Marc J. Goldstein Arbitrator & Mediator NYC
February 03, 2009

Second Circuit Invalidates Arbitral Class Action Waiver

The U.S. Court of Appeals for the Second Circuit has held that a class action waiver in an arbitration clause that operates in practice to stifle prosecution of federal antitrust claims, violates public policy and therefore is invalid under the Federal Arbitration Act (“FAA”). In re American Express Merchants’ Litigation, 2009 U.S. Dist. LEXIS 1646 (2d Cir. Jan. 30, 2009).

Whether the decision will affect the economic balance between consumer products companies and their customers is difficult to predict. Consumer services companies have sought over the last decade to limit their exposure to class-wide damages judgments by requiring claims to be arbitrated in non-class, non-consolidated, individual actions. The plaintiffs’ bar has responded by challenging the enforceability of such arbitral class action waivers, often by asserting that they violate state law principles of unconscionability. Several federal courts have accepted this position and invalidated class action waivers on state law unconscionability grounds. The Second Circuit’s decision is perhaps the first to invalidate an arbitral class action waiver strictly on public policy grounds, without invoking common law unconscionability principles.

Section 2 of the FAA provides that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In holding that this contract violated Section 2, the decision highlights that the FAA inhibits as well as promotes agreements to arbitrate: It makes arbitration agreements no more enforceable than other contracts, and thus, their enforcement must be denied when general principles of contract invalidity (e.g. illegality, unconscionability, violation of public policy) so indicate.

Plaintiffs’ claims arose under the federal antitrust laws, alleging unlawful tying arrangements. The Court found that such claims were individually too small to litigate in view of the expense of prosecution relative to the amounts of individual damages. The class action waiver thus effectively immunized the corporate defendant from liability. Thus, the arbitral class action waiver operated, in this case, as a prospective waiver of the substantive rights to bring civil claims for treble damages under the antitrust laws.

Nearly 24 years have passed since the Supreme Court of the United States held, in the Mitsubishi case [Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985)] , that an agreement to arbitrate private civil damages claims under the federal antitrust laws was not rendered unenforceable under the FAA merely by virtue of the antitrust subject matter. Responding to and rejecting the contention that arbitration was inherently a procedure that would render prosecution of private antitrust claims ineffectual, the Supreme Court in a famous dictum in Mitsubishi stated that “in the event the choice-of-forum and chose-of-law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.”

The Second Circuit’s decision essentially elevates the Mitsubishi dictum to a rule of decision, applicable to the particular antitrust claims asserted in this case, and applicable by virtue of the very specific showing made by plaintiffs that individual claims would not be pursued in arbitration in light of the costs for legal representation and expert assistance.

By using violation of public policy, rather than unconscionability, as the basis in contract law for denying enforcement, the Court had no occasion to consider the relative size, sophistication, or bargaining power, of the plaintiff merchants, and also had no need to consider whether the merchants had a meaningful economic choice simply not to participate in American Express credit card programs. But those considerations will likely continue to be important when consumers challenge arbitral class action waivers in cellular phone, cable television, and other consumer services contexts – where the underlying claims of fraudulent or improper service fees are not necessarily imbued with the same public interest as claims under the federal antitrust laws.

Thus, it is difficult to predict whether the decision will result in more class arbitrations, or a shift away from arbitration by consumer services companies like AmEx. In this case, the Second Circuit has remanded to the District Court for further proceedings, only mentioning that American Express might elect to withdraw its motion to compel arbitration. In view of the difficulties of prosecuting federal antitrust claims without wide-ranging discovery from the adverse party and from non-parties, a defendant in the position of AmEx might continue see advantages to an arbitral forum even for class actions. The District Court might then have to decide whether the invalidated class action waiver is severable from the remainder of the arbitration clause, permitting AmEx to require plaintiffs to pursue their class claims in an arbitral forum.

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