SCOTUS Upholds Contractual Waiver of Class Arbitration Regardless of Costs to Plaintiff

On Thursday, June 20, 2013, the United States Supreme Court issued a 5-3 decision (Justice Sotomayor recused herself from the case) in American Express Co. v. Italian Colors Restaurant, No. 12-133 (2013), holding that the Federal Arbitration Act does not permit courts to invalidate a contractual waiver of class arbitration on the grounds that the plaintiff's cost of individually arbitrating a federal statutory claim exceeds the potential recovery.

In American Express, various merchants and American Express entered into agreements that contained both an arbitration clause and a provision stating that "[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis."  The merchants brought a class action against American Express for violations of the federal antitrust laws, specifically under §1 of the Sherman Act, alleging that American Express improperly tied its monopoly power in the charge cards market to force merchants to accept credit cards at higher rates.  American Express moved to compel individual arbitration under the Federal Arbitration Act, which the U.S. District Court for the Southern District of New York granted.  After the Second Circuit Court of Appeals reversed on three separate occasions, the Supreme Court granted certiorari to consider whether the Federal Arbitration Act permits courts to invalidate arbitration agreements on the grounds that the agreements do not permit class arbitration and that the merchants would incur prohibitive costs if compelled to arbitrate.

Citing its recent decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __, 131 S. Ct. 1740 (2011), the Supreme Court reversed the Second Circuit and upheld the District Court's dismissal, holding that a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act even where a plaintiff may encounter "prohibitively high cost[s]."  The Supreme Court further held that "[c]ourts must 'rigorously enforce' arbitration agreements according to their terms," and the Court found no contrary congressional command, stating that federal antitrust laws, including the Sherman and Clayton Acts, "do not 'evinc[e] an intention to preclude a waiver' of class-action procedure."

The Supreme Court also rejected the merchants' reliance on the "effective vindication" exception to the Federal Arbitration Act, stating that the exception could not be applied simply because of the prohibitive costs of individual arbitration.  The Supreme Court stated that class action waivers do not constitute an elimination of the merchants' right to pursue a statutory remedy, but instead merely limit arbitration to the two contracting parties.

The American Express decision is significant for a number of reasons.  First, it removes a barrier to the enforcement of class action waiver provisions in arbitration agreements.  Second, this decision supports the argument that the National Labor Relations Board's recent decision in D.R. Horton Inc., 357 NLRB No. 184 (2012) (invalidating an arbitration agreement that required individual arbitration, finding that the "right" to file a class action constituted a protected activity) was decided incorrectly.  Finally, the decision further demonstrates the Supreme Court's intent to enforce terms of arbitration agreements.

About The Author

Ken LeCroix |