Last week, in American Express Co. v. Italian Colors Restaurant, the United States Supreme Court, in a 5-3 ruling, reversed the Second Circuit and held that a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act (FAA) even if the cost of proving an individual claim in arbitration exceeds the potential recovery. In holding that a class action waiver in an arbitration agreement is enforceable, even as to federal anti-trust claims, this decision builds upon the trend set in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), AT & T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), and CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012) – that arbitration agreements should be enforced according to their terms even for claims under federal statutes.
The case arose from an antitrust claim brought by Italian Colors Restaurant and other merchants against American Express. The merchants alleged that American Express violated federal laws by charging inflated fees through the use of an illegal tying arrangement. Though the merchants’ agreement with American Express contained an express arbitration clause which required all disputes to be mediated through bi-lateral arbitration, and not on a class basis, the merchants argued that it would not be economically feasible to vindicate their federal statutory rights in individual proceedings, and that they required class representation to pursue their claims. Despite the intervening Concepcion decision holding that a state law invalidating class action waivers in consumer arbitration agreements were preempted by the FAA and unenforceable, the Second Circuit agreed with the merchants, and refused to uphold the arbitration agreement.
The Supreme Court’s decision reversing the Second Circuit reaffirms how sweeping the Supreme Court majority intended the Concepcion decision to be. In American Express, the Court squarely rejected the interpretation by the Second Circuit and other lower courts that Concepcion was predicated solely on the FAA’s preemption of state law, and held that even for federal laws, the FAA requires that courts enforce the terms of an arbitration agreement as they have been written absent “contrary congressional command.”
The Court also considered and rejected the merchants’ “effective vindication” argument that the class action waiver prevents them from vindicating their rights because they would have no economic incentive to do so due to the high litigation costs. The Court concluded that the costs of litigation did not prevent the parties from pursuing relief under the antitrust laws but rather prevented them from proving a statutory remedy. The Court emphasized this critical distinction and reasoned that “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.”
The American Express decision is clearly a win for employers and corporations seeking to avoid costly and time-consuming class action litigation, especially in matters where courts have previously found that class action waivers conflict with federal or state statutes. The decision removes a judicially-created hurdle to the enforcement of class action waiver provisions, and going forward, it is unlikely that arbitration agreements will be overturned on an “effective vindication” theory.
Moreover, the decision further calls into question the viability of the National Labor Relations Board’s ruling in D.R. Horton Inc. v. NLRB. In D.R. Horton, the NLRB ruled that class action waivers in arbitration agreements violate section 7 of the National Labor Relations Act because such waivers interfere with employees’ right to engage in concerted activity. This ruling is now under review in the Fifth Circuit. The American Express decision, and specifically the principle that arbitration agreements should be enforced according to their terms even for claims under federal statutes unless the FAA’s mandate has been overridden by a contrary congressional command, cuts against the NLRB’s position because nothing in the NLRA creates an exception to arbitration or overrides the FAA. That said, the NLRB has and likely will continue to actively challenge mandatory arbitration programs until ordered otherwise. As such, the D.R. Horton ruling and NLRB enforcement are still obstacles that employers need to consider even post-American Express.
In addition to the outcome of D.R. Horton, other challenges to enforcing arbitration provisions remain as the decision does not affect lower courts’ use of general contract principles such as unconscionability and confusion to invalidate arbitration agreements. Lower courts have relied on contract defenses to get around Concepcion and likely will continue doing so after American Express. Given the opportunities presented by American Express and the remaining challenges, this decision reinforces the need for employers to reevaluate their arbitration agreements in light of their risk tolerance, docket composition, and other specific circumstances, weigh the various benefits of an arbitration program against the costs – which includes continued risk of enforcement by the NLRB – and develop a comprehensive dispute resolution strategy.