supreme-court-seal.pngBy  Gerald L. Maatman, Jr. and Jennifer A. Riley

This morning the U.S. Supreme Court issued its long-awaited decision in American Express Co. v. Italian Colors Restaurant, No. 12-133, 570 U.S. ___ (2013). The Supreme Court reversed the Second Circuit’s prior decision and held that merchants must arbitrate their antitrust claims on an individual, bilateral basis, even though the cost of pursing those claims would exceed their potential recovery. 

In doing so, the Supreme Court upheld the general validity of arbitration agreements containing class action waivers and reaffirmed the notion that the Federal Rules of Civil Procedure do not establish any entitlement to class proceedings. 

Factual Background

Plaintiffs, merchants who accept American Express cards, filed a class action suit against Amex alleging that Amex used its monopoly power in the market for charge cards to force them to accept credit cards at rates approximately 30% higher than the fees of its competitors. Id. at 1-2. 

Plaintiffs’ agreement with Amex contained a clause that required all disputes between the parties to be resolved by arbitration. The agreement provided that “there shall be no right or authority for any Claims to be arbitrated on a class basis.” Id. at 1.

Amex moved to compel individual arbitration under the Federal Arbitration Act (“FAA”). In opposition to the motion, Plaintiffs submitted a declaration from an economist stating that the cost of an expert analysis necessary to prove the antitrust claims would be “at least several hundred thousand dollars,” while the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled. Id. at 2. 

The district court granted the motion and dismissed the suit. The Second Circuit reversed, holding that, because Plaintiffs showed that they would incur prohibitive costs if compelled to arbitrate on a bilateral basis, the class action waiver was unenforceable and arbitration could not proceed. Id.

The Supreme Court initially vacated the judgment and remanded for further consideration in light of its decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), but on remand, the Second Circuit stood by its reversal.  Id. at 3. Our prior posts on those rulings are here and here.

The Supreme Court granted certiorari for a second time to consider whether the FAA permits courts to invalidate arbitration agreements that do not permit class arbitration of federal claims. Id.

The Supreme Court’s Opinion

In an opinion authored by Justice Scalia, the Supreme Court upheld the validity of Amex’s class action waiver and reversed the Second Circuit by a 5-3 decision. 

At the outset, the Supreme Court noted that arbitration is a matter of contract and that courts must “rigorously enforce” arbitration agreements according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which the arbitration will be conducted. Id.

The Supreme Court rejected Plaintiffs’ argument that requiring them to litigate their claims individually – as they contracted to do – would contravene the policies of the antitrust laws, noting that the antitrust laws “do not guarantee an affordable procedural path to the vindication of every claim.” Id. at 4.

The Supreme Court also rejected Plaintiffs’ argument that congressional approval of Rule 23 established an entitlement to class proceedings. The Supreme Court noted that, “it is likely” that such an entitlement would “abridge or modify” a substantive right – something forbidden by the Rules. But, it found no evidence of such an entitlement in any event because the Rules impose “stringent requirements for certification that in practice exclude most claims.” Id. at 5. 

Finally, the Supreme Court addressed the “judge-made” exception to the FAA which allows courts to invalidate agreements that prevent the “effective vindication” of federal statutory rights. The Supreme Court clarified that the exception applies to arbitration agreements that “operat[e] . . . as a prospective waiver of a party’s right to pursue statutory remedies.” Id. at 6. 

That Supreme Court held that, whereas this exception “would certainly cover” a provision forbidding the assertion of certain statutory rights – and perhaps cover unreasonably high filing and administrative fees attached to arbitration – “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.” Id. at 6-7.

Justice Kagan authored a strenuous dissent noting that, by so ruling, the Supreme Court effectively allowed a monopolist to use its monopoly power to insulate itself from antitrust liability by insisting on a contract that effectively deprived its victims of legal recourse. 

Implications For Employers

The decision in American Express v. Italian Colors seems to pave the way for employers to institute mandatory arbitration programs that require employees to bring claims on an individual basis. This is no small matter for workplace litigation, for the enforceability of class action waivers – and the future of workplace arbitration – is of major significance in controlling risks and costs in the workplace class action context.

The debate over whether this is good or bad for workplace disputes (and civil rights matters and consumer fraud litigation) is likely to continue and find its way into the halls of Congress again in terms of possible legislative responses to class action litigation issues.

It is also expected that class arbitration waivers will continue to face assault from legislative initiatives and from federal agencies such as the National Labor Relations Board (“NLRB”). Following the directive of former NLRB General Counsel Meisburg in a Memorandum issued on June 16, 2010, the NLRB has issued complaints against companies that maintain class actions waivers in pre-dispute arbitration agreements on the theory that such agreements interfere with employees statutory right to engage in concerted activity. Litigation over the NLRB’s position continues in the lower federal courts.

It is also expected that other federal enforcement agencies, such as the EEOC, may consider taking active steps to attack class action waivers relative to employers they deem to be violating federal law (and, of course, such waivers cannot block the EEOC from litigating lawsuits in its name against employers, even if the alleged victims for whom the Commission sues are parties to a workplace arbitration agreement with their employers).

In light of AT&T Mobility v. Concepcion and American Express v. Italian Colors, it behooves employers with pre-dispute arbitration agreements in employment contracts to consider inserting class-action waivers if their agreements do not already contain them. Employers without arbitration programs are likely to consider adopting them as a means to manage the risk of employment discrimination class actions.