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June 26, 2013

Supreme Court Upholds Class Arbitration Waiver

On June 20, 2013, in American Express Co. v. Italian Colors Restaurant, No. 12-133, 570 U.S. __ (2013), the United States Supreme Court found that class action waivers were enforceable.  The Court held that the Federal Arbitration Act (“FAA”) does not allow courts to invalidate a contractual waiver of class arbitration solely because the cost of individually arbitrating a federal statutory claim exceeds the potential recovery.

American Express Co. v. Italian Colors Restaurant

In American Express Co. v. Italian Colors Restaurant, the respondents were merchants who accepted American Express cards as a form of payment.  Their contract with American Express and a wholly owned subsidiary contained an arbitration clause barring “any Claims [from being] arbitrated on a class action basis.”  After the merchants brought a class action against American Express for violations of federal antitrust laws, American Express moved to compel arbitration under their agreement.  The merchants challenged the viability of the arbitration clause because the cost of expert analysis to prove antitrust claims on an individual basis would far outweigh their potential gain.

The district court granted American Express’s motion to compel arbitration, but the court of appeals reversed, explaining that the cost-prohibitive nature of the merchants’ federal antitrust claims made the class action waiver unenforceable.  The Supreme Court vacated the judgment and remanded for reconsideration based on its decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp, 559 U.S. 662 (2010).  On remand, the court of appeals maintained its position. The Supreme Court granted certiorari a second time to consider whether the FAA permits courts to invalidate arbitration agreements because they do not permit class arbitration of a federal law claim.

The Supreme Court held that, under the FAA’s basic tenet that arbitration is a “matter of contract,” contracts barring class arbitration should be enforced as written when no “contrary congressional command” exists.  The decision stated neither United States antitrust laws nor the existence of Federal Rule of Civil Procedure 23, which delineates the class certification requirements, guarantee an affordable procedural path to the vindication of every claim or establish an entitlement to class proceedings.  The Court also rejected application of the “effective vindication” theory, reasoning that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”  Furthermore, class arbitration waivers only limit the number of parties arbitrating, and do not affect the parties’ rights to pursue their statutory remedy individually.

Employment Arbitration Agreements

The Court's decision confirms the importance and validity of contractual provisions addressing class arbitration.  To avoid class arbitration, Employers should consider including express waivers of class arbitration in relevant agreements.

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If you have any questions regarding the Italian Colors Restaurant decision or the enforcement of class arbitration waivers, please do not hesitate to contact us.