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June 2013

U.S. Supreme Court Upholds Contractual Waiver of Class Arbitration Over Concerns About Prohibitive Costs of Individual Claims

In American Express Co. v. Italian Colors Restaurant, the U.S. Supreme Court continued its trend of strictly enforcing the terms of arbitration agreements, this time holding that a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act (FAA) even if individual claimants are unlikely to pursue their individual claims given the prohibitive cost to do so compared to the potential recovery.

American Express’s arbitration agreement with merchants who accept American Express cards contained a class arbitration waiver. The merchants nonetheless filed a class action against American Express in federal court, alleging antitrust violations. The merchants claimed that American Express violated Section 1 of the Sherman Act and sought treble damages for the putative class under Section 4 of the Clayton Act. American Express moved to compel individual arbitrations, citing the terms of the arbitration agreement. The merchants opposed, arguing that the cost of expert analysis required to prove the antitrust claims would far exceed an individual plaintiff's maximum potential recovery.

The district court granted American Express's motion to compel arbitration and dismissed the case. The Second Circuit Court of Appeals reversed, however, citing the prohibitive costs of an individual pursuing his or her claim, and holding that the class waiver was unenforceable.

In a 5-3 ruling, the Supreme Court reversed the appellate court. (Justice Sotomayor recused herself for the reason that she sat on the Second Circuit panel that originally decided the case.) The majority endorsed the district court's original order compelling individual arbitrations. The Court held that the class arbitration waiver was enforceable and could not be invalidated despite the high cost of individually proving the merchants’ antitrust claims against American Express.

The majority reasoned that no rule of law overcomes the FAA's mandate that arbitration agreements are to be “rigorously enforced” according to their terms. Further, the “effective vindication” exception does not guarantee class arbitration simply because an individual claim is expensive to prove. On a similar note, the Court wrote that a contrary holding would effectively preclude speedy resolution of claims because in each case courts could have to preliminarily determine the costs of proving claims compared to the potential damages.

Going forward, this ruling provides authority for courts to treat class arbitration waivers as ironclad – even when there is a claimed inordinate cost to pursue claims individually.

To read the Court’s opinion, click here.

Commercial Litigation

Kimberly D. Howatt

Commercial Litigation