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October Term, 2012

June 20, 2013

Today the Supreme Court issued one decision, described below, of interest to the business community.

Federal Arbitration Act—Arbitration of Federal Statutory Claims

American Express Co. v. Italian Colors Restaurant, No. 12-133 (previously discussed in the November 9, 2012, Docket Report and on Mayer Brown’s Class Defense Blog)

The Supreme Court held today in American Express Co. v. Italian Colors Restaurant, No. 12-133, that parties who have agreed to resolve disputes by arbitration on an individual basis, rather than through class-action litigation, may not avoid their agreements by asserting that individual arbitration would be cost-prohibitive. The Court explained that this issue was “all but resolved” by its earlier decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which held that the Federal Arbitration Act (FAA) prohibits courts from refusing to enforce arbitration agreements on the ground that they do not provide for class actions. Mayer Brown represented AT&T Mobility in Concepcion and filed an amicus brief for the Chamber of Commerce of the United States of America and the Business Roundtable in American Express.

Justice Scalia authored the opinion for the Court, joined by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito. Justice Kagan dissented, joined by Justices Ginsburg and Breyer. Justice Sotomayor was recused, as she had been on a Second Circuit panel in an earlier iteration of the case.

The majority began by emphasizing that the FAA requires arbitration agreements to be rigorously enforced unless the FAA’s mandate has been overridden by a contrary congressional command. The plaintiffs in this case argued that it would be too costly to pursue their federal antitrust claims through individual arbitration because of the high expert-witness costs that they contended were necessary to prove their claims. But the Court observed that the federal antitrust laws “do not guarantee an affordable procedural path to the vindication of every claim,” nor do they command that class-action procedures be available notwithstanding the FAA’s requirement that arbitration agreements be enforced as written.

The Court went on to say that Federal Rule of Civil Procedure 23, which sets forth procedures for litigating class actions in federal court, does not establish an entitlement to class proceedings; nor could it, without abridging or modifying the substantive rights under the FAA to have arbitration agreements enforced. Allowing class procedures under Rule 23 to trump the FAA would, the majority explained, violate the Rules Enabling Act’s limitations on judicial rulemaking authority.

Finally, the Court also rejected the argument that language in prior opinions authorized courts to invalidate arbitration agreements with class waivers on the ground that they would prevent the “effective vindication” of federal statutory rights. As the Court explained, the language in those cases (Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614 (1985), and Green Tree Fin. Corp.-Ala. v. Randolph, 531 U. S. 79 (2000)), was dictum, and in any event the concerns with “effective vindication” were not implicated in American Express because “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.”

Justice Thomas filed a short concurrence. Joining the Court’s opinion in full, he added that he would also have rejected the decision below as contrary to the plain text of the FAA, which, in his view, authorizes courts to refuse to enforce arbitration agreements only if the plaintiff successfully challenges the formation of the agreement. Because the plaintiffs in American Express “voluntarily entered into a contract containing a bilateral arbitration provision,” Justice Thomas explained, they “cannot now escape its obligations merely because the claim [they] wish[] to bring might be economically infeasible” or because of other policy concerns that do not relate to “whether the contract was properly made.”

The dissent argued that the Court’s effective-vindication cases bar applying an arbitration agreement “when (but only when) it operates to confer immunity from potentially meritorious federal claims.” The dissent contended that American Express’s arbitration agreement did so because, for some plaintiffs, the costs of proving an antitrust claim were significantly greater than the damages at stake.

Significantly, the dissent recognized that “non-class options abound” for feasibly pursuing antitrust claims through arbitration. But, in Justice Kagan’s view, the confidentiality provision of American Express’s arbitration agreement precluded plaintiffs from spreading lawyer and expert-witness costs across multiple arbitrations, so the avenues for cost-sharing had been cut off. (By contrast, the majority opinion pointed out in a footnote that American Express denied that cost-sharing was unavailable, and the court of appeals had not come to that conclusion either.)

Today’s decision is highly significant for all businesses that include arbitration provisions in their agreements with customers or employees. In the time since Concepcion was decided, the plaintiffs’ bar has aggressively fought to limit or evade that decision by arguing that arbitration agreements should not be enforceable when the value of individual claims is small relative to the cost of proving each claim. American Express rejects those efforts and reaffirms Concepcion’s holding that agreements to arbitrate on an individual basis are fully enforceable as a matter of federal law.

To be sure, neither American Express nor Concepcion opens the door to unfair arbitration clauses. As the American Express court recognized, the language in Mitsubishi Motors addressing concerns with the “prospective waiver of a party’s right to pursue statutory remedies . . . would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” And the Court has previously noted that generally applicable state-law unconscionability principles can be applied to invalidate arbitration agreements. But American Express sends a clear message that regardless of whether plaintiffs’ substantive legal claims arise under federal or state law, courts cannot refuse to enforce arbitration agreements simply because they bar class actions.

Any questions about this case should be directed to Andrew J. Pincus (+1 202 263 3220) or Archis A. Parasharami (+1 202 263 3328) in our Washington office.

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