High Court: Class-Action Waiver In Arbitration Clause Is Valid In Antitrust Case

High Court: Class-Action Waiver In Arbitration Clause Is Valid In Antitrust Case

WASHINGTON, D.C. - (Mealey's) A mandatory class action waiver clause in American Express Co.'s (AmEx) standardized service contract is enforceable under the Federal Arbitration Act (FAA), even if the cost of individual arbitration of merchants' antitrust claims is prohibitively high, the U.S. Supreme Court ruled 5-3 on June 20 in reversing the Second Circuit U.S. Court of Appeals (American Express Company, et al. v. Italian Colors Restaurant, et al., No. 12-133, U.S. Sup.) (lexis.com subscribers may access Supreme Court briefs and the opinion for this case).


Writing for the majority, Justice Antonin Scalia said that the FAA "reflects the overarching principle that arbitration is a matter of contract" and that "courts must 'rigorously enforce' arbitration agreements according to their terms. . . unless the FAA's mandate has been 'overridden by a contrary congressional command.'"

"No contrary congressional command requires us to reject the waiver of class arbitration here," Justice Scalia wrote, adding that "antitrust laws do not guarantee an affordable procedural path to the vindication of every claim."

'Effective-Vindication' Exception

The majority noted that the Sherman and Clayton Acts were enacted before Federal Rule of Civil Procedure 23 established class proceedings for vindication of statutory rights.

The majority rejected the merchants' argument that the class action waiver bars effective vindication of their federal statutory rights because the cost of individually arbitrating their antitrust claim exceeds their potential recovery and, therefore, the arbitration agreement is invalid.

"The [effective vindication] exception finds its origin in the desire to prevent 'prospec­tive waiver of a party's right to pursue statutory reme­dies,'" Justice Scalia said, adding 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."

Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Clarence Thomas and Samuel Anthony Alito Jr. joined in the majority opinion.

Plain Meaning

Justice Thomas filed a concurring opinion, saying that "the result here is also required by the plain meaning of the Federal Arbitration Act."

"Because [plaintiff] Italian Colors [Restaurant] has not furnished 'grounds . . . for the revocation of any contract,' 9 [United Stated Code] §2, the arbitration agreement must be enforced. Italian Colors voluntarily entered into a contract containing a bilateral arbitration provision. It can­not now escape its obligations merely because the claim it wishes to bring might be economically infeasible," Justice Thomas said.

Sharing Costs

Justice Elena Kagan filed a dissenting opinion, in which Justices Ruth Bader Ginsburg and Stephen G. Breyer joined.

The effective-vindication rule "bars applying [an arbitration] clause when (but only when) it operates to confer immunity from potentially meritorious federal claims. In so doing, the rule reconciles the Federal Arbitration Act (FAA) with all the rest of federal law-and indeed, promotes the most fundamental purposes of the FAA itself. As applied here, the rule would ensure that Amex's arbitration clause does not foreclose Italian Colors from vindicating its right to redress antitrust harm," the dissent said.

"[T]he majority disregards our decisions' central tenet:  An arbitration clause may not thwart federal law, ir­respective of exactly how it does so," Justice Kagan said.

In the instant case, AmEx's "contract expressly prohibits class arbitration. But that is only part of the problem. The agreement also disallows any kind of joinder or con­solidation of claims or parties. And more:  Its confidential­ity provision prevents Italian Colors from informally arranging with other merchants to produce a common expert report. And still more: The agreement precludes any shifting of costs to Amex, even if Italian Colors pre­vails. And beyond all that: Amex refused to enter into any stipulations that would obviate or mitigate the need for economic analysis. In short, the agreement as applied in this case cuts off not just class arbitration, but any avenue for sharing, shifting, or shrinking necessary costs," the dissent said.

"[T]he FAA was never meant to produce this outcome," the dissent said.

Justice Sonia Sotomayor took no part in the consideration or decision of the case.

Merchant Fees

Italian Colors and other merchants sued AmEx, alleging that AmEx used its monopoly power to force merchants to accept a service contract that contained an "honor all cards agreement" whereby merchants were forced to pay supracompetitive fees on AmEx's mass-marketed products or lose a significant portion of sales from businesses, travelers and affluent customers who are traditional users of AmEx cards. The agreement precluded merchants from accepting some AmEx cards and denying others in violation of the Sherman Act, the merchants said.

The merchants further alleged that as a condition of accepting AmEx's cards, they were required to sign a "card acceptance agreement" that contained a mandatory arbitration clause and prohibited the merchants from bringing a class action lawsuit in court and from having any claim arbitrated on anything other than an individual basis. The merchants contended that the agreement violated the FAA.

