Once again demonstrating its strong support for enforcement of the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (FAA), and class action waivers, the Supreme Court today struck a blow to what had become a potentially promising argument for plaintiffs' counsel. In American Express Co. v. Italian Colors Restaurant, No. 12-133, the Court in a 5-3 decision held that the FAA does not allow a court to strike a class action waiver provision in an arbitration agreement based on evidence that a plaintiff's cost of arbitrating on an individual basis (such as for experts, etc.) is greater than the potential recovery. Justice Sotomayor took no part in the decision.
The Second Circuit, in In re American Express Merchants' Litigation ("American Express"), 667 F.3d 204 (2d Cir. 2012), concluded that an arbitration agreement with a class action waiver was unenforceable based on expert testimony that it would be cost prohibitive for the plaintiffs to pursue their antitrust claims on an individual basis. This would mean, the court reasoned, that arbitration would not permit the plaintiffs to effectively vindicate their federal statutory rights. Id.
Reversing the Second Circuit, the Supreme Court reiterated that the FAA requires arbitration agreements to be "rigorously enforce[d]" "unless the FAA's mandate has been overridden by a contrary congressional command." Slip op. at 3-4 (quotation marks and citations omitted). "The antitrust laws do not 'evinc[e] an intention to preclude a waiver' of class-action procedure." Slip op. at 4 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614, 628 (1985)).
The Court went on to state:
Nor does congressional approval of Rule 23 establish an entitlement to class proceedings for the vindication of statutory rights. To begin with, it is likely that such an entitlement, invalidating private arbitration agreements denying class adjudication, would be an "abridg[ment]" or modif[ication]" of a "substantive right" forbidden to the Rules, see 28 U. S. C. §2072(b). But there is no evidence of such an entitlement in any event. Slip op. at 5.
Finally, the Court rejected the "judge-made exception to the FAA" designed to "harmonize competing federal policies by allowing courts to invalidate agreements that prevent the 'effective vindication' of a federal statutory right." In applying this "effective vindication" exception, the Second Circuit relied on the Supreme Court's earlier decision in Green Tree Financial Corp.-Ala. v. Randolph, 531 U.S. 79, 92 (2000), which noted that in some circumstances a party could "seek[] to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive." The Second Circuit concluded that the expert testimony about the costs of pursuing an antitrust claim satisfied this requirement. Am. Express, 667 F.3d at 217.
The Supreme Court's decision rejected this application of the "effective vindication" exception and clarified that in Green Tree, the discussion focused on comparing the "arbitration costs" to the costs of pursuing a claim in court. As the Court stated slip op. at 6:
[t]he exception finds its origin in the desire to prevent "prospective waiver of a party's right to pursue statutory remedies," Mitsubishi Motors, supra, at 637, n. 19 (emphasis added). That would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.
The expert testimony in American Express focused solely on the costs of pursuing an antitrust claim as an individual—regardless of whether that claim was pursued in arbitration or in court. As the Court put it, "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." Slip op. at 7.
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