Last month, the Supreme Court ruled in American Express v. Italian Colors Restaurant that the Federal Arbitration Act (FAA) does not permit courts to invalidate a contractual waiver of class arbitration simply because a plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the plaintiff’s potential recovery. Although the court issued its holding in the context of an antitrust dispute between merchants and credit card giant American Express, the repercussions of the decision are likely to be felt most immediately in the realm of employment litigation, particularly with respect to wage-and-hour claims brought under the Fair Labor Standards Act (FLSA). The rest of this article discusses the court’s reasoning in the American Express decision, and details the impact it may have on employers’ risk of exposure to federal class action arbitration.

American Express: The Court’s Ruling

In American Express, American Express and the merchants who accept the company’s cards entered into an agreement requiring all disputes between the parties be resolved by arbitration, and providing that “there shall be no right or authority for any Claims to be arbitrated on a class action basis.” Nonetheless, a group of merchants filed a class action against American Express claiming that the company had violated federal antitrust laws by using its monopoly power in the charge card market to coerce merchants into accepting credit cards at rates approximately 30 percent higher than the fees for competing credit cards.

American Express moved to compel the merchants to arbitrate their claims individually on the grounds that the FAA, which provides that agreements to arbitrate controversies arising out of contracts involving commercial transactions “shall be valid, irrevocable, and enforceable” mandated the enforcement of the class arbitration waiver provision in the agreement. In response, the merchants presented evidence that the cost of the expert analysis needed to prove the merchants’ antitrust claims would be “at least several hundred thousand dollars, and might exceed $1 million,” while the maximum recovery for each individual plaintiff would only amount to $12,850, or $38,549, if each plaintiff were to receive treble damages under the federal antitrust statutes. The 2nd Circuit ruled in favor of the merchants, holding that because the merchants had demonstrated that they would incur “prohibitive costs” if made to arbitrate their claims individually, the class action waiver was unenforceable.

The Supreme Court reversed. It found that under the FAA, courts were required to “rigorously enforce” arbitration agreements according to their terms, and emphasized that as a matter of principle, arbitration is governed by contract. The court went on to hold that this was no less true for claims alleging violations of a federal statute, unless there is a “contrary congressional command” to override the clear directives of the FAA. In examining whether the statutes under which the merchants had brought their antitrust claims evinced any congressional intent to trump the mandate of the FAA, the court answered in the negative, stating that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim” and finding no evidence that waivers of class action procedure were barred under the federal antitrust laws. The merchants attempted to invoke the so-called “effective vindication” exception to the FAA, which allows courts to invalidate, on public policy grounds, arbitration agreements that “operate as a prospective waiver of a party’s right to pursue statutory remedies.” However, the court held that the exception was not applicable in this particular case, as the class action waiver in the agreement between the parties did not work to eliminate the merchants’ rights to pursue a remedy under the antitrust laws, but merely made it economically unattractive for them to prove that they were entitled to a statutory remedy.

The three dissenting justices in American Express sharply criticized the majority’s opinion, arguing that under the “effective vindication” doctrine—which, according to the dissent, bars application of an arbitration clause when it operates to immunize a party from a potentially meritorious federal claim—the class action waiver should have been found unenforceable, as it effectively foreclosed the merchants from obtaining relief for violations of their federal statutory rights, and allowed American Express to insulate itself from antitrust liability. The dissent went on to state that the majority’s interpretation of the “effective vindication” rule was at odds with the overarching objectives of the FAA because it provided a “foolproof way of killing off valid claims,” rather than ensuring that arbitration remained a feasible method of dispute resolution for claimants.

A Favorable Outcome for Employers

Despite its growth out of an antitrust case, the American Express decision likely will have far-reaching implications in the employment law arena, particularly in light of the Supreme Court’s prior rulings in several other recently decided cases addressing class arbitration, which had already established that state laws purporting to bar companies from using class action arbitration waivers are preempted by the FAA, and that parties may be precluded from arbitrating claims on a class action basis as long there is a contract expressly waiving class arbitration. In conjunction with such precedent, the American Express holding substantially undermines any argument that arbitration agreements between employers and employees containing class action waivers are unenforceable, even if they operate to prohibit employees from pursuing claims under federal employment statutes.

The ruling is likely to be particularly advantageous to employers facing wage-and-hour suits brought under the FLSA, an area where class action claims have been on the rise for years, and payouts of unpaid wages and overtime for individual plaintiffs are notoriously low relative to the costs of arbitration and/or litigation. Although it is difficult to predict how lower courts will interpret the Supreme Court’s holding in American Express, as it stands now, the decision gives employers the opportunity to minimize liability and manage their risk of exposure to federal class action suits by drafting clearly articulated class waivers into their arbitration agreements with employees.