Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, November 12, 2012

Supreme Court Will Consider Challenge to Class Action Waivers on Federal Grounds

On Nov. 9 the Supreme Court granted certiorari to a case many have been following for years.  It raises the issue of whether class action waivers can be invalidated on federal grounds because plaintiffs have no effective individual remedy to vindicate a federal statutory right.  Last term the Court rejected a challenge to a class action waiver on state law unconscionability grounds in AT&T Mobility LLC v. Concepcion.

  • American Express Co. v. Italian Colors Restaurant, No. 12-133. Does the Federal Arbitration Act permit 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? The Second Circuit held that because the class action waiver in the contract between a group of plaintiff merchants and the defendant charge card service provider precluded the plaintiffs from enforcing their federal statutory right to bring antitrust claims, the arbitration provision was unenforceable.

By way of background, in its 2000 opinion, Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000),the Supreme Court stated that “it may well be that the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum.” The Second Circuit has been hostile toward class action waivers for this very reason. In its first opinion in In re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009), the Second Circuit held that a class action waiver was unenforceable because it would effectively preclude individual plaintiffs from vindicating their statutory rights under federal antitrust law, because of the high litigation costs and the small potential recovery. The court agreed with the plaintiffs that the class action waiver “flatly ensures that no small merchant may challenge American Express’s tying arrangements,” a troubling outcome because “private suits provide a significant supplement to the limited resources available to the Department of Justice for enforcing the antitrust laws and deterring violations.” Defendants sought certiorari before the Supreme Court, which granted the petition, vacated the decision, and remanded for reconsideration in light of Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010), in which the Court held that arbitrators exceeded their power under the FAA because they construed an arbitration clause in a shipping charter to permit class arbitration as a matter of public policy.  In its opinion on remand, which was decided prior to Concepcion, the Second Circuit affirmed its earlier decision, essentially finding that Stolt- Nielsen was not relevant:

While Stolt-Nielsen plainly rejects using public policy as a means for divining the parties’ intent, nothing in Stolt-Nielsen bars a court from using public policy to find contractual language void. We agree with plaintiffs that “[t]o infer from Stolt-Nielsen's narrow ruling on contractual construction that the Supreme Court meant to imply that an arbitration is valid and enforceable where, as a demonstrated factual matter, it prevents the effective vindication of federal rights would be to presume that the Stolt-Nielsen court meant to overrule or drastically limit its prior precedent.”

634 F.3d 187 (2d Cir. 2011).

After the Court's decision in Concepcion, the Second Circuit again considered the issue and determined that Concepcion did not alter its analysis, 667 F.3d 204 (2d Cir. 2012), which rests squarely on "a vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability."  Nothing in either Concepcion nor Stolt-Nielsen, asserted the Second Circuit, requires that all class-action waivers be deemed per se enforceable.  The Second Circuit declined to reconsider the case en banc, 681 F.3d 139, setting the stage for the showdown before the Supreme Court.

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