United States Supreme Court Holds That Plaintiffs Can Waive Their
Rights to Class Arbitration of Statutory Claims Under the Federal
Arbitration Act
On June 20, 2013, the U. S. Supreme Court held in American Express Co. v. Italian Colors Restaurant,
No. 12-133 (June 20, 2013) that the §2 of the Federal Arbitration Act
(FAA) does not permit courts to invalidate a contractual waiver of class
arbitration on the grounds that a plaintiff’s cost of individually
arbitrating a statutory claim exceeds the potential recovery.
The
scope of the FAA, particularly its effect on consumer arbitration
agreements that contain class action waivers, has been the subject of
continual litigation in recent years. The FAA was enacted in 1925 in
response to widespread judicial hostility to arbitration agreements. The
FAA provides, in relevant part, that:
[a]
written provision in any maritime transaction or contract evidencing a
transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction…shall be valid,
irrevocable, and enforceable, save upon such grounds as exist at law or
in equity for the revocation of any contract.
9
U.S.C. § 2. Despite a national policy favoring arbitration agreements,
some courts have interpreted the FAA to invalidate arbitration
provisions containing class action waivers when those provisions are
held unconscionable as a matter of state common law. In 2011, the U.S.
Supreme Court halted this trend by holding that the FAA preempts state
common law barring class arbitration waivers. AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011).
The
Supreme Court has now held that FAA prohibits lower courts from setting
aside arbitration provisions containing class action waivers on the
theory that such waivers prevent plaintiffs from vindicating their
statutory rights. In American Express Co., the plaintiffs were
merchants that accepted American Express cards. Their agreement with
American Express contained a clause that required all disputes between
the parties to be resolved by arbitration. The agreement also provided
that there shall be no right or authority for any claims to be
arbitrated on a class basis. Despite this provision, the plaintiffs
filed a class action lawsuit in the United Stated District Court for the
Southern District of New York. They alleged that American Express
violated federal antitrust laws by using its monopoly power in the
market for charge cards to force merchants to accept credit cards at
rates approximately 30% higher than the fees for competing credit cards.
Plaintiffs sought treble damages for the class under § 4 of the Clayton Act.
American
Express moved to compel individual arbitration under the FAA. In
opposition to the motion, plaintiffs submitted a declaration from an
economist who estimated that the cost of an expert analysis necessary to
prove the antitrust claims may exceed $1 million, while the maximum
recovery for an individual plaintiff would be $12,850 or $38,549 when
trebled. Plaintiffs argued that requiring them to litigate their claims
individually – as they contracted to do – would prohibit them from
effectively vindicating their rights under the antitrust laws because
their potential reward would be significantly outweighed by the cost of
arbitrating their claims individually.
The
United States District Court for the Southern District of New York
granted American Express’ motion. The Second Circuit reversed and
remanded for further proceeding. It held that respondents had
established that they would incur prohibitive costs if compelled to
arbitrate under the class action wavier. As such, it held that the class
action wavier was unenforceable and that the arbitration could not
proceed.
The
U.S. Supreme Court granted certiorari to consider the question of
whether the FAA permits courts to invalidate arbitration agreements on
the ground that they do not permit class arbitration of a statutory
claim. In reversing the Second Circuit, the Court held that there is no
congressional command that plaintiffs be entitled to pursue their claims
as a class to vindicate their statutory rights. Specifically, the Court
held that the "antitrust laws do not guarantee an affordable procedural
path to the vindication of every claim" nor do the antitrust laws
"evidence an intention to preclude a waiver of class-action procedure."
Moreover, the Court held that congressional approval of Federal Rule of
Civil Procedure 23 (the rule outlining federal class action procedure)
did not establish an entitlement to class proceedings for the
vindication of statutory rights. The Court also held that FAA prevents
federal and state courts from invalidating arbitration provisions
containing class waivers solely because the plaintiff’s expense in
pursuing their claim would outweigh their potential award and discourage
them from pursuing their statutory rights.
American
Express Co. v. Italian Colors Overturns The Massachusetts Supreme
Judicial Court’s Decision in Feeney v. Dell, Inc., 2013 WL 2479603 (Jun.
12, 2013)
The
Supreme Court’s holding in American Express significantly impacts the
Massachusetts Supreme Judicial Court’s (SJC) recent holding in Feeney v. Dell, Inc.,
2013 WL 2479603 (Jun. 12, 2013) (Cordy, J.) (Feeney II), setting aside
an arbitration provision containing a class wavier. In that case, the
SJC found that a class action waiver remained unenforceable under the
theory that it prohibited plaintiffs from effectively vindicating their
rights under G.L. c. 93A. In that case the SJC held that Congress
enacted the FAA to "preserve the availability of an arbitral forum and
remedy for the resolution of disputes between parties to a commercial
contract," and that it would be "contrary to Congressional intent to
interpret the FAA to permit arbitration clauses that effectively deny
consumers any remedy for wrongs committed in violation of other federal
and state laws intended to protect them." Id., 2013 WL 2479603, at *23.
The SJC’s ruling has been effectively overruled by the U.S. Supreme Court’s recent decision in American Express Co. v. Italian Colors Restaurant, No. 12-133. The U.S. Supreme Court’s decision in American Express Co., also significantly limits the rights of consumers in the class action context by making
class waivers in arbitration clauses very difficult to defeat. In light
of the court’s recent decisions relating to the FAA, it is particularly
important for clients to review arbitration and dispute resolution
clauses and strategies.
For more information about any of the material presented here, for assistance in reviewing arbitration and dispute resolution clauses and strategies, or for questions about any litigation matter, please contact practice group chair William A. Worth at 617 456 8005 or wworth@princelobel.com, or Julie A. Brennan, the co-author of this alert, at jbrennan@princelobel.com or 617 456 8088.