The conclusion of the U.S. Supreme Court's last term produced a number of notable victories for business. These victories involved decisions that made it more difficult for employees to prevail in discrimination claims, rejected attempts by plaintiffs to circumvent limitations on class actions in the Class Action Fairness Act, ruled in favor of generic-drug manufacturers sued by persons claiming to have been injured by defective generic medications and limited corporate liability under the Alien Tort Statute for conduct occurring outside the United States.
Among the most significant of these pro-business outcomes are decisions broadly affecting plaintiffs' ability to successfully bring and maintain federal class-action lawsuits.
By greatly enhancing the ability of companies to contract out of class procedures and by making it more difficult for plaintiffs to establish the prerequisites to class certification, the court has potentially drastically reduced the availability of the class-action device.
In particular, in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the court issued an opinion concerning the availability of class procedures for parties to consumer contracts that provide for mandatory arbitration.
Nearly seven months after the AmEx decision, its impact can begin to be assessed. Based on the decisions to date, it appears that AmEx is being construed so as to prevent customers, employees, clients and other constituents of corporate America from utilizing class actions where a contract provides for individual arbitration.
That is the case even in cases in which enforcing such a clause effectively means that the individual will not pursue claims because it is too expensive to do so relative to the potential recovery.
Because the class-action device is frequently used in precisely the situation in which it is not viable to pursue claims individually, the impact of the AmEx decision is potentially enormous.1
The AmEx Decision
In AmEx, the court addressed "whether a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act when the plaintiff's cost of individually arbitrating a federal statutory claim exceeds the potential recovery."2
Italian Colors Restaurant and a group of similarly situated merchants brought a purported class action against American Express, asserting that the company had violated Section 1 of the Sherman Act by allegedly using its monopoly power to force merchants to accept credit cards with fees paid to AmEx that were significantly higher than its competitors' fees.
Shortly after the suit commenced, AmEx moved to compel individual arbitration under the Federal Arbitration Act, 9 U.S.C. § 1, and under the parties' contracts, which required that all disputes be resolved in arbitration and explicitly waived the merchants' right to arbitrate claims against AmEx on a class-wide basis.3
In their response, the merchants argued that the costs of proving their antitrust claims individually would far outweigh their expected individual recoveries under the Sherman Act and that they should therefore be permitted to litigate as a class.
The District Court dismissed the merchants' class-action lawsuit. The 2nd U.S. Circuit Court of Appeals reversed, holding that the class-action waiver in the parties' contract was unenforceable because it created a situation in which the merchants "would incur prohibitive costs" when exercising their federal statutory rights, effectively amounting to a forfeiture of those rights.
Eventually, after the 2nd Circuit stood by its decision on two separate occasions even after considering subsequent Supreme Court decisions in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010), and AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court addressed AmEx head on.4
The Court's Decision
In a 5-3 decision authored by Justice Antonin Scalia,5 the Supreme Court reversed the 2nd Circuit, holding that the class-action waiver in the parties' contract was enforceable, even though the provision made it economically inefficient to prosecute a Sherman Act claim. The Supreme Court began its analysis by emphasizing that "arbitration is a matter of contract" and that the courts "must 'rigorously enforce' arbitration agreements according to their terms."6
The court then acknowledged that there are two exceptions to the general rule that courts should enforce arbitration agreements under the Federal Arbitration Act:
- Where the FAA's mandate is "overridden by a contrary congressional command."
- Where the parties' agreement includes a prospective waiver of a federal statutory right, the so-called "effective vindication" exception to the FAA.
The court found the first exception inapplicable, stating that there was "[n]o contrary congressional command" in the federal antitrust laws overriding the FAA. The court then analyzed but declined to apply the "judge-made" "effective vindication" exception to the FAA, which prohibits the "prospective waiver of a party's right to pursue statutory remedies."7
The court decided that "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."
The court determined that the agreement did not fall within the "effective vindication" exception because the arbitration agreement at issue in AmEx did not bar a merchant from pursuing its antitrust claim individually, and instead only made it economically inefficient to do so.
In a dissenting opinion joined by Justices Stephen Breyer and Ruth Bader Ginsburg, Justice Elena Kagan criticized the majority for failing to properly apply the "effective vindication" exception to the FAA.
The dissent asserted that the "effective vindication" exception was not intended to apply solely to "baldly exculpatory" arbitration provisions — clauses that expressly preclude the plaintiff from asserting specific federal statutory claims.
Instead, "the rule against prospective waivers of federal rights can work only if it applies not just to a contract clause explicitly barring a claim, but to others that operate to do so."
