Sunday, March 13, 2011

FYI: 2nd Cir Invalidates Class Action Waiver in Amex-Merchant Antitrust Litigation

 The U.S. Court of Appeals for the Second Circuit recently held that:  (1) the question of the enforceability of a class action waiver provision within a merchant card acceptance contract was properly decided by a court, rather than an arbitrator; and  (2) the class action waiver provision was unenforceable under the Federal Arbitration Act.  A copy of the opinion is attached.

Plaintiff merchants appealed a District Court decision granting Amex's motion to compel arbitration of a Card Acceptance Agreement pursuant to the Federal Arbitration Act ("FAA").  The agreement at issue contained a class action waiver provision which sought to preclude a signatory from either "litigating a claim in court" or "participat[ing] in a representative capacity or as a member of any class of claimants pertaining to any claim subject to arbitration." 

The Second Circuit reversed, holding that "the issue of the class action waiver's enforceability was a matter for the court, not the arbitrator" and that "the class action waiver in the Card Acceptance Agreement cannot be enforced in this case" because such enforcement would "grant Amex de facto immunity from antitrust liability by removing the plaintiffs' only [economically] feasible means of recovery."  Amex then appealed to the Supreme Court, which vacated the appellate decision and remanded for further consideration in light of Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010), which held that "a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."

On remand, the Court declined to accept Amex's argument that its previous decision could not stand in light of Stolt-Nielsen.  Although "Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so…[i]t does not follow…that a contractual clause barring class arbitration is per se enforceable," the Court ruled.

Explaining its holding, the Second Circuit first noted that Section 2 of the FAA, 9 U.S.C. § 2, provides that an agreement to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract" and thus that "Section 2 'create[s] a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the' FAA."  Further, "[c]lass action lawsuits are well-recognized by the Supreme Court as a vehicle for vindicating statutory rights," particularly where "the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action." 

In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Supreme Court ruled that "statutory claims may be the subject of an arbitration agreement… unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue."  However, the Court noted, in Gilmer, "a collective and perhaps a class action remedy was…available."  Conversely, in the instant case, the question is whether a "mandatory class action waiver in the [agreement] is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement of the waiver would be to preclude their…claims…in either an individual or collective capacity."

The Court noted that the Fourth Circuit previously ruled that a plaintiff could challenge "a class action waiver clause on the grounds that it would be a cost prohibitive method of enforcing a statutory right, provided that a plaintiff set forth sufficient proof to support such a finding." 

Similarly, the Court also noted that the Seventh Circuit previously ruled that "if a party could demonstrate that the prohibition on class actions likely would make arbitration prohibitively expensive, such a showing could invalidate an agreement." 

Finally, Court referenced Supreme Court dicta which states that "in the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party's right to pursue statutory remedies for antitrust violations," such an agreement would be contrary to public policy.

Thus, the Second Circuit ruled that "an agreement which in practice acts as a waiver of future liability under the federal antitrust statutes is void as a matter of public policy."  Further, the Court noted, the Supreme Court has previously ruled that "an agreement which confers even 'a partial immunity from civil liability for future violations' of the antitrust laws is inconsistent with the public interest."

Examining the record, the Court concluded that the "evidence before us establishes, as a matter of law, that the cost of plaintiffs' individually arbitrating their dispute with Amex would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws."  Because "Amex has brought no serious challenge to the plaintiffs' demonstration that their claims cannot reasonably be pursued as individual actions, whether in federal court or in arbitration," the Court concluded, "enforcement of the class action waiver in the [agreement] 'flatly ensures that no small merchant may challenge [Amex] under the federal antitrust laws.'" 

Thus, the Second Circuit ruled that, because the "class action waiver in this case precludes plaintiffs from enforcing their statutory rights, we find the arbitration provision unenforceable."

However, the Court noted, "two caveats… still apply."  First, "[o]ur decision relies…on the need for plaintiffs to have the opportunity to vindicate their statutory rights" – i.e., "the record demonstrates that the size of any potential recovery by an individual plaintiff will be too small to justify the expense of bringing an individual action."  Moreover, Court noted that "we do not conclude here that class action waivers in arbitration agreements are per se unenforceable [or that] they are per se unenforceable in the context of antitrust actions," but rather that "each case which presents a question of the enforceability of a class action waiver in an arbitration agreement must be considered on its own merits, governed with a healthy regard for the fact that the FAA 'is a congressional declaration of a liberal federal policy favoring arbitration agreements.'"


Ralph T. Wutscher
Kahrl Wutscher LLP
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