In AT&T Mobility LLC v. Concepcion,1 the Supreme Court gave prominence to the enforceability of class action waivers in arbitration provisions. However, in a recent decision, the U.S. Court of Appeals for the Second Circuit held unenforceable a class action waiver in an antitrust case. The Feb. 1, 2012, decision in In re American Express Merchants’ Litigation,2 turned on the court’s finding that arbitrating on an individual basis would be prohibitively costly, such that plaintiffs would be unable to enforce their statutory rights under the antitrust laws.
In light of the Second Circuit’s decision, it remains uncertain how broadly Concepcion will be applied and, accordingly, whether arbitration costs like those in American Express will be sufficient to invalidate class action waivers where the issue does not concern preemption of a state law but instead deals with the plaintiffs’ ability to vindicate their federal statutory rights.
In Concepcion, the Supreme Court held that the Federal Arbitration Act preempted a California rule of law that invalidated class action waivers given certain circumstances—where the waiver was part of a contract of adhesion, each individual plaintiff’s claim involved small amounts of money, and the plaintiffs alleged that the defendant used its bargaining power to cheat a large number of consumers. The Court noted that, under Section 2 of the FAA, an arbitration agreement may be held unenforceable only given “grounds as exist at law or equity for the revocation of any contract.”3 However, such a ground must be one applicable to “any” contract, and the Court found that the California rule disproportionately applied to arbitration agreements. In doing so, the rule conflicted with the FAA’s purpose of encouraging arbitration and was preempted by federal law.
Decision in ‘American Express’
In American Express, a class of merchants brought claims against American Express under the Sherman and Clayton acts. The plaintiffs alleged that American Express had violated the antitrust laws by compelling merchants that accepted traditional American Express charge cards to also accept newer American Express credit card products at the same fee rate. Under the plaintiffs’ contracts with American Express, all disputes arising from the agreement are to be litigated in arbitration. The contract also contains a class action waiver, including a provision precluding arbitration on a class action basis.
The plaintiffs sued in the U.S. District Court for the Southern District of New York, and American Express moved to compel arbitration. The district court granted the motion, finding that the arbitration clause was enforceable and that the question of whether the action could be arbitrated as a class was a matter to be decided by the arbitral tribunal.4
On appeal, the Second Circuit first found that the issue of whether the class action waiver is enforceable is a matter for the court to decide.5 Turning to the enforceability of the class action waiver, the court found that individual arbitration would be so costly as to deprive litigants of the ability to enforce their rights under the federal antitrust laws. Thus, a valid ground existed to invalidate the provision.
The court relied on the Supreme Court’s decision in Green Tree Financial Corp.-Alabama v. Randolph, which stated that when “a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs.”6 The Second Circuit compared Green Tree, where the plaintiff had provided minimal evidentiary support for the argument that arbitration would be cost-prohibitive, to the record in American Express, that included an affidavit from an economist suggesting that expert testimony would be more costly than an individual plaintiff’s potential damage award. The circuit court thus found that the class action waiver resulted in the “effective negation of a private suit under the antitrust laws” such that the clause was unenforceable.7
American Express filed a petition for writ of certiorari, which the Supreme Court granted. On appeal, the Supreme Court vacated the Second Circuit’s decision and remanded to the court for reconsideration of its holding given the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp.8 In Stolt-Nielsen, the Supreme Court addressed an arbitration clause that was silent as to class arbitration. Reasoning that there are “fundamental” differences between bilateral arbitration and class arbitration, the Supreme Court held that the FAA did not allow an arbitration panel to use “its own policy choice” to force a party to submit to class arbitration where the party had not so consented.
On remand, the Second Circuit again held that the class action waiver was unenforceable.9 The court interpreted Stolt-Nielsen to merely prevent the imposition of class arbitration on parties who had not consented to it, and did not find that Stolt-Nielsen required the court to change its initial decision. Shortly after the Second Circuit’s decision, the Supreme Court decided Concepcion. In light of that opinion, the Second Circuit again reconsidered its decision.
For a third time, the Second Circuit held the class action waiver in the American Express contract unenforceable.10 In its decision the court found that the Supreme Court’s decision in Concepcion did not require a different outcome. The court interpreted Concepcion narrowly, reading it to apply to state laws that limit arbitration agreements in violation of the FAA. The court framed the issue in American Express as one that instead involves whether a waiver of class arbitration deprives parties of their federal statutory rights. Finding that Concepcion was not instructive, the Second Circuit relied instead on prior Supreme Court precedents.
The circuit court cited Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc. for the proposition that arbitration should be used to enforce statutory rights only so long as the plaintiff can “effectively vindicate its statutory cause of action in the arbitral forum.”11 The court also looked to dicta in Mitsubishi indicating that a “prospective waiver” of the right to pursue remedies under the antitrust laws would likely be condemned.12 Moving on to its reliance on Green Tree, and noting that the Supreme Court did not overrule that decision in either Stolt-Nielsen or Concepcion, the Second Circuit again found that the American Express plaintiffs had met their burden of showing that arbitration would be “financially impossible.”
Reconciling the Decisions?
