Two terms ago, the U.S. Supreme Court dealt a near-death blow to consumer class actions in an arbitration ruling. This term, the justices may finish the job.
Consumer advocacy organizations, such as Public Citizen and Public Justice, as well as AARP and even a number of arbitration law scholars and arbitrators, are facing off against the U.S. Chamber of Commerce, the American Bankers Association, Financial Roundtable and others in American Express Co. v. Italian Colors Restaurant.
American Express is asking the justices to overturn a ruling by the U.S. Court of Appeals for the Second Circuit. That appellate court had held that the company’s arbitration agreement, which includes a class action waiver, was unenforceable because it would prevent merchants suing American Express from effectively vindicating their federal statutory rights—here, rights under the antitrust laws.
Representing American Express, Michael Kellogg of Washington’s Kellogg, Huber, Hansen, Todd, Evans & Figel, contends that the Supreme Court has never endorsed the "effective vindication of federal statutory rights" as a limit on the Federal Arbitration Act’s command that arbitration agreements be enforced according to their terms.
But, citing a 1985 Supreme Court ruling, Paul Clement of D.C.’s Bancroft, counsel to the merchants, argues that the court, for more than 25 years, has recognized that federal statutory rights may be resolved through arbitration only "so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum."
Although the American Express challenge, which will be argued Feb. 27, is a business-to-business arbitration case, it has huge stakes not just for antitrust law but for labor and employment law as well, both sides agree. The United States has filed an amicus brief supporting the merchants.
"American Express is going for a rule that in every case, the class action ban is always enforceable," said F. Paul Bland of Public Justice, who filed an amicus brief supporting the merchants on behalf of his own organization, AARP and the American Association for Justice.
However, referring to the court’s ruling two terms ago in AT&T Mobility v. Concepcion, Andrew Pincus of Mayer Brown, amicus counsel to the Chamber of Commerce and the Business Roundtable, countered that a ruling for American Express, "is a ruling that follows almost inevitably from Concepcion. I think to some extent the Rubicon has been crossed."
American Express’ standard card acceptance agreement contains a mandatory arbitration clause. It also states that "there shall be no right or authority for any Claims to be arbitrated on a class action basis," and that "Claims may not be joined or consolidated" with claims brought by other merchants. The prevailing party is not permitted to shift its costs to the other party, and it contains a confidentiality provision that prohibits the disclosure of information obtained in an arbitration proceeding.
A number of small business merchants brought a class action in federal court alleging that American Express was violating Section 1 of the Sherman Act by engaging in an unlawful tying arrangement. The credit card giant, they alleged, used its market power in corporate and personal charge cards to compel them to accept the company’s mass-market credit and debit cards at higher merchant-fee rates than charged by other companies.
The district court granted American Express’ motion to compel arbitration, but the Second Circuit reversed, holding that the merchants "would incur prohibitive costs if compelled to arbitrate under the class action waiver." The merchants had submitted a declaration from an economist who estimated that the cost of the expert analysis and testimony necessary to prove their antitrust claims would be "at least several hundred thousand dollars, and might exceed $1 million." The maximum damages any plaintiff could expect was $12,850, or $38,549 when trebled, according to the expert. American Express did not dispute that evidence, said the appellate court, concluding that the class action waiver in the agreement could not be enforced because it would grant American Express "de facto immunity" from antitrust liability by removing the merchants’ "only reasonably feasible means of recovery."
American Express petitioned the Supreme Court which, at the time, was considering another arbitration case, Stolt-Nielsen S.A. v. AnimalFeeds International Corp. In that case, the justices held in 2010 that under the Federal Arbitration Act (FAA), a party could not be compelled to submit to class arbitration unless there was a contractual basis to conclude the party had agreed to it. The justices vacated the Second Circuit’s American Express decision and remanded it consideration in light of Stolt-Nielsen. On remand, the Second Circuit stood by its initial ruling.
In 2011, the justices ruled in AT&T Mobility v. Concepcion, holding that the FAA pre-empted a California state-law rule barring most class action waivers in consumer contracts. The Second Circuit, sua sponte, reconsidered its American Express decision in light of Concepcion and again reversed the district court. Concepcion dealt with state-law contracts and FAA preemption, said the appellate court, and did not reverse the justices’ 2000 ruling in Green Tree Financial Corp. v. Randolph that an arbitration agreement should not be enforced when it effectively forecloses a plaintiff from asserting federal statutory rights.
