U.S. Supreme Court Ruling Upholds Class Action Arbitration Waivers

Building on two other recent decisions addressing the enforceability of arbitration clauses in consumer contracts, the U.S. Supreme Court ruled June 30, 2013, that the Federal Arbitration Act (“FAA”) does not permit courts to invalidate class action waiver provisions contained in arbitration clauses, even if the cost of individual arbitration would far exceed the potential recovery. See American Express Co. et al. v. Italian Colors Restaurant et al.1

Respondents in American Express are merchants who entered into an agreement with American Express, Inc. (“American Express”) authorizing the merchants to accept American Express credit cards. The agreement between the parties contained a clause that required all disputes to be resolved by arbitration and stated that “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” Despite this prohibitive language, the merchants brought a putative class action claim against American Express for alleged violations of federal antitrust laws. Specifically, the merchants argued that American Express used its monopoly power in the credit card market to force them to accept American Express charge cards at rates approximately 30% higher than fees charged by American Express’ competitors. This conduct, the merchants argued, violated §1 of the Sherman Act.

American Express moved to compel arbitration pursuant to the FAA and the arbitration clause contained in the agreement between the parties. The merchants opposed arbitration, arguing that the arbitration clause contained a class action waiver provision that essentially acted as a bar to their right to recovery since the cost of individual arbitration would surpass each merchant’s potential recovery and make it economically unfeasible to bring individual claims. The District Court granted American Express’ motion and dismissed the class action. On appeal, the Second Circuit reversed and remanded, holding that the class action waiver clause contained in the agreement was unenforceable because the merchants were able to show that they would “incur prohibitive costs” if compelled to arbitrate individually.

The Second Circuit revisited the issue twice more – first following the Supreme Court’s decisions in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp2 and AT&T Mobility LLC v. Concepcion,3 in which the Court held that the FAA preempted a state law prohibiting class action waiver clauses in contracts. After consideration of the Supreme Court’s rulings, the Second Circuit reaffirmed its decision both times, maintaining its position that the class action waiver provision in the arbitration clause between American Express and the merchants was unenforceable because the cost of individual arbitration was too high. The Supreme Court granted certiorari and reversed the Second Circuit’s ruling, holding that class action waiver provisions are enforceable under the FAA even where the cost of individual arbitration exceeds the potential recovery.

In its ruling, the Court held that the fundamental principles underlying the FAA require courts to view arbitration as a matter of contract. As such, the Court reasoned, courts must “‘rigorously enforce’ arbitration agreements according to their terms,” including terms that specify who and by what method arbitration is to be conducted. The Court found that this strict adherence to the agreement between the parties applies even to claims alleging a violation of federal statute unless the FAA’s policy favoring agreements to arbitrate has been “overridden by a contrary congressional command.”

The merchants argued that, although the FAA did not expressly prohibit the class action waiver clauses, enforcement of the clause would contravene the policies of the antitrust laws and effectively bar their right to recovery by making adjudication of their claim economically unviable. The Supreme Court disagreed, holding that neither of the merchants’ arguments showed the existence of a “congressional command” requiring the rejection of the class-arbitration waiver clause in the parties’ agreement. To begin with, the Court found that antitrust laws do not guarantee an affordable path to recovery of claims. Even if they did, the Court reasoned, that would have no effect in this case. That Congress in the past has been willing to go “beyond the normal limits of law” to facilitate some antitrust claims does not evidence congressional intent to advance the policies of antitrust laws over the policies of the FAA.

The Court further rejected the merchants’ argument that congressional approval of Rule 23 of the Federal Rules of Civil Procedure establishes an entitlement to utilize class actions for the vindication of their federal statutory rights. The Court noted that most claims cannot survive the strict criteria of Rule 23. Even in the interest of policy, the Court has consistently held that it will not relax those criteria because the “high cost of compliance would frustrate the policies underlying antitrust laws.”4 Additionally, the Court reiterated the position set forth in Concepcion, in which the Court rejected the proposition that federal law secures a non- waivable opportunity to pursue statutory class claims where the procedural strictures of Rule 23 can be satisfied.

The Court then addressed the merchants’ argument that the arbitration clause was unenforceable because a judge-made exception to the FAA precludes the enforcement of the class action waiver provisions. Specifically, the merchants argued that courts may invalidate agreements that prevent “effective vindication” of a federal statutory right. The merchants contended that the “effective vindication” exception was applicable because the class arbitration waiver would prevent effective vindication of their federal right to pursue antitrust claims because they have no economic incentive to pursue individual arbitration claims.

The Court found the merchants’ argument unconvincing, holding that the “effective vindication” exception applies only to arbitration agreements that operate to bar a party’s right to pursue a statutory remedy. There is a distinction, the Court pointed out, between the right to pursue a remedy and whether pursuit of the remedy would be economically viable. Here, the Court found that the merchants were simply arguing that individual arbitration would not be worthwhile economically, and that is not the type of bar to statutory relief contemplated by the “effective vindication” exception. Because the merchants are still able to pursue individual claims in arbitration against American Express, there is no basis for reliance on this exception.

The message sent by the Supreme Court in American Express is clear: courts must enforce arbitration agreements in accordance with their terms, including class action waiver provisions.

  1. 570 U.S. ___ (2013)
  2. 559 U.S. 662, 130 S. Ct. 1758 (2010)
  3. 131 S. Ct. 1740 (2011)
  4. Eiser v. Carlisle & Jacquelin, 417 U.S. 156, 166- 68, 175-76 (1974)