Canada: Back To Class On Class Arbitrations: What About Economic Feasibility?

Last Updated: July 10 2013
Article by Marie-Hélène Beaudoin

Most Read Contributor in Canada, September 2018

What happens when the parties to an arbitration agreement expressly contract out of the possibility of proceeding to a class arbitration, and this means that plaintiffs will have to incur great expense to each make proof of their claim individually, well above the amounts they may obtain as a result of their proceedings? Should a court not interfere and decide to hear the dispute because "effective vindication" could not be attained through arbitration? This was the question put to the Supreme Court of the United States in American Express Co. v. Italian Colors Restaurant (June 20, 2013). The six justices forming the majority held that the Court could not invalidate the class arbitration waiver and that the claims should thus be continued by arbitration, while the three remaining justices handed down a very strong dissent.

Background

Italian Colors Restaurant, as many other merchants, has entered into an agreement with American Express for the use of the American Express credit card. These merchants, however, claim that American Express used its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing cards, and that this allegedly constitutes a violation of antitrust law.

An agreement between the parties require that all of their disputes be resolved by arbitration. It provides that "there shall be no right or authority for any claims to be arbitrated on a class action basis".

The petitioners sought to have this clause invalidated and have their recourse proceed before the courts, rather than arbitration. They invoked the "effective-vindication exception" rule set out in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., (1985) 473 U.S. 614, claiming that the case should not be referred to arbitration because the costs of individually arbitrating a federal statutory claim would exceed the potential recovery, and would therefore be prohibitive of the assertion of their statutory rights.

"[...] respondents submitted a declaration from an economist who estimated that the cost of an expert analysis necessary to prove the antitrust claims would be "at least several hundred thousand dollars, and might exceed $1 million," while the maximum recovery for an individual plaintiff would be $12,850 or $38,549 when trebled."

The Decision

The majority, under the pen of Justice Scalia, held as follows:

"No contrary congressional command requires us to reject the waiver of class arbitration here. Respondents argue that requiring them to litigate their claims individually— as they contracted to do—would contravene the policies of the antitrust laws. But the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim."

[...]

[...] [T]he 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. [...] The class-action waiver merely limits arbitration to the two contracting parties. It no more eliminates those parties' right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938 [...]. Or, to put it differently, the individual suit that was considered adequate to assure "effective vindication" of a federal right before adoption of class-action procedures did not suddenly become "ineffective vindication" upon their adoption."

The Dissent

The dissenting justices, under the pen of Justice Kagan, were not kind to the majority in stating the following:

"And here is the nutshell version of today's opinion, admirably flaunted rather than camouflaged: Too darn bad."

They held, in short, that:

"[...] the expense involved in proving the claim in arbitration is ten times what Italian Colors could hope to gain, even in a best-case scenario. That counts as a "prohibitive" cost, in Randolph's terminology, if anything does. No rational actor would bring a claim worth tens of thousands of dollars if doing so meant incurring costs in the hundreds of thousands.

[...]

When an arbitration agreement prevents the effective vindication of federal rights, a party may go to court."

Potential Significance

The virtues of commercial arbitration have been recognized and welcomed by the Supreme Court of Canada, such that courts have gone from avoiding arbitration, and seeing it as contrary to public order and the proper administration of justice, to embracing it as a legitimate vehicle for fostering access to justice (except in a consumer protection context, where many legislators – Quebec, Ontario, Alberta, and British Columbia− have intervened to prohibit arbitration and waiver of class action clauses).

The majority decision in American Express Co. is in line with the conclusion achieved a decade ago by the Supreme Court of Canada in Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17, where the Court decided that there was no violation of "public order" to refer a copyright claim to arbitration, despite the fact that the Supreme Court had previously stressed the importance placed on the economic aspects of copyright in Canada. The importance of copyright, or antitrust law, in the case of American Express Co., does not mean it should be removed from arbitral jurisdiction.

What about class arbitration?

"It has been said that class arbitration – also known as "class action arbitration" – is a "'uniquely American' device."1

Very little Canadian authorities have touched the subject, it's true.

The American Express Co. decision is still very relevant in the Canadian context in that it reaffirms the principle of the autonomy of contracting parties who choose to submit a dispute to arbitration. It confirms that any authority guiding the conduct of the arbitration must be sought in the arbitration agreement, first and foremost.

Considering this, although class proceedings are statutorily available before the Courts, parties must have explicitly or implicitly allowed them in their arbitration agreements for an arbitrator to be entitled to order that the arbitration proceed on a class basis. As stated by the Supreme Court of the United States in Oxford Health Plans LLC v. Sutter:

"Class arbitration is a matter of consent: An arbitrator may employ class procedures only if the parties have authorized them."

Without consent of the parties, it seems that a number of obstacles could stand in the way of class arbitrations in Canada.

This is particularly true in Quebec, where the "arbitration agreement" is a "nominate contract" defined at sections 2638 and ff. of the Civil Code of Quebec, ruled by the principle of privity of contract provided for at section 1440 of the Civil Code of Quebec, which states that "A contract has effect only between the contracting parties; it does not affect third persons, except where provided by law." In this context, it is hard to envision how an arbitrator could chose to reunite claims made under separate contracts to hear them on a class basis, without express authority from the parties.

In fact, in Telus Mobilité c. Comtois, 2012 QCCA 170, the Court of Appeal of Quebec gave effect to a waiver of class action clause, and referred the claim of corporate customers for "private, confidential and binding arbitration" as per the arbitration agreement – the whole, without ever giving any thought to the possibility of class arbitration. The Court simply stated that it was for the arbitrator to decide whether the waiver of the right to institute a class action before the common law courts was abusive or not (thereby applying the principles stated in Seidel c. TELUS Communications Inc., 2011 CSC 15). This, even after the plaintiffs had pleaded that the costs associated with the arbitration would be too expensive.

"[35] The class representative submits, as an alternative argument for denying Telus' application, that the arbitration clause is abusive and should be declared null under art. 1437 C.C.Q. and arts 4.1 and 4.2 C.C.P. In her view, such an arbitration clause, by denying the possibility of participation in a class action and by exposing the losing party to the costs of arbitration, deters claims against Telus when the amount at stake is small.

[36] Absent legislated exception, any challenge to an arbitrator's jurisdiction over a claim against Telus should first be determined by the arbitrator [...]".

As my Toronto colleagues Brandon Kain and Larissa Moscu have stated earlier on this Blog:

"The Telus case confirms that arbitration clauses remain a potent defence to proposed class actions after Seidel v. TELUS Communications Inc., [2011] 1 S.C.R. 531."

That said, in light of the decisions rendered by the Supreme Court of the United States in American Express Co. and Oxford Health Plans LLC, one would be well advised to consider the opportunity of including a proper waiver of class arbitration in their arbitration agreements, if seeking to protect themselves of the possibility of an arbitrator ultimately deciding that claims may proceed on a class basis.

Case Information

American Express Co. v. Italian Colors Restaurant, U.S.S.C., No. 12-133.

Date of Decision: June 20, 2013

To view original article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Footnotes

1. S.I. STRONG, "Class Arbitration Outside the United States: Reading the Tea Leaves, in Dossier VII: Arbitration and Multiparty Contracts, Bernard Hanotiau & Eric A. Schwartz eds., 2010, also available online.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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