In May 2008, we wrote of the controversy surrounding the growing trend among financial services providers to include mandatory arbitration clauses and class action waivers in consumer credit card contracts. In that Alert, we discussed the Second Circuit's favorable, though narrow, disposition for class plaintiffs seeking to invalidate such provisions. Ross v. Bank of America, N.A., 524 F.3d 217 (2d Cir. 2008). The Second Circuit held that those plaintiffs had standing to bring antitrust violations against a group of banks who allegedly conspired to include mandatory arbitration and class action waiver provisions in all credit card agreements.
On February 24, 2009, the Third Circuit Court of Appeals followed suit with another favorable result for plaintiffs seeking to invalidate a mandatory arbitration clause and class action waiver. Homa v. American Express Co. et al, ____ F.3d ____ (3d Cir. Feb. 24, 2009). The Third Circuit concluded in Homa that the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16, does not preclude a federal court from applying state law unconscionability principles to void a class-arbitration waiver and reversed the District Court's dismissal of Homa's claim in favor of arbitration on an individual basis. Furthermore, the Third Circuit held that a class-arbitration waiver would be unconscionable under New Jersey law where each claim in a class action is "of such a low value as effectively to preclude relief if decided individually." Slip op. at 3, 17.
Plaintiff Homa is the lead plaintiff for a purported class of American Express "Blue Cash" credit card holders. Homa alleged that American Express misrepresented the actual terms of the rewards program associated with the "Blue Cash" card and failed to award him the promised amount of cash back in violation of the New Jersey Consumer Fraud Act. Id. at 3-4. Homa received, upon issuance of the Blue Cash card, an agreement from American Express delineating the terms and conditions of each cardholder's account. Id. at 4. That agreement included a class-arbitration waiver requiring arbitration on an individual basis of all claims brought under the agreement by either party. Id. The agreement also stated that disputes arising out of the agreement would be governed by Utah law, which allows class-arbitration waivers. Id. at 4-5.
Homa argued that New Jersey law applied because the application of Utah law would violate New Jersey's public policy preference against certain class-arbitration waivers. Id. at 5. The District Court disagreed with Homa and dismissed his claim with prejudice in favor of arbitration on an individual basis. Id. Homa appealed that decision to the Third Circuit Court of Appeals.
Before undergoing its own conflict of laws analysis, the Third Circuit addressed the argument made by American Express that § 2 of the Federal Arbitration Act did not permit it to consider state law unconscionability principles in interpreting an arbitration provision. Id. at 6-8 (citations omitted). The Court rejected American Express's argument that, based on dicta in the recent Third Circuit case Gay v. CreditInform, 511 F.3d 369 (2007), a federal court could never consider unconscionability principles of state law in determining the validity of an arbitration clause. Id. at 11 (citing Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 686-87 (1996) ("generally applicable contract defenses, such as ... unconscionability, may be applied to invalidate arbitration agreements without contravening [FAA] § 2.").
Next, the Court determined that the agreement between Homa and American Express was governed by New Jersey law because application of Utah law would have meant enforcement of the class action waiver provision in contravention of New Jersey principles of unconscionability. Under New Jersey choice of law principles, a contractual choice of law provision will be upheld only "if it does not violate New Jersey's public policy." The Third Circuit held that the choice of law provision violated New Jersey public policy because, under New Jersey law, "if the claims at issue are of such a low value as effectively to preclude relief if decided individually, then ... the application of Utah law to the class-arbitration waiver is unconscionable." Id. at 17. Accordingly, it reversed the District Court's order dismissing Homa's claim in favor of arbitration and remanded for further proceedings consistent with its opinion. Id.
This opinion further demonstrates that federal courts are well aware of the controversy surrounding mandatory arbitration clauses and class action waivers and that they will carefully evaluate such provisions to ensure they are fair under state and federal law.
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