In the latest of a series of decisions dealing with the
enforceability of arbitration agreements, the U.S. Supreme Court in its 2011
decision in the AT&T
Mobility LLC v Concepcion case [an enhanced version of this opinion is available to lexis.com subscribers]
held that the Federal Arbitration Act preempts state laws that refuse to
enforce class action waivers in consumer arbitration agreements as unconscionable
or against public policy.
The Concepcion decision has had a sweeping impact,
as was seen most recently in a February
21, 2013 FINRA Hearing Panel decision in a enforcement action involving
Charles Schwab & Company. The FINRA enforcement department had brought an
action against Schwab challenging the company's new customer agreement in which
the customer was required to agree to arbitrate any disputes and waive any
ability to assert a claim by means of a judicial class action. The Hearing
Panel concluded that the agreement violated FINRA's rules. However, it also
concluded, in reliance on Concepcion, that the Rules are unenforceable
because they conflict with the Federal Arbitration Act. (The Hearing Panel did
find the agreement did violate the Rules by attempting to limit the powers of
FINRA arbitrators to consolidate individual claims in arbitration.) FINRA has
appealed the Hearing Panel ruling, but the Ruling does show the Concepcion
decision's significant impact.
And now, the question of the enforceability of
arbitration agreements is back before the U.S. Supreme Court again. On February
27, 2013, the Court heard oral argument in yet another case examining the
enforceability of arbitration agreements. The case is styled as American
Express v. Italian Colors Restaurant. Background regarding the case can be
The case involves a purported class action antitrust action filed by a group of
vendors against American Express in which the vendors allege 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 been procedurally complicated and the
specific decision on appeal to the Supreme Court represented the third separate
opinion by the Second Circuit in the case. In what as 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 individual
arbitrations would make the expert witness expense cost prohibitive.
As a Ballard Spahr law firm points out in a
memo about the case, the Third, Ninth and Eleventh Circuits disagree with
the Second Circuit on whether or not the "vindication of statutory rights"
theory is still viable in light of Concepcion. Those courts have found
that Concepcion requires the enforcement of a class action waiver
notwithstanding arguments that the plaintiffs would be unable to vindicate
their statutory rights without a class action because their claims were worth
less than the cost of litigating them.
The vendor plaintiffs' were represented before the
Supreme Court by former Solicitor General Paul Clement, who argued that it
would not make economic sense for the vendors to pursue their claims
individually because the costs of economic experts would be far in excess of
their individual damages, and thus they would be effectively precluded from
asserting their claims. As described in Daniel Fischer's account of the oral argument
in a February
27, 2013 Forbes article, the vendors' contentions "did not seem to
make much headway with the Justices." Even liberal Justice Stephen Breyer
expressed skepticism and lack of sympathy for the vendors.
The outcome of the pending Italian Colors case
remains to be seen. But if as seems likely the Supreme Court continues to
follow its now established pattern of supporting the enforceability of
arbitration clauses, it seems likely that the vendors' efforts to avoid AmEx's
arbitration clause, including the class action waiver, will fail. Of course,
until the Supreme Court issues its decision in the Italian Colors case
there is no way of knowing this for sure.
If American Express prevails in the Italian Colors
case and the Supreme Court holds that the class action wavier in the AmEx
customer agreement is enforceable, it raises the question of what may be next
in the Supreme Court's recognition of arbitration agreement and class action
waiver enforceability. In particular it raises the question (that Daniel
Fischer noted in his Forbes article) that the next step may be the
question of enforceability of arbitration requirements in corporate articles of
incorporation or by-laws.
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.
For now, the questions of whether or not an arbitration
clause in a corporate governance document would be enforceable will have to
await another day. If the Supreme Court follows the trend of its own cases and
upholds AmEx's class action waiver in the Italian Colors case, we can
certainly expect to see arbitration clauses with class action waivers
proliferating in commercial documents. Unless and until Congress intervenes,
arbitration provisions including class action waivers would likely become an
increasingly common provision of transaction documents. Whether AmEx will
prevail and whether that would lead to a test case involving articles of
incorporation ad corporate by-laws remain to be seen. Until things change, it
seems likely that we will all have to become increasingly more accustomed to
dispute resolution through arbitration.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
For more information about LexisNexis
products and solutions connect with us through our corporate site.