In the latest in a series of decisions in which it has upheld the enforceability of arbitration agreements, the U.S. Supreme Court ruled on June 20, 2013 that an arbitration agreement with a class action waiver is enforceable even it meant that an individual's cost of pursuing a claim exceeded the economic value of the individual's potential recovery. A copy of the Court's opinion in American Express Co. v. Italian Colors Restaurant can be found here [an enhanced version of this opinion is available to lexis.com subscribers].
Although the decision is consistent with other recent Supreme Court rulings, it has its own important implications - and it also raises question about just how far the principle of broad enforceability of arbitration agreements can be taken. In particular, it question whether the broad enforceability of arbitration agreements reaches far enough to include the enforceability of arbitration agreements and class action waivers in corporate articles of incorporation or by-laws.
The American Express case involved a purported antitrust class action filed by a group of vendors against American Express in which the vendors alleged that AmEx's credit card policy constitutes an illegal tying arrangement because it forces the vendors to accept debit and credit cards at the same fee level. American Express sought to invoke the arbitration clause in its contractual agreement with the vendors.
The case has a long, tortuous procedural history and the specific decision on appeal to the Supreme Court represented the third separate opinion by the Second Circuit in the case. In what is known as the American Express III decision (here), the Second Circuit refused to enforce the class action waiver in the AmEx contractual agreement on the ground that it would effectively preclude the plaintiffs from prosecuting their federal antitrust claims, because the costs of economic experts would be far in excess of their individual damages.
In an opinion written by Justice Scalia for a 5-3 majority, the U.S. Supreme Court reversed the Second Circuit and held that the Federal Arbitration Act does not permit courts to invalidate a contractual waiver of class arbitration on the grounds that the plaintiff's cost of individually arbitrating a federal statutory claim exceeds the potential recovery. The opinion also dramatically narrowed the "effective vindication" exception to the enforceability of arbitration agreements, stating that the exception, while valid, would apply only in the event of a provision "forbidding the assertion of certain statutory rights" or the inclusion of fees so high "as to make access to the forum impracticable."
In light of the Court's recent decisions supporting the enforceability of arbitration agreements, the outcome in the American Express case arguably comes as no surprise. Justice Scalia suggested as much in his opinion when he commented that "truth to tell, our decision in [AT&T Mobility v. Concepcion] all but resolves this case."
The majority opinion was written over a spirited dissent written by Justice Kagan, in which Justices Ginsburg and Breyer joined. (Justice Sotomayor did not participate in the decision.) Justice Kagan characterized the outcome as holding that "the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse." She added "here is the nutshell version of today's opinion, admirably flaunted rather than camouflaged: Too darn bad."
Though the American Express decision follows a line of recent Supreme Court cases upholding the enforceability of arbitration agreements and class action waivers, it nevertheless also represents a significant development. The decision not only greatly narrowed the "effective vindication" exception. It also made it clear that courts will enforce arbitration agreements even if the agreement is not customer friendly and even if the individual's cost of pursuing an individual arbitration claim is certain to exceed the potential recovery.
And though this case arose in the context of an antitrust claim, it obviously has broad applicability to a wide variety of claims. It clearly will be valuable in the employment context, as employers will be better able to count on the enforceability of arbitration clauses and class action waivers in employment agreements and thereby avert class-action litigation.
The decision obviously will have wide applicability to many other types of commercial and consumer agreements. Clearly, businesses that want to avoid class actions have wide latitude to include waivers of class actions in arbitration clauses.
An obvious question is exactly how far that latitude extends. Does the Supreme Court's support for the enforceability of arbitration agreements extend far enough to include the enforcement of arbitration clauses in corporate charters?
The question of whether or not a company can impose an arbitration requirement through its articles of incorporation or its by-laws drew a great deal of attention when The Carlyle Group, which was preparing to go public at the time, specified in its partnership agreement that all limited partners would be required to submit any claims to binding arbitration. (I discussed Carlyle's initiative in a prior blog post, here.) Ultimately, the SEC used its control of the registration process to prevent Carlyle from including this provision. But as illustrated in an April 22, 2012 article by Carl Schneider of the Ballard Spahr law firm on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here), the idea continues to have its advocates and it seems likely that sooner or later there will be a case or circumstance testing the permissibility of arbitration provision in articles of incorporation or corporate by-laws.
As I am sure others will be quick to point out, it isn't at all clear that the line of cases in which the Supreme Court has upheld the enforceability of arbitration agreements would support the enforcement of an arbitration agreement in a corporate charter. Among other things, the cases all relate to arbitration clauses in bi-lateral contractual agreements. A corporation's charter documents represent a different type of legal instrument and involve a different kind of legal relationship. And though the Supreme Court cases sweep broadly, the still allow room to raise arguments even about contractual arbitration agreements about contract formation and procedural unconscionability.
In any event, we certainly can expect to see arbitration clauses with class action waivers proliferating in commercial and consumer contracts of all kinds. In this environment, where it seems likely that businesses will actively be seeking to drive disputes out of the courts and into arbitration, it seems probable that there are going to be businesses that try to drive shareholder disputes into arbitration as well. The day may not be far off where court will have to address the question of enforceability of arbitration clauses and class action waivers in corporate charter documents.
Another FDIC Failed Bank Lawsuit: On June 18, 2013, the FDIC as receiver for the failed Southern Community Bank of Fayetteville, Georgia filed a lawsuit in the Northern District of Georgia against nine of the bank's former directors and officers. The FDIC's complaint, which can be found here, alleges that the individual defendants were negligent and grossly negligent by approving loans that violated the Bank's internal policies, regulations and prudent lending practice, allegedly resulting in damages of $10.3 million. The bank failed on June 19, 2009, meaning that the FDIC did not initiate its suit until well after the third anniversary of the bank's failure, and suggesting that the parties may have entered into some form of tolling agreement.
The latest lawsuit is the 68th that the FDIC has filed against former directors and officers of failed banks as part of the current bank failure wave. The agency has filed 24 so far in 2013, compared to only 26 in all of 2012.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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