The U.S. Court of Appeals for the Second Circuit will not rehear en banc a decision that holds a class action arbitration waiver provision between American Express and its merchants unenforceable as against public policy.

Cementing a split in the circuits that makes review by the U.S. Supreme Court all the more likely, a majority of active judges on the circuit voted against full rehearing in In re American Express Merchants Association, 06-1871, where Judges Rosemary Pooler and Robert Sack found in February that merchants and supermarkets could not be forced into individual arbitration by Amex (NYLJ, Feb. 2).

Five judges publicly dissented from the denial of rehearing en banc, Dennis Jacobs, Jose Cabranes, Debra Ann Livingston, Reena Raggi and Richard Wesley.

The merchant and supermarket plaintiffs in two consolidated class actions claim Amex is violating the Sherman Act in the “honor all cards” provision in its credit card acceptance agreement. They allege the provision forces them to accept all American Express credit and debit cards as the cost of doing business with the company and is thus an illegal tying arrangement under the act.

The case has been heard three times by the Second Circuit since 2009.

In 2006, Southern District Judge George Daniels enforced the waiver provision, granting Amex’s motion to compel the merchants and supermarkets to individually arbitrate their claims.

Judges Pooler, Sack and then-Second Circuit Judge Sonia Sotomayor reversed in 2009 (NYLJ, Feb. 5, 2009), finding it would be cost-prohibitive for each plaintiff to arbitrate individually. Pooler wrote the court’s opinion, crediting expert testimony from the plaintiffs in saying a single mid-level merchant plaintiff would have to pay several hundred thousand dollars just to recoup $5,000 in damages.

The case returned to the circuit two more times, first in light of the U.S. Supreme Court decision in Stolt-Nielsen v. AnimalFeeds Int’l, 130 S.Ct. 1758 (2010), holding that “a party may not be compelled under the Federal Arbitration Act to submit to class arbitration unless there is a contractual basis for concluding the party agreed to do so,” and then AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), holding that the Federal Arbitration Act preempted a California law barring the enforcement of class action waivers in consumer contracts.

Both times, the Second Circuit held the result to be the same— that the cost of individual arbitration was so steep that it would “effectively depriving plaintiffs of the statutory protections of the antitrust law.”

Concepcion, Pooler wrote in February, “plainly offers a path for analyzing whether a state contract law is preempted by” the Federal Arbitration Act. “Here, however, our holding rests squarely on ‘a vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability.’”

She also cited Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), for the proposition that arbitration is “recognized as an effective vehicle for vindicating statutory rights, but ‘only so long as the prospective litigant may effectively’ vindicate its statutory cause of action in the arbitral forum.”

Yesterday, Pooler told the dissenters the majority “need not tarry long in addressing a final concern: that Amex III permits plaintiffs to evade enforcement of class action arbitration waivers simply by manufacturing an affidavit or choosing pricey attorneys.”

“The business plaintiffs here are prosecuting antitrust claims that will likely require complex discovery and expert testimony,” she said. “Other statutory claims may not require such extensive proof. The courts are perfectly capable of doing the analysis necessary to determine if the plaintiffs have made the necessary showing.”

A ‘Broad Ruling’

In a dissent joined by Cabranes and Livingston, Jacobs had a different view of Mitsubishi, saying the Supreme Court in that case rejected the “public policy approach.” He also cited the Supreme Court ruling in Gilmer v. Interstate/Johnson Lane, 500 U.S. 20 (1991), as reiterating that federal statutory claims can be subject to valid arbitration agreements.

“Now the panel opinion in this case uses public policy to hold that arbitration agreements containing class-action waivers are unenforceable when applied to federal statutory claims if (as is always easy to assert) a claim would not be ‘economically rational’ to pursue individually,” Jacobs said.

Jacobs called Amex III “a broad ruling that, in the hands of class action lawyers, can be used to challenge virtually every consumer arbitration agreement that contains a class-action waiver—and other arbitration agreements with such a clause.”