In the Supreme Court, American Express’ Kellogg urges a clean, straightforward rule: Absent an express limitation by Congress on the arbitration of a federal statutory claim, there is no basis for courts to refuse to enforce the FAA’s command that arbitration agreements be enforced according to their terms.
He accuses the Second Circuit of engrafting onto the FAA "a pro-class-action public policy" with no basis in that law. Relying on Stolt-Nielsen and Concepcion, he writes, "Twice in its last three terms, this Court has made clear that [the FAA mandate] requires courts to enforce arbitration agreements even when they call for bilateral rather than classwide proceedings."
"If plaintiffs were to win, the problem is every plaintiff or plaintiffs’ lawyer is going to make the same claim," said Mayer Brown’s Pincus. "Every time someone moves to enforce the clause, there’s going to be at a minimum a trial over whether claims can be effectively vindicated. The problem is that can be a very broad and expensive process. Once that condition gets imposed, that’s a situation where arbitration is undermined. If you’re telling me, a business, that I’m going to have huge litigation costs, then I won’t have arbitration."
Clement, the merchants’ counsel, argues that nothing in Concepcion or Stolt-Nielsen overrides the effective vindication rule, the analysis in Green Tree Financial. The rule, he writes, is narrow and puts a heavy burden on the party claiming it.
"This is the rare case in which the plaintiffs have carried that burden," he argues. "This is thus truly a case in which the alternative to litigation is not arbitration, but nothing."
His clients, he writes, have not demanded class arbitration or class litigation, simply a forum to vindicate their antitrust claims. "If Petitioners want to adopt a better arbitration agreement that allows cost-shifting for prevailing parties, such as the one employed by AT&T in Concepcion or by a number of other large companies, Respondents stand ready to vindicate their federal antitrust claims through bilateral arbitration," adds Clement. "Indeed, such agreements, which guarantee both the efficiencies of the arbitral process and the effective vindication of rights, are becoming more common."
Thomas Stipanowich of Pepperdine University joined an amicus brief supporting the merchants on behalf of professional arbitrators and arbitration scholars. Stipanowich, an arbitrator and mediator, said, "The practical result of overturning the Second Circuit decision would be to create a broad safe harbor for class action waivers coupled with an agreement to arbitrate. I am neutral on the subject of class action arbitration. My concern is about the broad enforcement of class action waivers just because they happen to be in the context of an arbitration clause."
He and his amicus colleagues worry that a ruling for American Express that eliminates the effective vindication rule would erode public confidence in the legitimacy of arbitration and trigger a congressional reaction that would place more restrictions on arbitration.
Stipanowich said what is needed is a policy discussion about the kind of class action framework needed under the law, a discussion apart from arbitration agreements. The Supreme Court’s decisions emphasize that arbitration is speedy and economical and it warns of consequences to business if class waivers are not enforced, he said.
"In the business arena today, one of the problems is arbitration is not that way," he said. "Sometimes people want arbitration to look like litigation, but that’s because they have the wherewithal to do so. I’m a person who likes arbitration because of the ability to choose processes, to fit a process to the needs of a party. What’s different here is it’s really one party choosing the system. We can’t close our eyes and pretend it’s all the same."
The pro-business public interest law firm, the New England Legal Foundation, and other amici supporting American Express, argue that nothing prevents similarly situated parties from pooling their resources to hire a lawyer, fund expert fees and share others costs while proving their claims in individual arbitrations.
"They could do that easier in this case—you have a group of plaintiffs organized already," agreed Pincus. "More generally, through the Internet and social media that’s something that could be replicated broadly."
Stipanowich called that a novel and ultimately cumbersome approach. Public Justice’s Bland said if American Express wins, there will be no per se defense left against a class action ban in an arbitration agreement.
"If a company drafts a clause that bans class actions and cleanly gets an arbitration agreement formed—and an American Express ruling goes as far as the company is asking—you will see a whole bunch of statutory rights wiped out," he predicted.