The Impact of Am Ex
Although it is too early to make any definitive assessment, AmEx already appears to have curtailed class actions in favor of arbitration. Since AmEx, numerous federal courts, including the 2nd Circuit, have relied on it in upholding class-action waiver provisions in arbitration agreements.8 Courts have also relied on AmEx to mandate individual arbitration in cases in which the arbitration provision was silent on whether class procedures were available.9 In addition, the 9th Circuit recently relied on AmEx to hold that California precedent exempting claims for "public injunctive relief" was preempted by the FAA.10
Federal appellate and district courts have likewise relied on AmEx to enforce arbitration agreements in the employment context.11
The post-AmEx decisions, however, do not uniformly uphold arguments against class arbitration procedures. AmEx and other Supreme Court precedent confirm that arbitration is a creature of contract and that parties wishing to preclude class procedures need to make that clear. An aspect of Lloyd v. JPMorgan Chase & Co., Nos. 11 Civ. 9305 and 12 Civ. 2197, 2013 WL 4828588 (S.D.N.Y. Sept. 9, 2013), illustrates this principle. Although the U.S. District Court for the Southern District of New York in Lloyd granted a motion to compel individual arbitration as to certain JPMorgan employee-plaintiffs, it also denied the defendants' motion to compel arbitration for a different set of employee-plaintiffs — employees who had signed a different employment contract.
The arbitration agreement signed by this second set of plaintiffs included the provision that only claims or controversies "required to be arbitrated by [Financial Industry Regulatory Authority] rules" would be "resolved by individual (not class or collective) arbitration."
The FINRA rules, in turn, prohibited the enforcement of arbitration agreements against a member of a putative class or collective action until class or collective certification has been denied or decertified.
According to the District Court, this provision meant that class procedures were available under FINRA's rules. Thus, the motion to compel the second set of plaintiffs to arbitration was denied.
A similar result was reached two days later in Zeltser v. Merrill Lynch & Co., No. 13 CV 1531, 2013 WL 4857687 (S.D.N.Y. Sept. 11, 2013), in which the District Court observed that AmEx did not "touch on whether arbitration should be compelled ... where FINRA rules bind the parties."
Lloyd and Zeltser illustrate the importance of clear drafting in arbitration agreements, but there is no reason to believe these courts would have invalidated class waivers had FINRA rules so provided.
In other decisions, however, courts appear to be striving to preserve the availability of class procedures. In Damato v. Time Warner Cable, No. 13-CV-994, 2013 WL 3968765 (E.D.N.Y. July 31, 2013), the plaintiffs argued that a commercial contract containing a mandatory arbitration provision that waived the ability to arbitrate on a class basis should not be enforced because "the arbitration procedures contemplated by the clause ... are cost-prohibitive."
The Damato court rejected the defendant's argument that AmEx applied, noting that the plaintiffs in AmEx resisted individual arbitration "because the cost of expert analysis needed to prove the [claims] would greatly exceed the individual recovery," whereas in Damato, "plaintiffs' complaint about the costs of arbitration ... have to do with access to the arbitral forum," e.g., hearing fees and the daily costs of hiring an arbitrator.
Even in Damato, while distinguishing AmEx, the court ultimately found that the plaintiff could not make the showing that arbitration access costs were prohibitive, and it compelled arbitration.
Likewise, in In re A2P SMS Antitrust Litigation, No. 12 CV 2656, 2013 WL 5202824 (S.D.N.Y. Sept. 16, 2013), in which the plaintiffs made a similar argument to the one made in Damato, i.e., that the administrative costs associated with arbitration would be "so high as to make access to the forum impracticable," the District Court found that the plaintiff had not made a sufficient showing that access costs were prohibitive.
The District Court enforced the arbitration agreement, holding that "[w]hile certain plaintiffs may conclude that it is not 'worth the expense involved in proving' the alleged statutory violation ... [that] does not amount to a statutory deprivation of their right to pursue their claims."
AmEx and its progeny pave the way for companies to incorporate express class-action waiver provisions in their standard-form investor, customer and commercial contracts.
Although the limits to a company's ability to preclude class procedures in their contracts mandating arbitration have not yet been fully tested, AmEx represents a dramatic enhancement of the ability of companies to protect themselves against class actions and the well-recognized costs entailed in defending such suits.
Nevertheless, AmEx and subsequent decisions reinforce that arbitration is a creature of contract. Careful drafting is essential in order for companies to realize the benefit of the AmEx holding.
