Supreme Court Approves Class-Action Arbitration Waiver, Rejects Argument that Individuals Will Not Have Financial Incentive and Capacity to Prove Claims

In a significant victory for businesses and employers, the U.S. Supreme Court ruled on June 20, 2013, that a class-action waiver in an arbitration agreement is valid and enforceable under the Federal Arbitration Act (FAA) even if the costs of prosecuting the claim on an individual basis are financially impracticable. The majority based its ruling on two findings: first, that the federal statute at issue did not expressly override the FAA’s preference for enforcing private arbitration agreements as written and, second, that the financial burdens imposed on individual claimants did not require application of the “effective vindication” rule, which permits courts to invalidate arbitration agreements that prevent a party from effectively pursuing a remedy provided by federal law.

In short, the Court determined that waiving the right to prosecute a claim on a class-wide basis, with multiple parties sharing the financial burdens, is not the same as waiving the right to the claim itself, the latter of which would be impermissible under the FAA. “The fact that it is not worth the expense involved in proving a statutory remedy,” Justice Scalia wrote for the majority, “does not constitute the elimination of the right to pursue that remedy.” The decision opens the door for businesses and employers to expand their use of class-action waivers in their arbitration agreements as they pertain to other federal claims.

In American Express Co. et al v. Italian Colors Restaurant et al., Case No. 12-133 (June 20, 2013), a group of merchants each separately signed a commercial arbitration agreement with a credit card company that required arbitration of claims but provided that such arbitration would be unavailable “on a class basis.” Despite the agreement, the merchants filed a class-action suit against the company alleging violations of federal antitrust laws, and the company responded with a motion to compel individual arbitration of the claims. The merchants, in turn, argued that the agreements that they signed were unenforceable under the FAA. Their theory was that the burdensome costs of individual arbitration effectively denied them the right to their federal antitrust remedy. They alleged that proving a claim would require expensive expert analysis and cost several hundred thousand dollars, and that each claimant would stand to be awarded about $40,000 at most. The U.S. Second Circuit Court of Appeals agreed with the merchants, finding that the arbitration agreements were invalid under the FAA due to the “prohibitive costs” that they imposed and that the class-action suit therefore should go forward. The credit card company appealed.

In a 5-3 decision, the Supreme Court reversed the Second Circuit’s decision and upheld the arbitration agreements. Justice Scalia, writing for the majority, began by noting that the FAA was designed by Congress to ensure that arbitration remains “a matter of contract.” Therefore, the majority observed, courts are compelled to “rigorously enforce” parties’ private arbitration agreements, with just two exceptions: where a separate federal statute expressly overrides the FAA and where an arbitration agreement is so restrictive that it prevents “effective vindication” of a federal cause of action.

The majority found that neither exception applied in this case. First, the justices found that the federal antitrust statutes at issue — the Sherman and Clayton Acts — contained no express intention on the part of Congress to override the FAA’s “usual rule” favoring private agreements. It, therefore, would be “remarkable for a court to erase that expectation,” Justice Scalia wrote. Second, the majority found no basis to conclude that the “effective vindication” of a federal statutory right was being prevented in this case. That exception, Justice Scalia wrote, “would certainly cover a provision ... forbidding the assertion of certain statutory rights” and would “perhaps” cover a situation in which filing and administrative fees “make access to the forum impracticable.”  But a class-action waiver such as the one in this case “merely limits arbitration to the two contracting parties,” he concluded, and does not cut off access to the forum itself. Thus, notwithstanding any financial burdens for an individual claimant, a class-action waiver is permissible and does not prevent “effective vindication” of a federal claim.

The Italian Colors decision provides a new tool for employers and businesses as they draft arbitration agreements. Provided that an agreement does not require express waiver of federal rights or create unreasonable barriers to prosecuting a claim in the arbitration forum, a provision such as a class-action waiver is valid and enforceable. The argument that individual employees or customers would not have the financial incentive or capability to prove their federal claims individually is not sufficient to invalidate such provisions, which now may be applied to class waivers regarding some federal discrimination and employment-related statutes. Hinshaw will continue to monitor this case as it is developed in the lower federal courts.