The Supreme Court has definitively declared that contractual waivers of class arbitration are valid and enforceable even if the plaintiff’s cost of individually arbitrating a federal statutory claim would exceed the potential recovery. American Express Co. v. Italian Colors Restaurant, No. 12-133, 2013 WL 3064410 (June 20, 2013). Reversing the Second Circuit, the Court stated that its 2011 Concepcion decision “all but resolves” the invalidity of the so-called vindication of rights ground for avoiding class action waivers in arbitration agreements. Id. at *6.
The Italian Colors plaintiffs, merchants who accept American Express cards, sought to represent a class alleging that American Express forced upon them a tying arrangement in violation of Section 1 of the Sherman Act. Plaintiffs sought treble damages for the class under Section 4 of the Clayton Act. A district court granted American Express’s motion to compel individual arbitration. The Second Circuit reversed, holding the class action waiver in American Express’s arbitration agreement unenforceable because the plaintiffs would incur prohibitive costs if compelled to arbitrate their claims individually. The Second Circuit subsequently confirmed its conclusion two times, after Supreme Court remands with instructions to reconsider in light of, first, Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), and then AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (three times, if one counts the Second Circuit’s denial last year of rehearing en banc).
The Supreme Court flatly rejected the notion that the mere cost of litigation alone could be equated with the deprivation of a litigant’s statutory rights: “[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Italian Colors, at *5 (emphasis in original). The class action waiver does not eliminate the parties’ right to pursue their statutory remedy, but merely limits arbitration to the two contracting parties. Id.
The Supreme Court noted that “[n]o contrary congressional command [in the Sherman Act or the Clayton Act] requires us to reject the waiver of class arbitration here.” Id., at *4. Rather, Concepcion established “that the [Federal Arbitration Act’s (“FAA”)] command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims. . . . Accordingly, the FAA does . . . favor the absence of litigation when that is the consequence of a class-action waiver. . . .” Id. at *6 n.5. As Justice Kagan’s dissent characterizes the majority's opinion, “[t]oo darn bad.” Id. at *8.
The Court noted the involved judicial process that vindication of rights analysis would require: a court would have to “determine (and the parties litigate) the legal requirements for success on the merits claim-by-claim and theory-by-theory, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success.” Id. at *7. “Such a preliminary litigation hurdle” would undermine the goals of arbitration and the FAA. Id.
The Supreme Court did, however, offer some limited basis for argument that the vindication of statutory rights theory has not been totally annihilated: “it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” Id. at *5 (citing Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90 (2000)). Firms would be well advised to structure their arbitration provisions so that circumstance does not arise.
Italian Colors seems to seal the fate of federal and state court decisions that have declined to enforce arbitration agreements containing class action waivers on vindication of statutory rights grounds. Among those are two recently issued decisions by the Massachusetts Supreme Judicial Court: Feeney v. Dell Inc., 465 Mass. 470, 2013 WL 2479603 (June 12, 2013), and Machado v. System4 LLC, 465 Mass. 508, 2013 WL 2479604 (June 12, 2013). See our recent Client Alert, Massachusetts Supreme Judicial Court Enforces One Class Action Waiver, Squelches Another (June 18, 2013). If the vindication of statutory rights theory does not work when federal statutory rights are at stake, it certainly has no traction with respect to state statutory rights or policies. Also, Italian Colors may provide some additional support and comfort to Charles Schwab & Co. in its defense before the Financial Industry Regulatory Authority’s (“FINRA”) National Adjudicatory Council of a FINRA disciplinary panel’s decision earlier this year not to sanction Schwab for inserting a class action waiver in its customer arbitration provisions.
The Italian Colors decision will undoubtedly engender increased pressure from class action advocates and arbitration opponents on, e.g., the Consumer Financial Protection Bureau (“CFPB”) and the Securities and Exchange Commission (“SEC”) to complete their studies of predispute arbitration provisions and to issue regulations forbidding them in the financial services and securities industries, respectively, and will renew petitions to Congress to pass the Arbitration Fairness Act.
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This article was originally published by Bingham McCutchen LLP.