration agreements. A decision squarely addressing the merits of this issue should put to rest much, and perhaps all, of the current uncertainty about the validity of these waivers. The business and legal community should take a key interest in closely analyzing the Supreme Court's decisions once they are issued and tracking how these decisions are thereafter interpreted by lower courts.

Should the Supreme Court decide that arbitration agreements that contain waivers are enforceable, the business community and the defense bar will have won a major victory, although a creative plaintiffs' bar will undoubtedly craft arguments that seek to avoid the import of any decision. A decision approving the use of waivers will result in waivers becoming standard fare in arbitration agreements and will encourage an even wider use of arbitration agreements by companies. If, however, the Second Circuit is upheld, these waivers will be effectively nullified, and the plaintiffs' bar may use the nullification as fodder to argue that the arbitration agreement in totality is void. The plaintiffs' bar may further argue that the significance of such a decision additionally provides support to class certification, serving as recognition that adequate redress was unavailable on an individual level.

In addition, should the Supreme Court decide that agreements that do not contain an express class action waiver nonetheless preclude class arbitration, the business community will have further relief from class liability. If, however, the Supreme Court upholds the Third Circuit's decision, businesses would be prudent to modify their arbitration agreements to expressly include a class arbitration waiver. Even if the Third Circuit is overturned, and if the Supreme Court otherwise endorses the use of class arbitration waivers, companies will best be served by including waivers and avoiding the uncertainty that led to decisions such as Sutter.

Elizabeth B. Sandza, a partner in Wilson Elser in Washington, D.C., has extensive experience representing corporate clients in government investigations and in complex business litigation. Sandza can be reached at

David M. Ross, also a partner in Wilson Elser in Washington, D.C., represents clients in all aspects of complex civil litigation before federal and state courts and alternative dispute forums. Ross is available at

Samuel I. Reich, an associate in Wilson Elser's Connecticut office, focuses on environmental, insurance & reinsurance coverage, and toxic tort litigation, and can be reached at

© 2013 Wilson Elser Moskowitz Edelman & Dicker LLP

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