A case involving a class action arbitration waiver provision in American Express’s credit card contract with plaintiff store owners was denied a full rehearing by a majority of active judges on the Second Circuit. The judges instead stood by a panel decision that the Federal Arbitration Act (FAA) does not supersede the protections afforded to the plaintiffs under federal antitrust statutes, rendering the waiver provision unenforceable. The denial cemented a split with the Ninth Circuit, increasing the likelihood that the Supreme Court will review the case. (In re Am. Express Merchants’ Litig., No. 06-1871-cv (2d Cir. May 29, 2012).)
The antitrust litigation involved an arbitration clause through which American Express required plaintiff store owners to “honor all cards” it issues, to submit to individual arbitration, and to waive their right to a class action lawsuit. The plaintiffs argued that the “honor all cards” clause was an all-or-nothing mandate that forced them to accept all types of American Express cards or risk a loss of business from customers who used traditional American Express cards. This “tying arrangement” violated the antitrust provisions of Sherman Act at the same time the class action waiver deprived them of the only economically feasible means to recover damages for the violation, the plaintiffs argued.
In the first round of appeals (Amex I), the Second Circuit agreed with the plaintiffs, holding that the waiver provision would render individual arbitrations too expensive. The Supreme Court vacated that judgment in light of its decision in Stolt-Neilsen S.A. v. Animal Feeds International Corp., in which it held that there must be a contractual basis to demonstrate that a party agreed to submit to class arbitration. In Amex II, the Second Circuit reconsidered and reaffirmed its ruling. Shortly afterward, the Supreme Court decided AT&T Mobility LLC v. Concepcion, holding that the FAA preempted a state law that barred class action waivers as unconscionable.
The Second Circuit again reconsidered the case in light of Concepcion and, in a 2-0 decision issued last February, reaffirmed its conclusion in Amex III. Interpreting a line of Supreme Court cases that establish that an arbitration agreement may be invalidated if it is proven to be too expensive to implement—which it found was unaffected by Concepcion—the court reaffirmed its rejection of the class action waiver.
Amex III prompted an unidentified circuit judge to request a poll of the Second Circuit’s 13 active judges to decide whether the case should be reheard en banc. The court denied the request, noting that there was “no majority” in favor of en banc review. According to Rule 35 of the Federal Rules of Appellate Procedure, an en banc hearing or rehearing “is not favored and ordinarily will not be ordered” unless it is “necessary to secure or maintain uniformity of the court’s decisions” or “the proceeding involves a question of exceptional importance.”
Judge Rosemary Pooler, who was a member of the panel that decided Amex III, wrote the only opinion in support of the denial of a full rehearing. She concluded that “Amex III gives full effect to a long line of Supreme Court precedent preserving plaintiffs’ ability to vindicate federal statutory rights, rather than eviscerating more than 120 years of antitrust law by closing the courthouse door to all but the most well-funded plaintiffs.” She distinguished the case from Concepcion, which she said dealt with preemption rather than the “vindication of statutory rights analysis” at issue in Amex III.
Five judges dissented, including Chief Judge Dennis Jacobs, who wrote an opinion that was joined by José Cabranes and Debra Livingston. Jacobs contended that the case conflicted with Concepcion and created a split with the Ninth Circuit, which recently held in Coneff v. AT&T Corp. that the FAA preempted a Washington state law that banned class action waivers. Amex III “cannot be squared with the FAA,” wrote Jacobs, who also argued that the panel opinion “impairs the Federal Arbitration Act’s strong federal policy favoring the enforcement of arbitration agreements, and frustrates the goals of arbitration by multiplying claims, lawsuits, and attorneys’ fees.” He also chided the majority for distinguishing Concepcion through a “labored analysis” that treats it “as an obstacle to be surmounted or evaded.”
Writing separately, Cabranes observed that “this is one of those unusual cases where one can infer that the denial of en banc review can only be explained as a signal that the matter can and should be resolved by the Supreme Court.” In her dissent, Judge Reena Raggi contended that a full rehearing was necessary because of the circuit split the decision created. Judge Richard Wesley joined in her opinion.
Jennie Anderson, a San Francisco lawyer who represents plaintiffs in class action cases, said the decision was “fantastic news for consumers.” But the fact that five judges dissented indicates that judges are “really struggling” in their application of Concepcion, she said. “While there is reason to celebrate the decision, the battle over class action arbitration is far from over.”
Paul Bland, a senior attorney at Public Justice in Washington, D.C., agreed that the case was properly decided in light of the substantive rights at stake. "The Second Circuit's decision has to be correct,” he said. “The facts in this case are absolutely clear that if the arbitration clause is enforced, the small-business plaintiffs will lose all their substantive rights under the antitrust laws.”
John Vail, vice president and senior litigation counsel with the Center for Constitutional Litigation in Washington, D.C., characterized the majority opinion as reaffirming the overarching purpose of the civil justice system. “The Second Circuit found that enforcement of this arbitration clause would thwart enforcement of substantive law,” said Vail. “Our civil justice system often relies on private parties, litigating private disputes in public forums, to make our laws work. The Second Circuit said Congress thought that was more important than enforcing the arbitration clause here.”