Originally published in Westlaw Journal, Volume 21, Issue 10 / February 2014
1 In another significant development, the Supreme Court granted certiorari Nov. 15 in Halliburton Co. v. Erica P. John Fund Inc., No. 13-317, cert. granted (U.S. Nov. 15, 2013), a class action in which the defendants have challenged the "fraud on the market" presumption of reliance in cases alleging fraud under Section 10(b) of the Securities Exchange Act of 1934. That presumption, first established by the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224, 245-47 (1988), significantly enhanced the odds of a plaintiff obtaining class certification in a Section 10(b) case because, absent the presumption, courts frequently hold that the essential element of reliance raises individual issues not common to the class, thereby requiring denial of class certification. The Supreme Court's decision in Halliburton has the potential to be extremely important, and four Supreme Court justices — Samuel Alito, Clarence Thomas, Antonin Scalia and Anthony Kennedy — recently questioned the viability of the fraud-on-the-market presumption in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184, 1204, 1209 n.4 (2013). If the court does away with the fraud-on-the-market presumption of reliance in Halliburton, that decision will make it very difficult, if not impossible, for plaintiffs to obtain class certification in Section 10(b) cases.
2 133 S. Ct. at 2307.
3 Id. The parties' contract expressly provided, among other things, that "there shall be no right or authority for any claims to be arbitrated on a class basis.'" Id. at 2308 (citation omitted).
4 See 554 F.3d 300; In re Am. Express Merchants' Litig., 667 F.3d 204 (2d Cir. 2012). In Stolt-Nielsen, the court held that parties could not be compelled to submit to class arbitration unless the agreement to do so was explicit. See 559 U.S. at 686-87. In Concepcion, the court held that a California law that deemed classaction waivers in arbitration agreements unenforceable was preempted by the FAA. See 131 S. Ct. at 1748 ("[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA").
5 Justice Sonia Sotomayor took no part in consideration of the decision. 133 S. Ct. at 2312.
6 Id. (citation omitted). The court stated that the parties to a contract may "include terms that 'specify with whom [they] choose to arbitrate their disputes' ... and 'the rules under which the arbitration will be conducted.'" Id. (citations and original emphasis omitted).
7 Id. at 2310 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985) (original emphasis omitted)). The court recognized that an arbitration provision "forbidding the assertion of certain statutory rights" would be within the scope of the "effective vindication" exception, as might a provision imposing high administrative fees on arbitration. Id. at 2310-11.
8 See, e.g., Sutherland v. Ernst & Young, 726 F.3d 290, 298 (2d Cir. 2013) ("class-action waiver is not rendered invalid by virtue of the fact that [plaintiff's] claim is not economically worth pursuing individually"); Shetiwy v. Midland Credit Mgmt., No. 12 Civ. 7068, 2013 WL 3530524, at **2-3 (S.D.N.Y. July 12, 2013) (same principle); Porreca v. Rose Group, No. 13-1674, 2013 WL 6498392, at *15 (E.D. Pa. Dec. 11, 2013) (same principle). The Porreca court wrote that class-action waivers have been employed with "increasing frequency" and, in light of the fact that "arbitration is the favored venue" of the business community, said this development was "unfortunate, and in many situations, unjust." See 2013 WL 6498392, at *16. While philoso-phically opposed to AmEx, the Porreca court remained cognizant of the fact that it was "not at liberty to ignore the decisions of the United States Supreme Court" and ultimately found that the arbitration agreement and class waiver at issue were "valid ... [and] not substantively unconscionable and therefore must be enforced." Id.
9 See, e.g., Reed Elsevier Inc. v. Crockett, No. 12-3574, 2013 WL 5911219, at *5 (6th Cir. Nov. 5, 2013) (even where the arbitration clause was "one-sided" and made it "economically unfeasible for [the plaintiff] or any other customer to assert ... individual claims," under AmEx, "the absence of a class-action right does not render an arbitration agreement unenforceable").
10 See Ferguson v. Corinthian Colls., No. 11-56965, 2013 WL 5779514, at *5 (9th Cir. Oct. 28, 2013) (AmEx reiterated that "courts must 'rigorously enforce' arbitration agreements according to their terms") (citation omitted).
11 See, e.g., Richards v. Ernst & Young, No. 11-17530, 2013 WL 4437601, at *2 (9th Cir. Aug. 21, 2013) (relying on AmEx in determining that the plaintiff's employment-related claims against her employer were subject to a mandatory arbitration provision in the plaintiff's employment contract because "Congress ... 'did not expressly provide that it was overriding any provision in the FAA when it enacted the NLR A [National Labor Relations Act] or the Norris-LaGuardia Act'") (citation omitted); Lloyd v. JPMorgan Chase & Co., Nos. 11 Civ. 9305 and 12 Civ. 2197, 2013 WL 4828588, at *6 (S.D.N.Y. Sept. 9, 2013) (finding arbitration clause and class waiver enforceable against JPMorgan employees because AmEx held "that waivers of class arbitration should be enforced, notwithstanding any allegations that pursuing an individual claim would be cost prohibitive"). The 9th Circuit "amended" the Richards decision "for the purposes of clarification" Dec. 9, but the amendments were "not substantive" in nature. Richards v. Ernst & Young, No. 11-17530, 2013 WL 6405045, at *1 (9th Cir. Dec. 9, 2013).
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