United States: When It Comes To Arbitration, The Supreme Court Means What It Says

Last Updated: July 8 2013
Article by Steven B. Katz

In Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985), the U.S. Supreme Court held that courts must "rigorously enforce" arbitration agreements. In Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662 (2010), it held that vigorous enforcement means not imposing arbitration-unfriendly features, such as class action procedures, unless the parties actually agreed to them. In AT&T Mobility LLC v. Concepcion, 563 U.S. ___ (2011), it held that states could not require the parties to agree to class action arbitration as a condition of enforcing an arbitration agreement. In last week's decision from the Supreme Court—American Express Co. v. Italian Colors Restaurant—the Court emphasized that it meant what it actually said.

The issue in American Express was whether the courts could create an exception to these principles whenever they believed that the absence of class arbitration procedures prevented "effective vindication" of a statutory right. A merchant brought a class action lawsuit against American Express, alleging that the company violated antitrust laws when it set the fees it charged merchants who accepted its card. The merchant's agreement with American Express required the parties to arbitrate their claims, and the agreement barred class arbitration.

Because the merchant provided evidence that it might cost more in expert witness fees to prove its claim than the claim was worth, the Second Circuit held that the merchant's agreement prevented a merchant from "effective[ly] vindicat[ing]" its rights under federal antitrust laws, and denied enforcement of the agreement. The Supreme Court granted review, but then returned the case to the Second Circuit to reconsider the ruling after Stolt-Nielsen. The Second Circuit held fast. Then, the Second Circuit took a third look at the case after AT&T Mobility was decided. It still held fast.

In last week's decision, the Supreme Court said, in effect, the Second Circuit should have gotten the hint. "Truth to tell, our decision in AT&T Mobility all but resolves this case. . . . We specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'" The Court acknowledged that there might be a narrow "effective vindication" exception to "prevent 'prospective waiver of a party's right to pursue statutory remedies . . . . 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." [Emphasis in original] In other words, the "effective vindication" exception is not a back-door path to imposing class arbitration.

American Express is important to employers because a number of states—led by California—have used the "effective vindication" rationale to create state rules that bar enforcement of employment-related arbitration agreements that contain class relief waivers. In Gentry v. Superior Court, 42 Cal.4th 443 (2007), cert. denied sub nom Circuit City Stores, Inc. v. Gentry, 552 U.S. 1296 (2008), for example, the California Supreme Court established a four-factor test to determine when a waiver of class arbitration in an employment agreement is unenforceable: (1) whether the "potential individual recovery" is "modest"; (2) whether there is a "potential for retaliation against members of the class"; (3) whether "absent members of the class may be ill informed of their rights"; and (4) whether there exist other "real world obstacles to the vindication of class members' rights . . . through individual arbitration." The continuing vitality of the Gentry rule is back before the California Court in Iskanian v. CLS Transportation Los Angeles, LLC, 142 Cal.Rptr.3d 372 (2012) (rev. granted). (We discussed recent developments in California here.)

American Express decisively disposes of the Gentry rule, and similar rules in other states, once and for all. The lesson? Try listening to what the U.S. Supreme Court says, so it doesn't have to repeat itself.

Originally published by Forbes.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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