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In a ruling hailed as an important victory for employers, a divided U.S. Supreme Court ruled Thursday that class action waivers in arbitration agreements are enforceable.
The litigation in American Express Co. et al. v. Italian Colors Restaurant et al. was filed by merchants who alleged that New York-based American Express used its monopoly power in the credit card market to force merchants to accept credit card fees approximately 30% higher than those for competing credit cards, according to the ruling.
The merchants' agreement with American Express contained a clause that requires all disputes between the parties to be resolved by arbitration, but it excluded arbitrations on a class action basis, the high court said in its ruling.
American Express moved to compel arbitration under the Federal Arbitration Act. The merchants contended, however, that the cost of the expert analyses necessary to prove their antitrust claims would be “at least several hundred thousand dollars and might exceed $1 million,” according to the Supreme Court's ruling.
A federal judge granted American Express' motion to dismiss the case, but the 2nd U.S. Circuit Court of Appeals in New York reversed and remanded the case, holding that the merchants “would incur prohibitive costs if compelled to arbitrate under the class action waiver.”
In overturning the 2nd Circuit's ruling, the Supreme Court said Thursday in its 5-3 ruling that the text of the Federal Arbitration Act “reflects the overarching principle that arbitration is a matter of contract.”
“No contrary congressional command requires us to reject the waiver of class arbitration here,” said the majority opinion by Justice Antonin Scalia. “Respondents argue that requiring them to litigate their claims individually — as they contracted to do — would contravene the policies of the antitrust laws. But the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”
The opinion also cited the court's own 2011 ruling in AT&T Mobility L.L.C. v. Concepcion, where it held that arbitration agreements may contain a class action waiver.
“Truth to tell, our decision in AT&T Mobility all but resolves this case,” the court ruled. In that case, “we specifically rejected the argument that class arbitration was necessary to prosecute claims 'that might otherwise slip through the legal system.'”
“The regime established by the court of appeals' decision would require — before a plaintiff can be held to contractually agreed bilateral arbitration — that a federal court 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.
“Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in partial was meant to secure. The FAA does not sanction such a judicially created superstructure,” the court ruled.
The American Express ruling follows the Supreme Court's unanimous ruling earlier this month in Oxford Health Plans L.L.C. v. Sutter, in which it held that an arbitrator's holding survives the limited judicial review allowed under the Federal Arbitration Act.
Commenting on the ruling, Christin M. Choi, an associate with law firm Fisher & Phillips L.L.P. in Philadelphia, said that although the ruling rises out of the commercial context, it is an important decision for employers. Employers that have arbitration agreements “may want to consider viewing those arbitration agreements to see if they include class action waivers,” she said.
Subjecting employers to class action arbitration would be extremely expensive and could lead to arbitration agreements that “may or may not be” in line with relevant rules of evidence, she said. “It really opens up the process to a lot of uncertainty” for employers.
Precluding class action arbitration gives employers “more control over that process and ensures any claims that are being litigated are on an individual basis,” said Ms. Choi.
Michael D. Leffel, a partner with law firm Foley & Lardner L.L.P. in Madison, Wis., said that if the 2nd Circuit ruling had been upheld, it would have been very easy for employees to get out of arbitration agreements with class action waivers in their employment contracts “by simply arguing, 'It's too expensive to proceed by myself. I need to do this on a class action basis.' Then you raise the stakes” because “all of a sudden instead of an individual dispute resolving in streamlined arbitration with one employee, you're now facing a potential class action,” he said.