Class Action Waivers in Arbitration Clauses are Enforceable
Recently, in American Express Co. v. Italian Colors Restaurant, a sharply divided United States Supreme Court issued the latest in a series of opinions that protect the enforceability of arbitration agreements. Our previous post about oral arguments in the case can be found here. The Supreme Court’s decision clears the way for businesses to require consumers to arbitrate disputes on an individual basis regardless of the litigation costs associated with the proceeding.
In Italian Colors, a group of merchants who accept American Express cards brought a class action claim against American Express alleging a violation of federal antitrust laws. According to the plaintiffs, American Express violated Section 1 of the Sherman Act by using “its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit cards.”
American Express responded by asserting that the agreement between the parties required the class members to arbitrate their claims on an individual basis. The plaintiffs responded that they should not be required to arbitrate their claims on an individual basis because the costs associated with bringing an individual action greatly outstripped the potential recovery by any one class member. The District Court agreed with American Express and dismissed the lawsuit. The Second Circuit Court of Appeals reversed the District Court’s opinion and remanded for further proceedings.
The Opinion of the Court (authored by Justice Antonin Scalia and joined by Chief Justice Roberts and Justices Thomas, Kennedy, and Alito) and the Dissenting Opinion (authored by Justice Kagan and joined by Justices Breyer, Ginsburg, and Sotomayor) disagreed over whether the arbitration clause could be voided under the judge-made “effective vindication” doctrine. The Effective Vindication Doctrine, first mentioned in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., holds that arbitration clauses may be disregarded if they “operat[e] … as a prospective waiver of a party’s right to pursue statutory remedies.”
After determining that Congress had not prohibited the use of class arbitration waivers in arbitration clauses, the majority noted that the Effective Vindication Doctrine did not apply in this case because it only protects “the right to pursue” a statutory remedy, not the right to pursue a statutory remedy in the most cost effective manner possible. A class action waiver is permissible because the party initiating the arbitration still has the right to pursue its remedy, even if pursuing that remedy carries a hefty price tag.
Justice Kagan’s dissent claimed that the majority had failed to appreciate the full scope of the Effective Vindication Doctrine. In her opinion, the Supreme Court’s precedents established that the Doctrine applies when a provision in an arbitration agreement has the practical result of denying a party the ability to pursue a statutory remedy. Here, because the class arbitration waiver made arbitration prohibitively expensive by requiring arbitration on an individual, the class action waiver effectively barred merchants from vindicating their statutory rights and should have been disregarded.
The Italian Colors opinion reinforces that if parties consent to an arbitration agreement, the Court should respect the parties’ decision and require arbitration under the agreed to terms. After this opinion, options for plaintiffs who wish to challenge the validity of arbitration clauses because of the terms of the arbitration are very slim. Instead, plaintiffs will likely focus on issues related to contract formation and attempting to have arbitration clauses discarded by state courts under state unconscionability laws.
However, for the time being, it appears that parties seeking to have arbitration agreements enforced will have the upper hand. The state of the law makes it very important that companies consider the full impact of the terms contained in an arbitration agreement before entering into contracts in the future.