The Second Circuit stated that it was not declaring all antitrust-related class action waivers unenforceable. Rather, the court reiterated that the FAA reflects the “liberal federal policy favoring arbitration agreements,”13 and stated that the validity of each waiver would require individual case-by-case consideration. However, while the court distinguished the case from the circumstances in Concepcion, it appears that the Second Circuit is holding that all antitrust class action arbitration waivers are presumed void as a matter of law. Further, it remains unclear why the issue in American Express, which concerns federal statutory rights, rather than preemption of a state law, permits a conclusion different than the one reached by the Supreme Court in Concepcion.
Section 2 of the FAA requires that arbitration agreements be enforced unless there are grounds in law or equity, such as fraud, duress, or unconscionability, which would be applicable to invalidate “any” contract. The Second Circuit’s reasoning presumably asserts that the class action waiver is unconscionable, based on the finding that individual arbitration would be cost-prohibitive. However, a similar argument was rejected in Concepcion, where the California rule invalidated class action waivers under circumstances that resulted in high costs of individual enforcement.
As in American Express, the lower court in Concepcion reasoned that the limitation on class action waivers applied to “any” contract because it applied to both arbitration and litigation. The Supreme Court rejected this argument, finding that the rule disproportionately applied to arbitration. The California rule, while not “requiring” class-wide arbitration, “allow[ed] any party to a consumer contract to demand it ex post.”14 This, the Court said, was inconsistent with the FAA. In American Express, the Second Circuit acknowledged that it could not require class-wide arbitration. However, the alternative was to invalidate the arbitration provision altogether. The question, then, is whether the impact of the Second Circuit’s decision on the validity of antitrust class action arbitration waivers is distinguishable from the disproportionate effect condemned by the Supreme Court in Concepcion.
The Second Circuit’s decision must be somehow distinguished from Concepcion in its reasoning that each waiver be assessed individually, and that prior Supreme Court precedent allows for the invalidation of a provision where the plaintiff can show that arbitration would be ineffective. For this proposition, the circuit court relied primarily on Green Tree, which stated that the party seeking invalidation of the arbitration provision must establish that arbitration would be prohibitively costly. However, Green Tree also stated that the party seeking invalidation of an arbitration provision “bears the burden of establishing that Congress intended to preclude arbitration of the statutory claims at issue.”15
The Second Circuit also relied on Mitsubishi, citing that decision for the position that claims under federal statutes may be arbitrated “so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum.”16 As in Green Tree, the Supreme Court in Mitsubishi indicated that an arbitration clause would be enforceable “unless Congress itself has evinced an intention to preclude a waiver of judicial remedies of the statutory rights at issue.”17
Similarly, in CompuCredit Corp. v. Greenwood, decided on Jan. 12, 2012, the Supreme Court rejected the argument that the use of terms like “action” and “court” in a federal statute necessarily established “contrary congressional command” to override the FAA and require initial judicial enforcement rather than arbitration.18 The Second Circuit in American Express discussed the congressional intent issue only briefly, stating that “[e]radicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statutes.”19
While it is true that the antitrust statutes include provisions that encourage private enforcement, neither the Sherman Act nor the Clayton Act sets forth a statutory right to class arbitration or certification of a class action. Rule 23 of the Federal Rules of Civil Procedure governs the determination of whether a class can be certified. Thus, the Second Circuit’s reasoning, relying on the importance of enforcing substantive rights under federal statutes through the class action mechanism arguably reflects the type of court-determined policy decision prohibited by Concepcion.
To the extent that the Second Circuit’s reasoning relies instead on the common law defense of unconscionability, we are reminded of Concepcion’s finding that the savings clause in §2 of the FAA “cannot be construed as [allowing] a common law right, the continued existence of which would be absolutely inconsistent with the provisions of the [FAA].”20 The defendants have filed a petition for rehearing en banc and we intend to follow the case with great interest.
Neal R. Stoll is a partner at Skadden, Arps, Slate, Meagher & Flom. Nikki Sachdeva, an associate at the firm (not yet admitted to practice), assisted in the preparation of this column.
1. 131 S. Ct. 1740 (2011).
2. In re Am. Express Merchs. Litig. (Amex III), 667 F.3d 204 (2d Cir. 2012). American Express filed a petition for rehearing en banc on Feb. 14, 2012.
3. 9 U.S.C. §2 (2012).
4. In re Am. Express Merchs. Litig., 2006 WL 662341 (S.D.N.Y. March 16, 2006).
5. In re Am. Express Merchs. Litig. (Amex I), 554 F.3d 300 (2d Cir. 2009).
6. 531 U.S. 79, 92 (2000).
7. Amex I, 554 F.3d at 319.
8. 130 S. Ct. 1758 (2010).
9. In re Am. Express Merchs. Litig. (Amex II), 634 F.3d 187 (2d Cir. 2009).
10. Amex III, 667 F.3d at 219.
11. Id. at 214 (citing Mitsubishi, 473 U.S 614, 632 (1985)).
12. Id. (citing Mitsubishi, 473 U.S. at 637, n. 19).
14. Concepcion, 131 S. Ct. at 1750.
15. 531 U.S. at 91-92.
16. 473 U.S. at 632.
17. Id. at 628.
18. 132 S. Ct. 665 (2012).
19. 667 F.3d at 218.
20. 131 S. Ct. at 1748 (quoting Am. Telephone & Telegraph Co. v. Central Office Telephone Inc., 524 U.S. 214, 227-28 (1998)).