Argument preview: Under what circumstances are arbitration agreements with class action waivers enforceable?

Next Wednesday, the Court will hear oral argument in American Express Company v. Italian Colors Restaurant, on the following question: “Whether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”

This is the fourth year in a row that the Court has addressed questions surrounding arbitration agreements and class action waivers.  In 2010, in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., the Court held that class arbitration could not be imposed on parties that have not agreed to it.  In 2011, in AT&T Mobility LLC v. Concepcion, the Court held that state law could not render a class action waiver in an arbitration agreement unenforceable because the Federal Arbitration Act (FAA) preempts state law.  And last year, in CompuCredit Corp. v. Greenwood, the Court held that an arbitration agreement could be enforced in a case involving claims under the federal Credit Repair Organizations Act (CROA), because the CROA is silent on whether arbitration is permissible.  To say that the Court is interested in these issues right now is an understatement.  Indeed, AmEx is only one of two such cases the Court has taken up this year.  At the end of March, it will hear oral argument in Oxford Health Plans LLC v. Sutter, to address whether the parties to an arbitration agreement authorize class arbitration when the agreement provides that “any dispute” will be submitted to arbitration. 

The plaintiffs in this case are merchants alleging a Sherman Act tying claim against American Express for allegedly forcing them to accept American Express credit cards and debit cards as a condition of accepting American Express charge cards, at higher rates than competing credit cards and debit cards.  American Express moved to compel arbitration pursuant to its arbitration agreements with the merchants, which included a class action waiver. In 2006, the Southern District of New York granted American Express’s motion to compel arbitration, and the merchants appealed.  In 2009, the Second Circuit reversed, holding that the class action waiver was unenforceable. (“AmEx I“). Relying on Green Tree Financial Corp.-Alabama v. Randolph (2000) and Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985), it held that enforcement of the class action waiver would “effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.”  The Second Circuit held that the merchants had met their burden of showing this – through expert economic opinion regarding none other than the prohibitive expense of procuring expert economic opinion in support of individual antitrust claims. 

AmEx filed a petition for a writ of certiorari.  In the wake of its decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., the Court granted the petition, vacated the decision below, and remanded the case to the Second Circuit for reconsideration in light of Stolt-Nielsen.  The Second Circuit reviewed Stolt-Nielsen and reaffirmed its decision. It held that Stolt-Nielsen was inapposite and did not require a different result: “Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so. It does not follow, as Amex urges, that a contractual clause barring class arbitration is per se enforceable.”

Weeks later, the Supreme Court released its decision in AT&T Mobility LLC v. Concepcion, upholding the enforceability of a class action waiver in an arbitration agreement on the ground that the FAA preempted California’s common law of unconscionability. The Second Circuit requested supplemental briefing regarding the impact of Concepcion, and on February 1, 2012, it reaffirmed its earlier decisions and again held (in AmEx III) that American Express’s class action waiver was unenforceable. The Second Circuit held that Concepcion was inapposite because it did not address whether a class action waiver could be enforced if “the practical effect of the enforcement would be to preclude [plaintiffs’] ability to vindicate their federal statutory rights.” According to the Second Circuit, Concepcion, like Stolt-Nielsen, did not “require that all class-action waivers be deemed per se enforceable.” On May 29, 2012, the Second Circuit denied a request for rehearing en banc.

The central holding of the three AmEx decisions is the same – under Randolph and Mitsubishi, arbitration clauses preventing litigants from effectively vindicating federal statutory rights cannot be enforced.  According to the merchants and their experts, class action waivers prevent them from effectively vindicating their federal statutory rights under the antitrust laws because the cost of pursuing individual antitrust claims against American Express, particularly with respect to expert proof, is simply too high when compared to the small potential award an individual claimant might obtain. 

American Express filed a petition for certiorari, which the Court granted on November 9, 2012.  Represented by Michael Kellogg, American Express argues in its merits brief that the Court’s holding in Concepcion was broad and clear, and plainly contradicts AmEx III:  arbitration agreements should be enforced according to their terms and cannot be conditioned on the availability of classwide procedures.  American Express also asserts that the Court in Concepcion already considered and rejected the “effective vindication” argument when it held that an arbitration agreement with a class action waiver was enforceable even if “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.” 

