The Supreme Court heard oral arguments last week about whether a class action waiver in an arbitration agreement is enforceable when the plaintiffs’ claims are too small to arbitrate individually, effectively barring them from vindicating their rights. The case took a surprising turn when American Express (Amex), the original defendant, seemed to change its previous arguments. (Am. Express Co. v. Italian Colors Rest., No. 12-133 (U.S. oral arg. Feb. 27, 2013).)
A class of store owners sued Amex, alleging the company violated the Sherman Act by forcing them into a “tying arrangement” that required them to honor all Amex cards, even the more costly ones, if they wanted to accept the charge cards most commonly used by customers. The merchants’ arbitration agreement with Amex included a class action waiver, and Amex moved to compel individual arbitration. The district court granted the motion, and the plaintiffs appealed to the Second Circuit, setting off years of appeals.
Initially, the Second Circuit agreed with the plaintiffs that allowing the class action waiver would preclude vindication of their statutory rights. The Supreme Court vacated that decision for reconsideration in the wake of Stolt-Nielsen S.A. v. AnimalFeeds International Corp., in which it held that class arbitration cannot be imposed on parties that do not agree to it. The Second Circuit reaffirmed its holding, but after the Court ruled in AT&T Mobility LLC v. Concepcion that the Federal Arbitration Act (FAA) preempted a state law that prohibited class action waivers as unconscionable, the Second Circuit again reconsidered. It then reaffirmed its holding that the waiver is unconstitutional.
Throughout the appeals process, Amex agreed with the plaintiffs that if the case were forced into arbitration, the plaintiffs would have no recourse because the cost of an expert report alone—estimated at between $300,000 and $1 million—was far greater than the $5,000 trebled damages any one merchant could recover. Further, the customer agreement had a confidentiality clause prohibiting disclosure of information obtained in arbitration, so each plaintiff would have to produce its own report. But Amex said it didn’t matter if the plaintiffs would lose their avenue of recourse because Concepcion rejected the “vindication of rights” doctrine in holding that a waiver is enforceable even if the individual claims would be too small to prosecute.
The Supreme Court granted certiorari on whether the FAA “permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.” But the merchants’ counsel felt the focus on the class action waiver itself was missing the point.
“The case isn’t about class actions. It is a referendum on whether there is any safety valve in the arbitration system,” said one of the class attorneys, Deepak Gupta of Washington, D.C. “Is there any mechanism for bringing these claims if everyone agrees that arbitration would deprive the plaintiffs of their ability to vindicate their statutory rights?”
Amex surprised lawyers involved in the case during the oral argument by proclaiming that not only was it fine with the plaintiffs sharing the cost of the expert report, but that—contrary to the Second Circuit’s findings—the confidentiality clause did not prevent each merchant from relying on the same report. Thus, there was no concern that the plaintiffs couldn’t afford to vindicate their rights.
“I think the argument in the case turned out to be a bit of a bait and switch,” said Paul Bland, a senior attorney at Public Justice in Washington, D.C., who wrote an amicus brief. “They ended up with the parties having litigated under one set of premises all along and suddenly changing direction and approaching the case from a completely different basis once they were in front of the Court.”
At the end of the argument, Justice Elena Kagan agreed, saying “people are saying different things about the confidentiality clause, and people may be saying different things about the necessity of an expert. It suggests that the premise on which this case was presented to us was not quite right.”
The new direction may have been a game changer because several justices seemed to focus on whether the plaintiffs could in fact vindicate their rights in arbitration, rather than on the doctrine itself. Chief Justice John Roberts speculated that a trade association could pay for the report, which could be used in individual arbitrations to win the first one, prompting settlements in the others. Justices Anthony Kennedy and Stephen Breyer questioned why the expert report would have to be that expensive when the parties could select an arbitrator who knew enough about antitrust law to not need an extensive report.
Breyer worried some plaintiff lawyers by questioning the vindication-of-rights doctrine, suggesting that “it’s an odd doctrine that just says, plaintiff by plaintiff, you can ignore an arbitration clause if you can get a case that’s expensive enough, and there we are.” But he also questioned whether there would be a way to send the case to arbitration but allow some of the “beneficial aspects of class actions.”
“I thought several justices made comments that show there is some possibility of a limited remand, that they’ll reverse part of it and send it down for the question whether or not the plaintiffs can really vindicate their claims. I don’t think there are five votes for no vindication of rights at all,” said Gupta, expressing cautious optimism.
Gupta noted that the government supported the merchants—it usually stays out of arbitration cases—and some congressional leaders have expressed skepticism that arbitration is a good solution in areas where “it’s the little guy versus the big guy.” “It puts the Court in an odd place because I think they understand it would be very hard for them to adopt Amex’s most extreme argument. If that were to happen, there’s a real possibility of congressional backlash,” he said.