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."