• The Supreme Court Decision Confirming that Arbitration Agreements with Class Action Waivers are Enforceable
  • November 8, 2013 | Authors: Kathleen Hopkins Alsina; Jane R. Goldsmith
  • Law Firms: Phelps Dunbar LLP - Houston Office ; Phelps Dunbar LLP - Baton Rouge Office
  • In American Express Co. v. Italian Colors Restaurant, No. 12-133 (U.S. June 20, 2013), merchants filed a class action suit against American Express under the antitrust laws. The American Express motion to compel arbitration was granted and the underlying claims were dismissed. The plaintiff merchants appealed.

    The arbitration agreement at issue provides that there “shall be no right or authority for any Claims to be arbitrated on a class action basis.” The plaintiff merchants attempted to avoid arbitration by arguing that the “effective vindication” exception to the Federal Arbitration Act (“FAA”) applied. Specifically, the plaintiffs argued that individual arbitration would prevent them from having an opportunity to “vindicate” their rights under federal antitrust law due to the relatively low payoff and the expense in arbitrating those claims on an individual basis. The Second Circuit agreed with the plaintiffs, concluding that the arbitration provision was unenforceable because the plaintiffs would incur prohibitive costs if compelled to arbitrate. The Supreme Court disagreed with the Second Circuit and rejected the plaintiffs’ argument in a decision that has implications for companies that utilize arbitration provisions.

    The Supreme Court ruled that the “effective vindication” exception applied only where the arbitration agreement acts as a prospective waiver of a party’s right to pursue statutory remedies. “[A]n arbitration agreement forbidding the assertion of certain statutory rights” would be within the exception. The Supreme Court also stated that the effective vindication exception could “perhaps” cover filing and administrative fees that are so high as to make access to the forum impracticable. “[T]he 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.” As a result, the Supreme Court held that the effective vindication exception did not apply, reversing the Second Circuit’s decision invalidating the arbitration agreement.

    The dissenting Justices believed that the effective vindication rule applied, and stated that "[i]f the arbitration clause is enforceable, American Express has insulated itself from antitrust liability — even if it has in fact violated the law." The dissent said that the effective vindication rule was created for cases where a defendant is alleged to use its authority to force arbitration provision on individuals that would "make pursuit of the antitrust claim a fool's errand."

    This case is instructive for companies wanting to limit their potential for class actions. Companies may want to consider updating their arbitration agreements in light of this decision.