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Legal Alert: Supreme Court Forecloses Vindication of Rights Challenge to Class Action Waiver in Arbitration Provision

June 20, 2013

A court cannot invalidate a class action waiver in an arbitration agreement on the ground that it may leave a party unable to vindicate its statutory rights economically, even if the plaintiff’s cost of individual arbitration would exceed the potential recovery.  This was the message of the Supreme Court in a 5-3 decision strongly upholding the enforceability of arbitration agreements.  American Express Co. v. Italian Colors Restaurant, 12-133 (Amex).  The decision, authored by Justice Scalia, reconfirmed that courts must “rigorously enforce arbitration agreements according to their terms,” and specifically rejected the argument that a class action waiver is unenforceable merely because the plaintiff’s cost of individual arbitration would exceed the potential recovery.  The Court reasoned that because the parties agreed to arbitrate on a non-class basis, “it would be remarkable for a court to erase that expectation.”  (Click here for a copy of the opinion).

The question for the Court was whether a mandatory class action waiver in an arbitration provision was unenforceable where the plaintiffs claimed that enforcement of the waiver would prevent them from vindicating federal statutory rights, specifically antitrust laws.  In the proceedings below, the Second Circuit Court of Appeals found that if the class waiver were enforced, “the cost of plaintiffs individually arbitrating their dispute with Amex would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws.”  See In re American Express Litigation, 667 F.3d 204 (February 1, 2012).  The Second Circuit held that this fact rendered the arbitration provision and class waiver unenforceable based on language from Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), which stated that where “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.”  The Second Circuit found that plaintiffs had met that burden, and that the provision was unenforceable because otherwise “[t]he defendant will thus have immunized itself against all such antitrust liability by the expedient of including in its contracts of adhesion an arbitration clause that does not permit class arbitration.”

The five-justice majority in Amex emphatically rejected this theory.  In response to the respondents’ arguments that requiring them to litigate individually would contravene the policies of the antitrust laws, the Court stated that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”  The Court distinguished between a party’s right to pursue a claim and the ability to prove that claim:  “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”  Because the “class-action waiver merely limits arbitration to the two contracting parties,” the Court held that “[i]t no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938.”

The majority also rejected the dissent’s contention that the class action waiver functioned as an exculpatory clause that should not be enforced.  The dissent, authored by Justice Kagan, characterized the decision as allowing an alleged monopolist “to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”  The majority rejected the connection between vindication of rights and the use of class action procedure:  “the individual suit that was considered adequate to assure ‘effective vindication’ of a federal right before adoption of class-action procedures did not suddenly become ‘ineffective vindication’ upon their adoption.”

Amex strikes another blow against challenges to class action waivers in arbitration provisions.  It rejects conclusively the argument that there is a carve out for vindication of statutory rights, and the decision further closes the door on per se challenges to arbitration, similar to the Court’s 2011 decision in AT&T Mobility LLC v. Concepcion.  Indeed, Justice Scalia commented in Amex that “our decision in AT&T Mobility all but resolves this case.”  Amex follows in a line of arbitration decisions issued by this Court over the past few years, most notably AT&T Mobility, which have made it more difficult for plaintiffs to escape arbitration agreements and bring claims in a class action.

This term, the Supreme Court has issued a series of decisions affecting class actions, including two decisions on arbitration issues.  Most recently, the Court upheld an arbitrator’s authority to interpret an agreement to permit class proceedings in situations where the parties had submitted that question to the arbitrator.  (Click here for the Sutherland Legal Alert on Oxford Health Plans LLC v. Sutter)Earlier this term, the Court held that a district court may not certify a class action without first resolving whether the plaintiff class has introduced adequate evidence to show that the case is susceptible to an award of classwide damages.  (Click here for the Sutherland Legal Alert Comcast Corp. v. Behrend).  Other class action decisions this term have addressed the Class Action Fairness Act (click here for the Sutherland Legal Alert on Standard Fire Insurance Co. v. Knowles), offers of judgment (click here for the Sutherland Legal Alert on Genesis HealthCare Corp. v. Symczyk), materiality in securities fraud cases (click here for the Sutherland Legal Alert on Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds), and use of databases maintained by state departments of motor vehicles to identify and solicit potential class action plaintiffs (click here for the Sutherland Legal Alert on Maracich v. Spears).

If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed or the Sutherland attorney with whom you regularly work.

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