The Federal Arbitration Act (FAA) declares that contractual arbitration provisions “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”1 In well over a dozen decisions since the mid-1980s, the Supreme Court has affirmed that the FAA creates “a body of federal substantive law of arbitrability” and evinces a “national policy favoring arbitration” requiring courts to “enforce agreements to arbitrate according to their terms.”2 Although arbitration agreements containing express limitations on available statutory remedies are vulnerable to challenge, the Supreme Court has never ruled that otherwise valid agreements may be denied enforcement because individual arbitration will make certain statutory challenges more difficult.
Nevertheless, the U.S. Court of Appeals for the Second Circuit inIn re American Express Merchs. Litig. (Amex III) invalidated for the third time a class action waiver in a mandatory arbitration agreement on the ground that enforcing its provisions would effectively foreclose plaintiffs from vindicating their federal statutory rights.3 The defendants filed their petition for writ of certiorari on July 30, 2012, and the plaintiffs’ response will be due on Sept. 18.
The Amex case involves a group of merchants who allege that American Express has subjected them to an illegal tying arrangement in violation of the federal antitrust laws.4 According to the plaintiffs, Amex was able to compel merchants to accept credit cards at the same elevated fee as its higher-value charge cards because merchants had to accept all Amex products in payment as a condition of the Amex Card Acceptance Agreement.5 The plaintiffs seek to prosecute these allegations on behalf of a class comprised of “all merchants that have accepted American Express charge cards…and have thus been forced to agree to accept American Express credit and debit cards.”6 However, the agreement contains a mandatory arbitration clause that expressly precludes a merchant from bringing a class action lawsuit, and permits arbitration only on an individual basis.7 The enforceability of this clause has been at the front and center of the Amex litigation for the past six years.
The ‘Amex’ Trilogy
In In re American Express Merchs. Litig. (Amex I), the Second Circuit reversed the district court’s 2006 order compelling arbitration of the plaintiffs’ substantive antitrust claims, as well as the court’s holding that it was within the arbitrator’s province to determine whether class action waivers were enforceable.8 The appellate panel reasoned that Amex had failed to raise any meaningful challenge to the plaintiffs’ submission of an economist’s affidavit describing the financial impracticality of pursuing individual claims because of the need for expert testimony in an antitrust case.
The Supreme Court vacated and remanded Amex I for reconsideration in light of its intervening decision in Stolt-Nielsen v. AnimalFeeds Int’l.9 The Supreme Court in Stolt-Nielsen held that when an arbitration agreement is “silent” on the question of class arbitration, “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”10
On remand from the Supreme Court, the Second Circuit held in In re American Express Merchs. Litig. (Amex II), that Stolt-Nielsen did not alter its analysis in Amex I, and again reversed and remanded the district court’s decision.11 Although acknowledging that “Stolt-Nielsen plainly precludes us from ordering class-wide arbitration,” the Amex II court maintained that the agreement’s class action waiver was unenforceable because the record evidence “establishe[d], as a matter of law, that the cost of plaintiffs’ individually arbitrating their dispute with Amex would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws.”12
While the Amex II mandate was on hold, the Second Circuit was asked to reconsider its “vindication of statutory rights” analysis, in light of the Supreme Court’s latest class action waiver decision, AT&T Mobility v. Concepcion, which held that the FAA preempted a California common law rule that would bar as unconscionable the enforcement of most class action waivers in consumer contracts.13
The Second Circuit in Amex III declared that Concepcion did not alter its basic analysis: “It is tempting to give both Concepcion and Stolt-Nielsen such a facile reading, and find that the cases render class action arbitration per se enforceable. But a careful reading of the cases demonstrates that neither one addresses the issue presented here: whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.”14 Whereas Concepcion provides the framework for assessing whether the FAA preempts a state contract law, the Amex III court explained, the Second Circuit’s holding in the Amex line of cases “rests squarely on ‘a vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability.’”15
In a footnote, the Amex III court also distinguished the Supreme Court’s latest decision in CompuCredit v. Greenwood, in which the court reaffirmed that, absent an explicit directive from Congress restricting the use of arbitration, the FAA requires arbitration agreements to be enforced according to their terms.16 The Amex III court concluded that CompuCredit was irrelevant to its analysis because, “although the Sherman Act does not provide plaintiffs with an express right to bring their claims in court, forcing plaintiffs to bring their claims individually here would make it impossible to enforce their rights under the Sherman Act and thus conflict with congressional purposes manifested in the provision of a private right of action in the statute.”17
The panel acknowledged that cases from other circuits have permitted challenges to class action waivers on this basis, but recognized that “[i]n each of these cases, plaintiffs’ attempts to avoid the waiver clause failed because plaintiffs were unable to demonstrate the class-action waivers barred them from vindicating their statutory rights.”18 Here, the affidavit submitted by the plaintiffs’ economist opined that, in light of the median plaintiff’s anticipated recovery of approximately $5,252 in treble damages, “it would not be worthwhile for an individual plaintiff…to pursue individual arbitration or litigation where the out-of-pocket costs, just for the expert economic study and services, would be at least several hundred thousand dollars, and might exceed $1 million.”19 This affidavit, the court found, “demonstrates that the only economically feasible means for plaintiffs enforcing their statutory rights is via a class action.”20
