Saturday, February 4, 2012

FYI: 2nd Cir Refuses to Enforce Class Action Waiver in Commercial Antitrust Case

The U.S. Court of Appeals for the Second Circuit recently reaffirmed its prior holding that a class-action waiver provision in commercial agreements was unenforceable under the Federal Arbitration Act, because enforcement of the provision would effectively strip plaintiffs of their rights under federal antitrust laws.  A copy of the opinion is attached.
This appeal arose from long-running litigation involving a group of retail merchants that had entered into agreements with defendants American Express Company and American Express Travel Related Services Company (collectively, "Amex") to accept Amex charge cards.  Plaintiffs-merchants had filed a class-action lawsuit against Amex, claiming that Amex used tying arrangements in violation of federal antitrust statutes to force the merchants into accepting Amex's new line of credit and debit cards, thereby grossly inflating the fees the merchants paid Amex in connection with any customer purchases made with an Amex card.
Amex sought to compel arbitration, arguing that the arbitration clause in the merchant agreements prohibited class actions and required each merchant to resolve its dispute individually through binding arbitration.  The District Court had twice previously upheld the arbitration clause. 
Considering the case for the third time, the most recent in light of the Supreme Court's holding in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), that the Federal Arbitration Act ("FAA") preempted state law barring enforcement of class action waivers, the Second Circuit reaffirmed its prior holding that the arbitration clause in this particular case was unenforceable.
Previously in this litigation, the Second Circuit held that the mandatory arbitration clause prohibiting class actions was unenforceable because the high costs associated with antitrust cases precluded, as a practical matter, individual antitrust actions against Amex.  See In re American Express Merchants' Litigation, 554 F.3d 300 (2d Cir. 2009)("Amex I").  In so holding, the Second Circuit court noted that the FAA provides that an arbitration agreement is valid and enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract."  See 9 U.S.C. § 2.  Relying on Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), in which the Supreme Court observed that arbitration could potentially be so cost-prohibitive as to preclude vindication of federal statutory rights, the Second Circuit court examined the cost-benefit evidence presented by the merchant plaintiffs' expert economist.  The court concluded that, in view of the economic evidence in this particular case, the "fiscal impracticability" of individual actions against Amex would effectively preclude the merchants from vindicating their federal antitrust rights. 
Amex petitioned for a writ of certiorari, and, after granting Amex's petition, the Supreme Court vacated Amex I and remanded in light of its decision in Stolt-Nielsen, S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010).  In that opinion, the Supreme Court held that "a party may not be compelled under the FAA to submit claims to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."  Finding that the Stolt-Nielsen decision did not alter its analysis of the matter before it, the Second Circuit subsequently held again in In re American Express Merchants' Litigation, 634 F.3d 187 (2d Cir. 2011) ("Amex II"), that, in light of plaintiffs' evidence of the prohibitively high costs of individually arbitrating the disputes with Amex, the class-action waiver arbitration clause was unenforceable, as the clause operated to preclude the merchants from bringing federal antitrust claims against Amex, thus effectively shielding Amex from antitrust liability.
In this appeal, the Second Circuit stressed that neither Stolt-Neilsen nor Concepcion required that class-action waivers be deemed per se enforceable and further emphasized that each case must be assessed on its own merits.  In rejecting Amex's argument that Concepcion required reversal of its Amex II decision, the court observed that, while the Supreme Court's decision in Concepcion upheld the enforceability of arbitration agreements generally, Concepcion did not address the specific issue presented in this case and therefore was not controlling.  The court noted that the issue in Concepcion was "whether the FAA prohibits States from conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures" and that the Supreme Court did not specifically address the enforceability of an arbitration clause where plaintiffs can show "that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights." 
Referring to Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), which held that an arbitration agreement was enforceable "only 'so long as the prospective litigant may effectively vindicate its statutory cause of action in the arbitral forum,'" the Second Circuit noted the dicta in that case suggesting contractual provisions which operate as a prospective waiver of statutory rights for antitrust violations would likely be held to be unenforceable as against public policy.
The Court concluded that the plaintiffs demonstrated that enforcement of the arbitration clause would force them to incur exorbitant costs in pursuing their antitrust claims individually against Amex and, thus, effectively precluded them from bringing any antitrust actions against Amex. 
Accordingly, the court ruled that such an obstacle constituted an unenforceable bar to the plaintiffs' rights to bring federal antitrust claims.   The Court remanded the case with instructions to deny Amex's motion to compel arbitration.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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