“Under the panel opinion,” he said, “arbitration must now begin in federal court—and be litigated there on the merits in many critical respects.”

Cabranes wrote a one-paragraph dissent saying “the issue at hand is indisputably important, creates a circuit split, and surely deserves further appellate review. This is one of those unusual cases where one can infer that the denial of in banc review can only be explained as a signal that the matter can and should be resolved by the Supreme Court.”

Raggi also issued a dissent joined in by Wesley, saying, “I think it would be useful to have the issues explored further by the full court in the adversarial context of an en banc argument. To the extent a majority of the court maintains this circuit split without further consideration, I must dissent.”

Michael Kellogg and Derek Lo of Kellogg, Huber, Hansen, Todd, Evans & Figel represented Amex.

Gary Friedman of Friedman Law Group represented the plaintiffs before the original panel.

“I think it’s premature to assume that certiorari will be granted,” Friedman said. “I just wouldn’t jump to that conclusion.”

En Banc Review

The Second Circuit considers rehearing en banc on either application by one of the parties or if one of the judges calls for a poll sua sponte.

Since 2007, the court has had only five rehearings en banc, which is reserved for cases of “exceptional importance” or where a panel decision conflicts with the court’s existing precedent.

In December 2011, the full court reheard the challenge of former immigration attorney Raghubir K. Gupta on a Sixth Amendment challenge to a trial judge’s closing of the courtroom to the Gupta family during jury selection (NYLJ, Dec. 16, 2011). That decision is pending.

The circuit quietly rejects hundreds of requests for rehearing en banc each year, issuing orders that state simply that rehearing has been denied.

That was the case even in the hot button issue of the use of New York City public schools by religious groups for Sunday worship in July 2011, where no accompanying opinions were written on denying full review of a 2-1 panel decision vacating a judge’s preliminary injunction against a New York City Board of Education rule ending the practice of allowing religious groups to conduct services.

That case, The Bronx House of Faith v. Board of Education of the City of New York, 11-386, is expected to reach the circuit again after Southern District Judge Loretta Preska explores a distinct challenge to the rule this summer. She is scheduled to hear oral arguments on June 1.

But yesterday’s opinion was the second time in two weeks that judges have stated their differences over a rehearing vote.

And it was not the first time that Judges Jacobs, Cabranes, Raggi, Livingston and Wesley have gone public with their exasperation over a panel decision they considered wrongheaded, at odds with the law, and worthy of a debate with all hands on deck.

Increasingly, some or all of these judges have decided to let the public know where they stand on issues considered for en banc review.

In September, all five were in the minority and all five issued or joined in dissenting opinions as the circuit denied rehearing en banc in Amnesty Int’l USA v. Clapper, 09-4112-cv, where a panel recognized that lawyers, journalists and human rights groups have standing to challenge amendments to the Foreign Intelligence Surveillance Act because they fear their conversations are being, or will be, intercepted by the U.S. government (NYLJ, Sept. 22, 2011).

Judge Peter Hall voted against rehearing but did not join the opinions.

In February, the circuit rejected rehearing en banc in Alliance for Open Society International v. U.S. Agency for Int’l Dev., 08-4917-cv, where a panel barred the conditioning of taxpayer-funded grants to prevent AIDS/HIV on a pledge by the recipient not to encourage prostitution. Judges Cabranes, Raggi and Livingston dissented.

On May 22, Judges Jacobs, Raggi, Cabranes, Livingston and Wesley wanted, but did not get, rehearing in Southerland v. City of New York, 07-4449-cv, where a panel had ruled that even an abusive father who had his children removed from his home could still sue a city caseworker for civil rights damages. The panel had found that caseworker Timothy Woo was not protected by qualified immunity because there were material omissions and mistakes in his family court applications for both an order to enter the home and a subsequent order of removal.