American Express also argues that the Second Circuit distorted the Court’s holdings in Mitsubishi and Randolph.  According to American Express, the Court’s “effective vindication” dicta in Mitsubishi dealt with whether substantive U.S. antitrust law would apply in arbitration, not whether individual arbitration would be cost prohibitive.  The Second Circuit’s reliance on dicta from Randolph was also misplaced, because that case dealt with costs associated with obtaining access to arbitration (such as filing fees, etc.).  American Express explained that Mitsubishi actually holds that arbitration agreements should be enforced according to their terms unless Congress has expressed another intention.  With respect to congressional intent, American Express examined the legislative history of both the FAA and the Sherman Act and concluded that nothing in the legislative history of either statute indicates that Congress believed class proceedings were essential.  Indeed, American Express noted that before the Sherman Act was passed in 1890, Senator James Z. George of Mississippi proposed an amendment to the Act to allow classwide determinations of liability, citing the prohibitive cost of pursuing small individual claims, and the amendment was rejected. 

American Express also criticizes the Second Circuit for imposing its own policy judgments and ignoring the law.  American Express goes on to tackle those policy concerns head on, pointing to empirical studies showing that bilateral arbitration actually reduces arbitration costs and costs for consumers.  In addition, American Express asserts that class arbitration has many disadvantages, including placing enormous pressure on defendants to settle even unmeritorious claims. 

The merchants, respondents in the Supreme Court, are represented by Paul Clement.  Their merits brief focuses on establishing the place of the effective vindication “rule” in the law of arbitration agreements.  They argue that the rule is long-standing and has been followed and applied by the Court not only in Mitsubishi and Randolph but also in numerous other decisions. According to the merchants, the rule plays the important and necessary role of harmonizing the FAA with all other federal statutes.  Moreover, it protects the policies of the FAA and various federal statutes by making sure that federal statutory rights are actually arbitrated rather than simply permitting the enforcement of arbitration agreements that provide de facto immunity.  The merchants also stress that the rule is narrow and only applies in the rare circumstance that an arbitration agreement imposes “prohibitive costs” on a claimant.  Those situations, they contend, are arising less and less frequently because companies are including beneficial terms in their arbitration agreements that permit effective vindication of statutory rights in bilateral arbitration, such as the terms of AT&T’s arbitration agreement at issue in Concepcion.  They argue that if the Court sides with American Express, it would not only end the long-standing effective vindication rule, but it would also stop the trend of including pro-arbitration terms in arbitration agreements. 

The merchants also assert that AmEx III did not conflict with the Court’s decisions in Stolt-Nielsen or Concepcion.  They assert that they never sought, and the Second Circuit never imposed, class arbitration, so there can be no conflict with Stolt-Nielsen’s holding that class arbitration cannot be imposed on a party that has not agreed to it.  As the merchants explain, all they have ever sought is the effective vindication of their statutory rights.  It doesn’t matter whether that takes the form of class litigation, class arbitration, bilateral arbitration with cost-shifting, or something else. And with respect to Concepcion, they assert that the decision had nothing to do with effective vindication of federal statutory rights and everything to do with the completely unrelated topic of federal preemption of state law. 

American Express, in its reply brief, focuses on tearing down the notion of an accepted effective vindication rule.  It argues that “creative” lawyers for the merchants have “stitched” together a new effective vindication “exception” to the enforcement of arbitration agreements.  It also points out that nothing stops the merchants from cooperating with each other or sharing costs through their own efforts and organization in a bilateral arbitration setting. 

A top-notch oral argument can be expected.  There are many important questions for the Court, encompassing many of the Court’s prior decisions.  Has the Court always recognized the effective vindication “rule,” or is this a new made-up “exception” to the enforceability of arbitration agreements? Was the Court’s decision in Concepcion limited to resolving a conflict between state law and the FAA, or did it also address and reject the effective vindication arguments raised by the merchants here?  Does it matter what the legislature thought when it passed the Sherman Act in 1890?  Shouldn’t we encourage all the beneficial, pro-arbitration terms that are increasingly appearing in arbitration agreements that have class action waivers? 

The Second Circuit’s repeated affirmance of its AmEx decision as the Court churned out Stolt-Nielsen, Concepcion and CompuCredit essentially refines and poses the basic question of whether the blanket endorsement of arbitration agreements with class action waivers for state law causes of action in Concepcion based on the Federal Arbitration Act is going to have any exceptions when federal rather than state law provides the rule of decision for the claim being pressed by the putative class.   If state law claims are to be treated differently than an as-yet-undefined subset of federal claims, then we can expect fewer class actions in state courts and more class actions in federal courts in the future, on claims where arbitration agreements with class action waivers may come into play.