The U.S. District Court for the Southern District of New York granted AmEx's motion to compel arbitration of the merchants' antitrust claims and the question of whether the class action waivers were enforceable, and the District Court dismissed their cases.

On Jan. 30, 2009, the Second Circuit reversed, finding that the merchants had adequately demonstrated that the class action waiver provision was not enforceable because enforcement of the waiver would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs and "would grant AMEX de facto immunity from antitrust liability."  According to the appeals panel, the merchants demonstrated that "the size of the recovery received by any individual plaintiff will be too small to justify the expenditure of bringing an individual action."

The panel found that Section 2 of the FAA provides that an agreement to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."  The panel held that because a valid ground exists for the revocation of the class action waiver, it cannot be enforced under the FAA.

Stolt-Nielsen And Concepcion

On May 3, 2010, the Supreme Court granted AmEx's petition for a writ of certiorari, vacated the Second Circuit's decision and remanded in light of Stolt-Nielsen S.A., et al. v. AnimalFeeds Int'l Corp, 130 S.Ct. 1758 (2010) [an enhanced version of this opinion is available to lexis.com subscribers], in which the Supreme Court, in a 5-3 decision on April 27, 2010, held that an arbitration panel exceeded its authority under the FAA by construing an arbitration clause to permit class arbitration of antitrust claims when the clause was silent on that issue.

The Supreme Court subsequently issued its decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) [enhanced version], in which the Supreme Court held that the FAA preempted a California law barring the enforcement of class action waivers in consumer contracts.

The Second Circuit panel said that its original analysis was unaffected by Concepcion. The Second Circuit denied rehearing en banc in a divided ruling on May 29, 2012, and, on Nov. 9, the Supreme Court granted AmEx's petition for a writ of certiorari.

The Second Circuit remanded to the District Court with the instruction to deny AmEx's motion to compel arbitration, commenting that "each waiver must be considered on its own merits, based on its own record, and governed with a healthy regard for the fact that the FAA 'is a congressional declaration of a liberal federal policy favoring arbitration agreements.'"


Amicus curiae briefs in support of AmEx's petition for certiorari were filed by the Equal Employment Advisory Council; Experian Information Solutions Inc. and Concumerinfo.com Inc.; American Bankers Association, American Financial Services Association and Consumer Bankers Association; The Financial Services Roundtable; The Chamber of Commerce of the United States of America and Business Roundtable; New England Legal Foundation; Distinguished Law Professors; and DRI-The Voice of the Defense Bar.

Also filing an amicus brief in support of reversal were senior legal officers for public companies - Marcy S. Cohen, general counsel and managing director of ING Financial Holdings Corp; Augustus I. DuPont, vice president, general counsel and secretary of Crane Co.; Hayward D. Fisk, former vice president, general counsel and secretary of Computer Sciences Corp.; William Graham, former senior vice president, general counsel and secretary of Bethlehem Steel Corp.; Frank R. Jimenez, chief legal and government affairs office of a "large cap" public company; Robert Lonergan, former executive vice president and general counsel of Rohm and Haas Co.; and Clifford B. Storms, former senior vice president and general counsel of CPC International - and the International Association of Defense Counsel.

Amicus briefs filed in support of affirmance were filed by National Community Pharmacists Association, National Association of Convenience Stores and National Grocers Association; COSAL -The Committee to Support the Antitrust Laws; Ohio and 21 other states; Professors of Civil Procedure; American Antitrust Institute; Public Citizen Inc.; Public Justice P.C., AARP and the American Association for Justice; Food Marketing Institute and National Retail Federation; Professional Arbitrators and Arbitration Scholars; and Antitrust Scholars.


The United States is represented by Solicitor General Donald B. Verrilli Jr., Deputy Assistant Attorney General Leslie C. Overton, Deputy Solicitor General Malcolm L. Stewart, Assistant to the Solicitor General Ginger D. Anders and Attorneys Catherine G. O'Sullivan, Robert B. Nicholson, David Seidman and Adam Chandler of the U.S. Department of Justice and Acting General Counsel David C. Shonka of the Federal Trade Commission. All are in Washington.

AmEx is represented by Michael K. Kellogg and Derek T. Ho of Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington, Louise M. Parent, Mark G. Califano and Bernadette Miragliotta of American Express Travel Related Services Inc. in New York and Julia B. Strickland of Stroock & Stroock & Lavan in Los Angeles.

The merchants are represented by Paul D. Clement and Michael H. McGinley of Bancroft and Deepak Gupta, Brian Wolfman, Gregory A. Beck and Jonathan E. Taylor of Gupta Beck. All are in Washington.

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