Supreme Court Strictly Enforces a Class Action Waiver in an Arbitration Agreement
In American Express Co. v. Italian Colors Restaurant, ___ S. Ct. ___ (2013), the Court continued its recent trend of strictly enforcing the terms of arbitration agreements. In a 5-3 decision, penned by Justice Scalia, the Court held that a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act (FAA) even if the high cost of proving an individual claim in arbitration exceeds the plaintiff's potential recovery. The plaintiffs were merchants that had agreed with American Express to settle all disputes between the parties via arbitration. Nonetheless, the merchants sought to bring an antitrust class action under the Sherman Act premised upon alleged monopolistic credit card fees. In response, American Express invoked the arbitration clause. In resisting the referral to arbitration, the plaintiffs submitted a declaration from an economist who estimated that the cost of proving this antitrust claim would be at least several hundred thousand dollars, while the maximum recovery for an individual plaintiff would be at most approximately forty-thousand dollars. The plaintiffs argued that compelling individual arbitrations would effectively insulate American Express from recourse. The majority upheld the class waiver for three reasons. First, no contrary congressional command overrode the FAA's mandate that that arbitration agreements be "rigorously" enforced. Ultimately, "no legislation pursues its purposes at all costs," and class proceedings are the exception to the usual rule. The Court found no Congressional intent that the Sherman Act override the FAA. Second, the "effective vindication" judge-made exception does not guarantee class certification where an individual claim is prohibitively expensive. While the Court did recognize the exception, the Court refined its application, finding it inapplicable in this instant action. Finally, the Court held that an opposite holding would defeat the point of arbitration-a speedy resolution of claims. Allowing an exception based on the costs of individual litigation would require a court to determine the costs and merits of a suit on a claim-by-claim and theory-by-theory basis before referring a case to arbitration. The necessary costs and time required by such an approach would defeat the efficiency that arbitration offers. In response, the dissent expressed concern that "a monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse." In its view, the "effective vindication" rule bars enforcement of any term in an arbitration agreement that could "confer immunity from potentially meritorious federal claims," precisely what it believes is occurring here. Ultimately, the overarching theme of the majority opinion is that arbitration is a matter of contract, and, therefore, courts must rigorously enforce arbitration agreements according to their terms where the parties have freely agreed to them. This principle is not altered by the fact that the arbitration terms may make litigation more costly. In this opinion, the Supreme Court has significantly strengthened the power of a waiver of class arbitration contained in an arbitration agreement. For more information on consumer finance litigation topics, please contact one of the Burr & Forman team members for assistance. We are happy to answer any questions or concerns you may have.
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