The Amex III court concluded that the district court had improperly focused on the damages provision of the Clayton Act, which, although providing for treble awards and recovery of attorney fees and expenses, would be “unlikely to assist plaintiffs where, as here, ‘the trebling of a small individual damages award is not going to pay for the expert fees [plaintiffs' expert] has estimated will be necessary to make an individual’s case.’”21 Likewise, the court found little comfort in the Clayton Act’s fee-shifting provisions, because “the plaintiffs must include the risk of losing, and thereby not recovering any fees, in their evaluation of their suits potential costs.”22
Significantly, the court qualified this holding with two caveats. First, the court stressed that its holding “in no way relie[d] upon the status of plaintiffs as ‘small’ merchants”; rather, the court solely relied “on the need for plaintiffs to have the opportunity to vindicate statutory rights.”23 Second, the court cautioned lower courts that the enforceability of a waiver is a fact-intensive inquiry, and that its holding was not one of per se unenforceability: “We do not hold today that class action waivers in arbitration agreements are per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions. Rather, as demonstrated by the different outcomes in our sister Circuits, we hold that each waiver must be considered on its own merits, based on its own facts in the records, and governed with a healthy regard for the fact that the FAA ‘is a congressional declaration of a liberal federal policy favoring arbitration agreements.’”24
Denial of Rehearing En Banc
On May 29, 2012, the Second Circuit denied rehearing en banc in Amex III.25 Concurring in the denial, Pooler (the author of the panel decision) emphasized that the court’s decision in Amex III did not implicate Concepcion.26 Pooler underscored the “significant distinction” between the state contract rights addressed in Concepcion and federal statutory rights at issue in Amex III: “Amex III raises a different issue: whether the FAA always trumps rights created by a competing federal statute, as opposed to rights existing under a common law of unconscionability. At issue here is not the right to proceed as a class, but the ability to effectively vindicate a federal statutory right that predates the FAA.”27 Pooler also emphasized that the Clayton Act’s treble-damages and fee-shifting provisions were incapable of making an individual plaintiff whole, in light of the statutory provision limiting recovery of expert witness fees to $40 per day.28
Five judges dissented from the denial of rehearing en banc. In an opinion written by Chief Judge Dennis Jacobs, joined by Judge Jose Cabranes and Judge Debra Ann Livingston, the chief judge emphasized that Amex III could not be reconciled with the Supreme Court’s FAA jurisprudence.29 Cabranes concurred fully in Jacobs’ opinion, but wrote separately “simply to underscore that the issue at hand is indisputably important, creates a circuit split, and surely deserves appellate review.”30 Judge Reena Raggi, joined by Wesley, also dissented.
Although the Second Circuit emphasized that the fact-intensive nature of its “vindication of statutory rights” analysis limited its holding, Amex III nonetheless creates considerable uncertainty in the law. The panel’s approach may open the door to continued collateral challenge, not only to an arbitration agreement’s actual terms, but one involving speculative inquiry into whether the plaintiff in an arbitration proceeding that has not yet occurred will be able to vindicate his or her statutory rights. Other litigation within the Second Circuit suggests that Supreme Court review will be needed before the parties can be assured that their arbitration agreement will in fact be enforced according to its terms.31
Samuel Estreicher is the Dwight D. Opperman Professor of Law at New York University School of Law and of counsel to Paul Hastings. Zachary Fasman is a partner at Paul Hastings. Kelsey Van Wart, an associate at the firm, assisted in the preparation of this article.
1. 9 U.S.C. §2.
3. 667 F.3d 204 (2d Cir. 2012).
4. Id. at 208.
5. Id. A charge card requires its holder to pay the full outstanding balance at the end of a standard billing cycle. A credit card, by contrast, allows the cardholder to pay a portion of the amount owing at the close of a billing cycle, subject to interest charges. In plain terms, the credit card is a means of financing purchases, the charge card is a method of payment. In re Am. Express Merchs., 2006 U.S. Dist. LEXIS 11742, 2006 WL 662341, at * 1, n. 6 . Amex charge cards attract more affluent users than do its credit cards.
6. Id. at 207.
7. Id. at 209-10.
8. 554 F.3d 300, 311, 320 (2d Cir. 2009).
9. 130 S. Ct. 1758 (2010).
10. Id. at 1775.
11. 634 F.3d 187 (2d Cir. 2011).
12. Id. at 200, 197-98.
13. 131 S. Ct. at 1746.
14. Amex III, 667 F.3d at 212.
15. Id. at 213 (quoting Amex I, 554 F.3d at 320).
16. 132 S. Ct. at 673.
17. Amex III, 667 F.3d at 213 n.5.
18. Id. at 217.
19. Id. at 218.
21. Id. (quoting Amex I, 554 F.3d at 317).
22. Id. (quoting Amex I, 554 F.3d at 317).
23. Id. at 219.
24. Id. (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr., 460 U.S. 1, 24 (1983)).
25. In re American Express Merchs. Litig., 681 F.3d 139 (2d Cir. 2012) (Amex IV).
26. Id. at 139 (Pooler, J., concurring).
27. Id. at 140.
28. Id. at 141; 28 U.S.C. §1821(b) (“A witness shall be paid an attendance fee of $40 per day for each day’s attendance.”).
29. Amex IV, 681 F.3d at 143 (Jacobs, C.J., dissenting).
30. Id. at 149. (Cabranes, J., dissenting).
31. Raniere v. Citigroup, 827 F.Supp.2d 294 (S.D.N.Y. 2011), appeal docketed, No. 11-5213 (2d Cir. Dec. 19, 2011); Chen-Oster v. Goldman, Sachs, No. 10-cv-6950, 2011 U.S. Dist. LEXIS 73200 (S.D.N.Y. July 7, 2011), appeal docketed, No. 11-5229 (2d Cir. Dec. 15, 2011). See also D.R. Horton, 2012 NLRB LEXIS 11 (NLRB, Jan. 3, 2012); Samuel Estreicher and Kristina A. Yost, “NLRB Reaches Into Employment Law to Invalidate Class Action Waivers,” NYLJ, Feb. 2, 2012.