The Supreme Court’s recent decision in American Express Co. v. Italian Colors Restaurant eliminated the last significant obstacle to the adoption by businesses of fair arbitration programs that reduce high transaction costs associated with class action litigation—including large legal fees for both plaintiffs’ and defense lawyers—while affording consumers and employees an inexpensive and realistic way to pursue their own disputes. 

In AT&T Mobility LLC v. Concepcion, the Supreme Court held that the Federal Arbitration Act (FAA) prohibits courts from refusing to enforce arbitration agreements on the ground that they do not provide for class actions. American Express takes the next step, holding unequivocally that Concepcion’s interpretation of the FAA applies to claims under federal law as well. As the court put it:  “Truth to tell, our decision in AT&T Mobility all but resolves this case.”

The decision

Justice Antonin Scalia authored the opinion for the court in American Express, joined by Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito. The court divided 5-3, with Justice Sonia Sotomayor recused because she had been on a 2nd Circuit panel in an earlier iteration of the case.

The majority underscored that, under the FAA, arbitration agreements must be rigorously enforced unless Congress has overridden the FAA’s mandate by a contrary congressional command. The plaintiffs argued that it would be too expensive to pursue their federal antitrust claims individually because of the high expert witness costs they said were integral to proving those claims. But as the court explained, the federal antitrust laws “do not guarantee an affordable procedural path to the vindication of every claim,” nor do they mandate that class action procedures be available.

In addition, the court pointed out, Federal Rule of Civil Procedure 23 does not create a substantive entitlement to class proceedings—nor could it without abridging or modifying the FAA’s mandate to enforce arbitration agreements, a transformation that likely would violate the Rules Enabling Act’s limits on court procedural rules. 

Finally, the court also held that “dictum” in its prior opinions did not open the door for courts to refuse to enforce arbitration agreements with class waivers on the grounds that they would prevent the “effective vindication” of federal statutory rights.  Rather, any concerns with “effective vindication” were not triggered because “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.”

Justice Thomas filed a short concurrence stating that he “join[s] the Court’s opinion in full,” while adding that, under the rationale of his concurrence in Concepcion, he also would have rejected the “effective vindication” argument because (in his view) the FAA’s language requires enforcing arbitration agreements unless “the contract was” not “properly made.”

Justice Elena Kagan authored the dissent, which contended that the “effective vindication” cases “bar applying” an arbitration agreement “when (but only when) it operates to confer immunity from potentially meritorious federal claims.” According to her, American Express’ arbitration agreement did so because, for some plaintiffs, the costs of proving an antitrust claim were greater than the damages at stake.  True, the dissent recognized that “non-class options abound” for individuals to pursue antitrust claims through arbitration. But, stated Justice Kagan, such options did not exist because American Express’ arbitration agreement allegedly did not authorize the shifting of expert witness costs or spreading lawyer and expert witness costs across multiple arbitrations. (As the majority opinion pointed out, however, American Express “denied that” cost-sharing was unavailable.)

Future ramifications

The implications of American Express are significant.  Since Concepcion was decided two years ago, the plaintiffs’ bar has aggressively sought to avoid that decision by arguing that arbitration agreements should not be enforceable when the value of individual claims is small relative to the cost of proving each claim. American Express should put an end to such arguments.

Some observers—both on the plaintiffs’ and defense side—might contend that the combination of American Express and Concepcion will lead to unfair arbitration clauses. We think such views are mistaken.  As the American Express court explained, the so-called “effective vindication” doctrine “would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” And the court has previously reiterated that generally applicable state-law unconscionability principles can be applied to strike down arbitration agreements. But certainly American Express puts to rest the notion that courts may refuse to enforce arbitration agreements solely because they preclude class actions.

In our view, the Supreme Court’s decision in American Express is not just correct as a matter of law; it also is sound as a matter of policy. Inside counsel know that class actions tend to enrich lawyers—both plaintiffs’ and defense lawyers—while imposing high transaction costs on businesses, especially with today’s mounting e-discovery costs.  Yet these lawsuits do little to benefit consumers and employees.  Most class actions are not certified or are dismissed on the merits, and those that do settle rarely deliver more than pennies on the dollar—if that—to class members themselves. 

At the same time, most disputes are not “classable” at all—they are inherently individualized claims resulting from a billing dispute, a personal workplace problem or a damaged product.  The court system is inhospitable to consumers or employees with such disputes.  For those individuals, arbitration represents the most realistic opportunity for access to justice. 

Moreover, small claims can be—and increasingly are—brought in arbitration by lawyers who develop a “portfolio” of clients using the Internet and social media. Significantly, the dissenting justices in American Express recognized that cost-sharing in this manner enables the vindication of small claims through individualized arbitration. In fact, they concluded that an arbitration agreement may “prohibit class arbitration without offending the effective-vindication rule if it … provide[s] an alternative mechanism to share, shift, or reduce the necessary costs,” such as cost-sharing by claimants asserting similar claims.

Finally, as in-house lawyers know well, class actions do little, if anything, to deter alleged corporate misconduct. Companies are justifiably skeptical of private class actions when the decision to settle them depends much more on litigation costs than whether the underlying claims have merit. By contrast, government enforcement and valued relationships with consumers and employees are far more likely to deter wrongful conduct.

In short, American Express is a positive development for businesses as well as their consumers and employees:  It ensures that arbitration will be available for the resolution of genuine individual disputes while avoiding the economic and social costs of class action lawsuits.