On Friday, November 9, 2012, the Supreme Court granted certiorari in American Express Company vs. Italian Colors Restaurant, No. 12-133 to address the following question: “Whether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.” As we predicted in February, the Supreme Court was likely to grant certiorari in American Express after the Second Circuit held, for the third time in the same case, that a class action waiver in an arbitration agreement between American Express and plaintiff merchants was unenforceable because it would effectively preclude plaintiffs from vindicating their federal statutory rights under the Sherman and Clayton Acts (plaintiffs are merchants alleging a Sherman Act tying claim against American Express for allegedly forcing merchants to accept American Express credit cards and debit cards as a condition of accepting American Express charge cards, at higher rates than competing credit cards and debit cards). See In re American Express Merchants’ Litigation, 667 F.3d 204 (2d Cir. 2012) ("AMEX III") (previously blogged at In re American Express Merchants’ Litigation – Plaintiffs Survive Three Rounds In The Second Circuit, But Can They Survive The Supreme Court?). To reach its decision, the Second Circuit had to bob and weave its way around three recent Supreme Court decisions all upholding the express terms of arbitration agreements under the Federal Arbitration Act (“FAA”): CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (2012) (holding that an arbitration agreement could be enforced in a case involving claims under the federal Credit Repair Organizations Act (CROA), because the CROA is silent on whether arbitration is permissible); AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (holding that a class action waiver in an arbitration agreement was enforceable because the FAA preempts state law); Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010) (holding that class arbitration cannot be imposed on parties that have not agreed to it). American Express will now become part of this line of cases.
In its Petition for Writ of Certiorari and Reply in support of the Petition, American Express asserted that the Second Circuit ignored and disregarded the Supreme Court’s recent decisions. It characterized AMEX III as creating a “sweeping, unwritten loophole” to the FAA. According to American Express, it makes no sense and would eviscerate Concepcion to hold that the FAA permits courts to ignore class action waivers in cases involving federal law claims but not state law claims, since it is not difficult for a plaintiff to “manufacture” a federal statutory claim. American Express also argued that the Second Circuit had misread and improperly expanded dicta from two earlier Supreme Court cases (Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90 (2000) and Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985)) regarding “effective vindication” of rights. According to American Express, neither case suggested that class arbitration could be imposed if plaintiffs simply proved that the cost of litigating an individual case exceeded the potential recovery or was otherwise “prohibitive,” which would give plaintiffs “an easy-to-follow roadmap . . . to invalidate literally millions of arbitration agreements nationwide.” Instead, Mitsubishi involved the choice of substantive antitrust law in arbitration, while Green Tree concerned excessive arbitration fees. American Express further noted that AMEX III not only conflicts with Supreme Court precedent, but also with other federal circuit court decisions. In particular, American Express cited a recent case involving federal claims against AT&T based on service agreements, Coneff v. AT&T Corp., 673 F.3d 1155 (9th Cir. 2012) where the Ninth Circuit upheld a class action waiver, holding that a class action was not the only economically feasible means for plaintiffs to effectively vindicate their federal statutory rights. See 673 F.3d at 1158-59 & n.3.
American Express’s position echoes the views of Second Circuit Court of Appeals Chief Judge Dennis Jacobs, who American Express cited in its Petition. On May 29, 2012, the Second Circuit denied rehearing en banc in AMEX III. See In re American Express Merchants’ Litigation, 681 F.3d 139 (2d Cir. 2012) (“AMEX IV”). In Judge Jacobs’ dissent, he described AMEX III as “a broad ruling that, in the hands of class action lawyers, can be used to challenge virtually every consumer arbitration agreement that contains a class-action waiver – and other arbitration agreements with such a clause.” AMEX IV, 681 F.3d at 143 (Jacobs, J. dissenting). Judge Jacobs also found AMEX III’s attempt to distinguish Concepcion as a case involving state law rather than federal law a “labored analysis” that “does not rise to a distinction.” Id. at 146.
Respondents argued that AMEX III correctly applied the “effective vindication” analysis set forth in Green Tree and Mitsubishi. Because respondents had proven that the cost of proving individual claims would “dwarf” each claimant’s possible recovery, the class action waivers were unenforceable. Respondents characterized the effective vindication principle as a “fundamental” principle that the Court had “repeatedly reaffirmed” in a number of decisions through the years. Respondents also noted that the effective vindication rule sets a very high bar, one that is “almost never met.” Respondents explained that AMEX III did not conflict with Concepcion, because Concepcion only addressed a conflict between the FAA and state law, not a conflict between the FAA and federal law. Moreover, Respondents asserted that since Concepcion, the trend has been to include “consumer-friendly” terms in arbitration agreements similar to those at issue in Concepcion, terms which are absent from the 8-year-old American Express arbitration agreement at issue. Respondents also distinguished Coneff as simply a case involving different facts. According to respondents, the Ninth Circuit applied the same law as the Second Circuit, but to different facts, when it held that the individual claimants in Coneff could effectively vindicate their rights without class procedures.
Many will likely be surprised if the Court decides that the class action waiver in American Express’s arbitration agreement is unenforceable. The Court’s recent decisions all seem to favor strictly enforcing the terms of arbitration agreements. In addition, the Court used broad language in Concepcion, holding that the purpose of the Federal Arbitration Act “is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” 131 S. Ct. at 1740. The Court in Concepcion also rejected the notion that “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.” Id. at 1753. On the other hand, Concepcion did not squarely address the enforceability of class action waivers in cases involving federal claims, and the Court’s earlier decisions in Green Tree and Mitsubishi may establish a potentially applicable exception to the enforceability of class action waivers when “effective vindication” of federal statutory rights is impossible without class procedures. Indeed, direct purchaser plaintiffs almost always rely on class procedures to effectively vindicate their rights under Sherman Act Section 1, where the disparity between individual damages and the cost to prove those damages is typically far greater than in other types of cases. At the very least, the Supreme Court’s decision in American Express will tell us whether American Express’s arbitration agreement is enforceable against the federal antitrust claims that have been asserted against it. But the Supreme Court also has the opportunity to render what may be its most important decision yet in the area of arbitration agreements and class action waivers, and clarify the scope of numerous earlier decisions, including Concepcion, Mitsubishi, and Green Tree, among others.