In American Express v. Italian Colors Restaurant (Amex IV),1 the U.S. Supreme Court has ruled that the Federal Arbitration Act (FAA)2 does not permit courts to invalidate arbitration agreements requiring individual arbitration on the ground that plaintiffs lack the economic incentive to pursue claims individually. In so doing, the court dramatically limited the judicially created "'effective vindication' exception" to the FAA, which had been construed in some circuits as a bar to enforcement of arbitration agreements also containing class arbitration waivers, where "the cost of plaintiffs' individually arbitrating their dispute…would be prohibitive."3
After Amex IV, the "economic incentive to pursue…claims individually in arbitration" is no longer relevant in determining the enforceability of a class action arbitration waiver.4 Rather, "courts must 'rigorously enforce' arbitration agreements according to their terms" unless Congress has indicated otherwise.5 In essence, the "effective vindication" doctrine is now limited to express restrictions on statutory rights and forum and arbiter costs under arbitration that would not be present in litigation; it does not refer to the costs of bringing an individual claim in any forum, judicial or otherwise.
The plaintiffs in Amex IV were merchants who claimed that American Express violated the antitrust laws by using its "monopoly power…to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit cards."6 The plaintiffs all had signed arbitration agreements with American Express expressly waiving the "right or authority for any Claims to be arbitrated on a class action basis."7 They nevertheless resisted American Express' motion to compel individual arbitration, claiming that "[e]nforcing the waiver of class arbitration" would prevent "effective vindication" of their claims because the cost of arbitrating individually would exceed any potential recovery to the individual merchant.8 The District Court granted American Express' motion to compel but the U.S. Court of Appeals for the Second Circuit reversed, declaring the waiver unenforceable "because [plaintiffs] had established that 'they would incur prohibitive costs'"—namely, the costs of an expert witness, which presumably could not be shared among the class of injured merchants—if compelled to pursue an individual arbitration.9 The Supreme Court reversed.
The Court's Opinion
The court, per Justice Antonin Scalia's opinion joined by Chief Justice John Roberts and Justices Anthony Kennedy and Samuel Alito, held that the FAA does not permit courts to invalidate arbitration agreements solely because the plaintiffs would lack the economic incentive to pursue claims individually.
The opinion is based on two central premises. First, the court emphasized, the FAA's "overarching principle [is] that arbitration is a matter of contract."10 Thus, as it recently held in CompuCredit v. Greenwood,11 "courts must 'rigorously enforce'" the terms of arbitration agreements, unless confronted with a "'contrary congressional command.'"12 The Amex IV majority determined that the antitrust laws do not contain such a "contrary congressional command" because, as the court previously ruled in Mitsubishi Motors v. Soler Chrysler-Plymouth,13 they do not bar arbitration pursuant to a pre-dispute agreement. Moreover, these statutes "do not 'evinc[e] an intention to preclude a waiver' of class-action procedure"14 or "guarantee an affordable procedural path to the vindication of every claim."15
Second, the Amex IV majority explained, the so-called "'effective vindication' exception" did not justify a refusal to compel individual arbitration pursuant to the American Express agreement. This exception, which is based upon dicta in Mitsubishi, had sometimes been construed to allow "courts to invalidate agreements that prevent the 'effective vindication' of a federal statutory right."16 Although not rejecting every application of the exception, the court reasoned that the doctrine does not allow judicial refusal to compel arbitration simply because pursuing the claim on an individual basis "is not worth the expense involved in proving a statutory remedy."17 Instead, the exception is appropriately applied only where the arbitration agreement on its face creates an unavoidable barrier to assertion of the statutory right, such as "a provision in an arbitration agreement forbidding the assertion of certain statutory rights" or "perhaps,"18 in circumstances like those in Green Tree Financial-Alabama v. Randolph,19 where there are prohibitively high forum fees or arbiter fees that would not be present in an individual lawsuit.
The court referred to three prior decisions to reaffirm that courts under the FAA may not refuse to order arbitration absent a clear barrier to statutory relief. First, the majority cited Gilmer v. Interstate/Johnson Lane, where the court rejected a blanket refusal to arbitrate claims under the Age Discrimination in Employment Act (ADEA); "statutory permission" for collective actions under §216(b) of ADEA "did 'not mean that individual attempts at conciliation were intended to be barred.'"20 Second, the Amex IV majority relied upon Vimar Seguros y Reaseguros v. M/V Sky Reefer, where the court held that a "'tally[ing] [of] the costs and burdens'" of litigating abroad did not affect liability.21 Finally, in AT&T Mobility v. Concepcion, the majority noted, the court "specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'"22
Justice Clarence Thomas joined the majority's opinion, but wrote a short concurrence "to note that the result…[was] also required by the plain meaning of the [FAA]."23 Thomas concluded that the agreement at issue had to be enforced according to its terms, regardless of economic feasibility, "[b]ecause Italian Colors ha[d] not furnished 'grounds…for the revocation of any contract.'"24
Justice Elena Kagan's dissent, which Justices Ruth Bader Ginsburg and Stephen Breyer joined, insisted that the effective-vindication theory originating in Mitsubishi and endorsed in Green Tree Financial should allow a court to "'invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive.'"25 The dissent argued that the majority erred by limiting the effective-vindication rule to "baldly exculpatory provisions" because this allows monopolists to "avoid antitrust liability" through crafty drafting.26
In Kagan's view, the American Express agreement as a whole made arbitration "prohibitively expensive"—it did not allow joinder, consolidation, or cost-shifting to American Express. Additionally, its confidentiality provision essentially barred "a common expert report." As a result, the agreement presented plaintiffs with the following options: "Spend way, way, way more money than your claim is worth, or relinquish your Sherman Act rights."27
The court's Amex IV ruling limits the "'effective vindication' exception" to FAA enforceability to situations where an arbitration clause on its face expressly restricts statutory rights or imposes prohibitive forum or arbiter costs that would not be incurred in litigation. The plaintiffs had argued that the combination of the class arbitration waiver provision with the confidentiality provision of the arbitration agreement barred sharing arrangements to fund an expert witness in an individual arbitration proceeding. American Express responded that the agreement did not bar such arrangements.
