Written by Stanley A. Camhi
On June 20, 2013, the United States Supreme Court affirmed the viability of arbitration waiver clauses which preclude arbitrating claims on a class action basis even when the plaintiff’s cost of individually arbitrating the claim far exceeds the potential recovery.
In American Express v. Italian Colors Restaurant, merchants who accept American Express credit cards challenged a provision in their agreement with American Express which provided that “[t]here shall be no right or authority for any claims to be arbitrated on a class action basis.” The merchants asserted that American Express had used its monopoly power in the marketplace to force them to accept credit cards at rates 30% higher than fees for competing cards and commenced a class action challenging the fees as a violation the Federal antitrust laws. American Express moved to compel individual arbitrations citing the clause in its arbitration agreement with the merchants in which they waived class actions.
The merchants opposed the motion arguing that the clause was unenforceable because the costs would be prohibitive if they were not able to proceed as a class action, producing evidence that the cost to prove the antitrust claim could exceed $1 million even though the maximum recovery an individual merchant might expect was between $12,850 and $38,549.
The specific issue before the Court was “whether the Federal Arbitration Act permits courts . . . to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim.” The Court noted that the text of 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.” The Court also found that there was nothing in the antitrust laws themselves which evidenced a Congressional intent to preclude waivers of class actions in such cases.
In reaching its conclusion that the provision was valid, the Court rejected the merchants’ argument that the provision was unenforceable because it “prevents the ‘effective vindication’ of a federal statutory right,” since they would have “no economic incentive” to pursue the antitrust claims individually in arbitration. In doing so, the Court distinguished its prior decisions which invalidated waiver clauses in an arbitration agreements on public policy grounds because they prospectively waived a party’s right to pursue a statutory remedy. The Court found that was not the situation presented by this case noting “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.”
While the Court’s decision was in the context of a commercial dispute asserting alleged violation of Federal antitrust laws, the holding and the Court view of class action waivers in arbitration agreements has potential application in a variety of other areas including wage and hour collective actions under the Fair Labor Standards Act and employment discrimination cases. Arbitration agreements with class action waivers may provide a potent tool for employers to foreclose the possibility of having to defend against a class action.
Please contact us if you have any questions regarding this recent development in the law and how it affects your business.