Class Actions - Class Arbitration Waivers

Article excerpt

The Supreme Court has interpreted the policies underlying the Federal Arbitration Act (1) (FAA) to be in conflict with class procedure, and has therefore determined that the FAA expresses a clear federal policy in favor of enforcing class waivers contained in arbitration agreements. (2) Given this presumption of enforceability, the class action waiver has become a favorite tool of corporate counsel (3) who, by including class waivers in arbitration agreements contained in form contracts, seek to insulate their clients from aggregate--and often any--liability for contractually based actions that create small harm to large groups of people. (4) Prior to last Term, the effective vindication principle, which provided that "[a]n arbitration clause will not be enforced if it prevents the effective vindication of federal statutory rights, however it achieves that result," (5) remained a plausible means for invalidating a class waiver that would prevent a plaintiff from protecting her federal rights.

Last Term, in American Express Co. v. Italian Colors Restaurant (6) (Italian Colors), the Supreme Court held that a class action waiver contained in an arbitration agreement was enforceable, even though the plaintiffs showed that the waiver effectively prevented them from bringing their federal antitrust claims because litigating the claims individually would be prohibitively expensive. (7) This decision continued the Court's pattern of enforcing arbitration agreements according to their terms, and it virtually eliminated one of the last plausible judicial limits on the enforcement of class waivers in arbitration agreements. The Court's decision makes it likely that many federal statutes will no longer be enforced privately in certain contexts, further weakening a judicially created principle that was already difficult to apply. Thus, it is now up to Congress to determine whether, and in what contexts, it favors contractual freedom in arbitration agreements over private enforcement of federal statutes.

American Express (AmEx) derives revenue by withholding a "merchant discount fee" from each transaction in which an AmEx card is used, and requires merchants who wish to accept AmEx cards to sign a form contract that sets this fee and contains an "Honor All Cards" provision, which provides that retailers must accept both AmEx's charge and credit cards. (8) These contracts also contain an arbitration clause that mandates arbitration of all claims "arising from or relating to...the relationship resulting from this Agreement," and provides that the merchants do not have the right to use class procedure for any claim subject to arbitration. (9)

A group of merchants brought a class action against AmEx, claiming that AmEx violates section 1 of the Sherman Act (10) by charging a supracompetitive merchant discount fee and sustaining this fee via an unlawful tying arrangement--accomplished by the "Honor All Cards" provision. (11) AmEx moved to compel these claims to bilateral arbitration, and the plaintiffs argued in response that bilateral arbitration "would impose such punishing costs as to preclude vindication in that forum." (12) To support this claim, the plaintiffs provided an affidavit from economics expert Gary L. French, Ph.D., who stated that it would not be worthwhile for the plaintiffs to pursue individual arbitration because it would cost several hundred thousand dollars just to generate an expert economic report. (13) By comparison, the most that any plaintiff could expect to recover was $38,549. (14) District Judge Daniels rejected this argument and granted AmEx's motion to compel arbitration, (15) reasoning that the plaintiffs were "actually challenging the enforcement of the collective action waivers," which was a claim for the arbitrator to resolve. (16)

The Second Circuit reversed. (17) Writing for the court, Judge Pooler (18) explained that in Green Tree Financial Corp.-Alabama v. Randolph, (19) the Supreme Court stated that a party could invalidate an arbitration agreement by showing that it will incur prohibitive costs under the agreement. …