If there were ever an arbitration case ripening on the US Supreme Court’s certiorari vine for full judicial review, surely it is In re American Express Merchants Litigation, 667 F.3d 206 (2d Cir. Feb. 1, 2012), suggestion for rehearing en banc denied, 2012 WL 1918412 (2d Cir. May 29, 2012).
At issue is the validity of a class action waiver in the arbitration clause of Amex’s standard agreement with participating merchants. The basis for challenge to the validity of the waiver is that it is said to effectively prohibit the pursuit of federal statutory antitrust claims by the merchants against Amex. The Second Circuit’s initial panel decision in the case — which pre-dated the Supreme Court’s class arbitration decisions in Stolt-Nielsen and Concepcion — held that the effect of the clause was to make prosecution of the merchants’ federal antitrust claims economically untenable because the cost for expert assistance was so high that no single Claimant with a modest individual damages claim rationally would elect to bear that cost alone. (554 F.3d 300 (2d Cir. 2009)). Justice Sonia Sotomayor, then a Second Circuit Judge, was on the unanimous panel that issued the Circuit’s decision. The Court reasoned that a contract provision whose economic effect in practice is to foreclose vindication of a federal statutory right, violates public policy, and that whereas such illegality is a basis for non-enforcement of any contract, not just arbitration agreements, non-enforcement of the arbitration clause containing the class action waiver is permitted by the Federal Arbitration Act (Section 2 of which provides that arbitration clause shall be enforced “save upon such grounds as exist at law or in equity for the revocation of any contract.”)
The merchants took the case to the Supreme Court, which first decided Stolt-Nielsen and then vacated the Amex judgment and remanded the case to be reconsidered in light of Stolt-Nielsen. The panel — now two judges, Judge Sotomayor having been elevated — adhered to its original decision. (634 F.3d 187 (2d Cir. 2011). But before the Court issued its mandate, the Supreme Court decided Concepcion. The Second Circuit panel accepted further briefing, and then once again held the class action waiver to be unenforceable.
An active judge of the Court then requested a poll of all the judges on whether to rehear the case en banc (before all the judges) — with the result that there was “no majority favoring” en banc rehearing. But five judges of the court signed on to a written dissent from the order, led by the Chief Judge whose lengthy opinion forcefully argues that non-enforcement of the arbitration clause violates the FAA.
In very simplified terms, there are two issues. First, does the Supreme Court’s decision in Concepcion govern, because the “vindication of federal statutory rights” principle of public policy violation is arbitration-specific and therefore not a ground covered by FAA Section 2 “for the revocation of any contract”? (emphasis supplied). Second, viewing the “vindication of federal statutory rights” principle as a principle of federal common law of contracts, does the principle extend public policy violation to contracts which do not prohibit enforcement of federal statutory rights by legal proscription, but only inhibit enforcement of such rights through the economic logic of compliance with the contract?
Concepcion did not involve any claims under a federal statute. It involved common law claims of consumers against AT&T. A California common law rule of contract unconscionability held that a consumer contract of adhesion that made small consumer claims based on systematic fraud uneconomical to pursue, because they were required to be pursued individually and not on a class basis, was unconscionable. Whereas this was a special common law rule of unconscionability aimed at dispute resolution clauses, and was not a ground “for the revocation of any contract,” the Concepcion Court held that it did not fall within FAA Section 2’s category of permitted grounds for non-enforcement of an arbitration clause. The Court held that Section 2 does not cover contract defenses “that derive their meaning from the fact that at agreement to arbitrate is at issue,” and that California’s rule was such a rule even though it also applied to class action waivers in clauses selecting a judicial rather than arbitral forum. The Concepcion decision has bred controversy because of the majority opinion’s broader discussion positing that classwide arbitration is itself inconsistent with objectives of the FAA, at least when there is no specific contractual assent to it. That is quite evidently the perspective of the five Justices who subscribed to the majority opinion. But it was not the holding of the case.
Moreover, even if one reads Concepcion to hold broadly that state courts may not adopt common law rules that require classwide arbitration procedures in certain cases, that would not answer the question posed by the Amex case. Stated narrowly, in terms grounded in FAA Section 2, the question is whether the federal common law rule that a coercive waiver of substantive federal statutory rights violates public policy is a ground “for the revocation of any contract.” Stated more broadly, the question is whether federal courts, in enforcing agreements to arbitrate federal statutory claims as to which access to a judicial forum is provided in the statute, may require arbitration to allow procedures fundamentally necessary to vindication of the federal substantive right?
Perhaps the answer to each question ultimately depends on the same factual premise of the Amex Second Circuit decisions: that the very high cost of obtaining an expert economist’s report to support the tying arrangement claim at issue in Amex, given the small amount of damages sustained by any single merchant, made individual as opposed to class proceedings so inconceivable that Amex’s class action waiver amounted to a covenant not to sue. But one can imagine solutions to the Claimants’ cost problem short of invalidating the arbitration clause or the class waiver. Groups of Claimants might band together to bring consolidated, but not class, arbitration, and the question of consolidation would normally be one the arbitrators could decide in favor of the aggregated proceedings. And several such groups of Claimants could reach agreement to use, in their separate arbitrations, and to share the cost of, the same expert report. If that is a feasible solution — and I offer no view on whether it is or isn’t — then there could be considerable force to the argument that in the context of the Amex case, the class action waiver should not be equated with an explicit waiver of the right to sue for violation of the antitrust laws.
In all events, the Amex case will be closely watched for a forthcoming petition for certiorari, and, if review is granted, to the way in which the Supreme Court defines the issues in this potentially landmark case.