By specifically noting that American Express denied its agreement "bar[red] other forms of cost sharing," the majority implied that agreements with both class claim or collective action waivers and provisions that bar forms of cost sharing may be unenforceable, but it left this question open.28 Beyond such situations, however, the courts must enforce an otherwise valid arbitration agreement that contains a class or collective action waiver, even where the plaintiffs maintain that the costs of an individual arbitration are prohibitive in light of the small value of their own claims.
Two important points emerge from Amex IV. First, the most important inquiry in deciding whether class arbitration has been waived is what the arbitration agreement says regarding class claims or class arbitration: Is it silent, does it explicitly prohibit class arbitration, or does it allow for it? In Stolt-Nielsen v. AnimalFeeds International,29 the Supreme Court held that courts may not impose class arbitration where the parties have not authorized class proceedings; when the agreement is silent on the question, the parties have not provided such authorization. But an arbitrator's views will apparently be given considerable weight. In Oxford Health Plans v. Sutter,30 decided several days before Amex IV, the Supreme Court held that class arbitration is permissible where an arbitrator concludes that the agreement can be read to permit it. An express preclusion in the agreement of class claims or class arbitration would presumably avoid such a result.
Second, the court has significantly curtailed plaintiffs' ability to block motions to compel individual arbitration. Plaintiffs can still defend against a motion to compel arbitration if the statute being sued upon contains a "contrary congressional command," or by showing the arbitration agreement was invalidly formed under generally applicable contract law principles. But plaintiffs may no longer claim that they can bypass an otherwise enforceable arbitration agreement containing a class or collective action waiver by arguing about the economics of an individual claim, that the individual's likely recovery does not warrant the costs of proceeding individually in any forum.
Samuel Estreicher is the Dwight D. Opperman Professor at New York University School of Law and of counsel to Paul Hastings. Zachary Fasman is a partner at Paul Hastings. Shaira Nanwani, an associate in the firm, assisted in the preparation of this article.
1. No. 12-133, 2013 U.S. LEXIS 4700 (U.S. June 20, 2013).
2. 9 U.S.C. §1 et seq.
3. In re American Express Merchs. Litig., 667 F.3d 204, 217 (2d Cir. 2012).
4. 2013 U.S. LEXIS 4700, at *11.
5. Id. at *8 (citation omitted).
6. Id. at *5.
8. Id. at *11. Although attorney fees are recoverable in antitrust suits, expert fees are not. Plaintiffs claimed that they required extensive expert testimony to prove their suit, which made litigating on an individual basis cost-prohibitive.
9. Id. at *6 (quoting In re Am. Express Merchants' Litig., 554 F.3d 300, 315–16 (2d Cir. 2009)).
10. Id. at *7–8.
11. 132 S. Ct. 665 (2012).
12. 2013 U.S. LEXIS 4700, at *8 (citations omitted).
13. 473 U.S. 614 (1985).
14 2013 U.S. LEXIS 4700, at *9 (quoting Mitsubishi Motors, 473 U.S. at 628).
15. Id. at *8–9.
16. Id. at *11.
17. Id. at *13 (emphasis in original).
18. Id. at *13.
19. 531 U.S. 79 (2000).
20. 2013 U.S. LEXIS 4700, at *15–16 (quoting Gilmer v. Interstate/Johnson Lane, 500 U.S. 20, 32 (1991)).
21. Id. at *16 (quoting Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U. S. 528, 532, 536 (1995)).
22. Id. at *17 (quoting AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011)).
23. Id. at *18–19 (Thomas, J., concurring).
24. Id. (citation omitted).
25. Id. at *25–26 (Kagan, J., dissenting) (quoting Green Tree Fin.-Ala. v. Randolph, 531 U.S. 79, 92 (2000)).
26. Id. at *23.
27. Id. at *31.
28. Id. at *15 n. 4 (majority opinion).
29. 130 S. Ct. 1758 (2010).
30. No. 12-135, 2013 U.S. LEXIS 4358 (U.S. June 10, 2013).