The Second Circuit reaffirmed its decision in In re American Express Merchants’ Litigation, 634 F.3d 187 (2d Cir. 2011) (Amex II) that the class action waiver provision contained in the contracts between American Express and merchants is unenforceable under the Federal Arbitration Act (FAA), because enforcement of the clause would as a practical matter preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs. The Second Circuit ruled that the U.S. Supreme Court’s recent opinion in AT&T Mobility v. Concepcion did not alter its analysis. In re American Express Merchants’ Litigation (Amex III) (2d Cir. Feb. 1, 2012).
The Second Circuit has now issued three opinions on this question, necessitated by recent Supreme Court pronouncements. In Amex I, 554 F.3d 300 (2d Cir. 2009), the court considered the enforcement of a mandatory arbitration clause in a commercial contract that also contained a class action waiver and determined that it was unenforceable. The court reasoned that the high costs of litigating an antitrust claim ruled out individual claims and meant that without a class action, plaintiffs would have no remedy.
The Supreme Court granted Amex’s petition for certiorari and vacated and remanded in light of its decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), which held that parties could not be compelled to submit to class arbitration unless they agreed to it. In Amex II, the Second Circuit found that Stolt-Nielsen did not affect its original analysis, since the court acknowledged that it could not, and thus were not, ordering the parties to participate in class arbitration. After Amex II, the court placed a hold on its mandate in order for Amex to file a petition for certiorari. While the mandate was on hold, the Supreme Court issued Concepcion, which held that the FAA preempted a California law barring enforcement of class action waivers in consumer contracts. The Second Circuit then sua sponte considered rehearing in light of Concepcion, and parties submitted supplemental briefing on the question.
In Amex III, the Second Circuit, in response to Amex’s argument that Concepcion applies and requires reversal, observes that:
“[I]t is tempting to give both Concepcion and Stolt-Nielsen such a facile reading, and find that the cases render class arbitration waivers per se enforceable. But a careful reading of the cases demonstrates that neither one addresses the issue presented here: whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.”
“Concepcion plainly offers a path for analyzing whether a state contract law is preempted by the FAA. Here, however, our holding rests squarely on a ‘vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability’.”
Accordingly, since Concepcion and Stolt-Nielsen do not answer the question, the Second Circuit looked for guidance in other Supreme Court decisions addressing the issue of vindicating federal statutory rights in arbitration. The court begins its analysis with precedent acknowledging the importance of class actions in vindicating statutory rights and then proceeds to a discussion of arbitration, also recognized as an effective vehicle for vindicating statutory rights, so long as the litigant can effectively vindicate its statutory cause of action in arbitration (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.) Most recently, in Green Tree Financial Corp. – Alabama v. Randolph, 531 U.S. 79 (2000), the Supreme Court acknowledged in dicta “that the existence of large arbitration costs could preclude a litigation…from effectively vindicating her federal statutory rights in the arbitral forum.”
Because neither Stolt-Nielsen nor Concepcion overrules Mitsubishi and neither even mentions Green Tree, the Second Circuit, in Amex III, reaffirms its earlier analysis in Amex II: because plaintiffs’ expert evidence establishes as a matter of law that the cost of plaintiffs’ individually arbitrating their disputes with Amex would be prohibitive, the effect of enforcing the class action waiver is to ensure that the merchants could not challenge Amex’s tying arrangements under antitrust laws. Accordingly, the clause is unenforceable under the FAA. The court made clear that each class action waiver must be considered on its own merits, based on its own record and “governed with a healthy regard for the fact that the FAA “is a congressional declaration of a liberal federal policy favoring arbitration agreements.”