“Too Darn Bad”: Class Action Waivers Are Enforceable in Arbitrations

In American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013), the Supreme Court held, by a five to three margin, that class action waivers are enforceable under the Federal Arbitration Act even if it was too expensive to pursue the antitrust claims in issue in the case in an individual action. Justice Scalia’s majority opinion ruled that “arbitration is a matter of contract,” and the fact that antitrust claims were involved did not make the contractual waiver contained in the defendant’s form agreement ineffective. Thus, “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”

While the plaintiff invoked the “judge-made exception” that permitted a court to strike down an agreement that prevents the “effective vindication” of a federal statutory right, Justice Scalia saw that exception as limited to an agreement that prevented “a party’s right to pursue statutory remedies,” not to one which makes it too expensive to do so. Thus, the doctrine “would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to an arbitration that are so high as to make access to the forum impracticable.”

The majority opinion also noted the administrative problems that would be caused if federal courts were called upon to determine whether to void a class action waiver because of the excessive expense that would be incurred in proving a particular claim outside of a class action. As Justice Scalia put it, “Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure.” 

In a dissenting opinion by Justice Elena Kagan, three justices would have none of this. As Justice Kagan put it, the majority’s position in a nutshell came down to “Too darn bad.” She pointed out that Italian Colors’ antitrust claim, even if trebled, was only worth less than $39,000, while an expert economist concluded that the requisite economic analysis would cost that plaintiff at least several hundred thousand dollars to obtain. The dissenters were also troubled by the fact that the same arbitration agreement prohibited any joinder or consolidation of claims, or even arranging for a joint expert report. Moreover, American Express refused to entertain any stipulations to lessen the need for the economic analysis.

All of these provisions combined, in the dissenters’ view, to put the plaintiff to a stark choice: “Spend way, way more money than your claim is worth, or relinquish your Sherman act rights.” This choice demonstrated to the dissenters that the arbitration agreement, as a whole — and not simply the class action waiver — prevented the effective vindication of Italian Colors’ Sherman Act rights.

Two key points emerge from an analysis of the opinions in American Express and in Oxford Health Plans (covered in our post of June 10). First, the Supreme Court has a five-member majority favoring the literal enforcement of arbitration agreements, including form agreements where no negotiation is possible. As such, what you sign will in fact bind you in almost all arbitration cases falling within the federal act.

Second, several justices, including most prominently, Justice Scalia, disfavor class actions generally. On this point, there is a telling sentence in the American Express majority opinion, in which Justice Scalia speaks of Rule 23 of the Rules of Civil Procedure as one which “imposes stringent requirements for certification that in practice exclude most claims.” Indeed, Justice Kagan spoke of “a Court bent on diminishing the usefulness of Rule 23,” to which “everything looks like a class action, ready to be dismantled.”

Both of these points pose formidable future challenges to plaintiffs in business litigation where the amount in controversy is modest. As a result, attempts to achieve a legislative solution may be expected in hopes to reverse these trends.

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