Last month, the Second Circuit—for the third time, no less—struck down a class arbitration waiver in American Express’ card acceptance agreement with merchants. The latest decision, however, is particularly striking given that it follows, and vigorously distinguishes, the Supreme Court’s opinion last spring in AT&T Mobility v. Concepcion. Will the Supreme Court, whose previous opinions on the subject have twice caused the Second Circuit to revisit its original decision, take this opportunity to weigh in yet again on class arbitration? If not, how do businesses—and courts--navigate the two decisions?
Unlike Concepcion, which involved fraud and false advertising claims under California law, In re American Express Merchants’ Litigation is a federal antitrust case. The plaintiffs allege that American Express’ requirement that merchants honor all American Express cards—both charge cards and credit cards—constitutes a tying arrangement in violation of the Sherman Act. American Express’ card acceptance agreement with the merchants, however, both (i) permits either party to elect arbitration and (ii) prohibits classwide arbitration. Thus, by electing arbitration, American Express can force merchants to adjudicate their claims on an individual basis.
After the Second Circuit first held the arbitration waiver invalid (“Amex I”), the Supreme Court remanded the case for reconsideration in light of the Supreme Court decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. Stolt-Nielsen involved an arbitration clause that was silent on class arbitration, and the Court held that the Federal Arbitration Act prohibits compelling a party to submit to class arbitration unless there is contractual evidence that the party agreed to do so. On remand, the Second Circuit (“Amex II”) concluded that since the American Express contract was not silent, but expressly banned class arbitration, Stolt-Nielsen did not change the original Amex I analysis. So far, so good.
While the Amex II mandate was on hold, however, Concepcion was decided, and the Second Circuit requested further briefing. Earlier this month (“Amex III”), the Second Circuit held that Concepcion, like Stolt-Nielsen, was inapplicable. The court’s effort to distinguish Concepcion, however, is far more troubling—if not from a legal perspective, then at least from a practical perspective.
In Concepcion, the plaintiffs—consumers challenging a class arbitration waiver in their cellular telephone contract—sought to invoke a California common law rule holding that arbitration clauses containing class waivers are unconscionable in consumer contracts of adhesion, where individual damages are small. The Supreme Court held that this rule was preempted by the FAA’s general protection of arbitration clauses.
In light of this holding, doesn’t the FAA protect the American Express arbitration clause, class waiver or no class waiver? Not according to the Second Circuit. In AmEx III, the court held that the American Express class arbitration waiver could be unenforceable if “the practical effect of enforcement would be to preclude [plaintiffs’] ability to vindicate their federal statutory rights.” The panel went on to hold that the plaintiffs’ economic expert had demonstrated, as a matter of law, that the cost of the plaintiffs’ individually arbitrating their disputes with American Express would be prohibitive, such that the class arbitration waiver had the effect of precluding their rights under the federal antitrust laws. Accordingly, since enforcing the arbitration clause would impermissibly force the plaintiffs into individual arbitrations, the Second Circuit held the arbitration clause unenforceable.
At first glance, the Second Circuit’s opinion, in light of Concepcion, is a head-scratcher. The plaintiffs’ economist opined that the median volume merchant would sustain damages of approximately $5,300 after trebling. While such a small amount surely would render individual arbitration cost-prohibitive, individual arbitration would have been even less feasible in Concepcion, where the named plaintiffs’ damages were a mere $30.22. Moreover, the AmEx plaintiffs were businesses—albeit small ones—while the Concepcion plaintiffs were individual consumers. Why was the Second Circuit concerned with the practical preclusion of the American Express merchants’ ability to enforce their rights, when the Supreme Court in Concepcion allowed a class arbitration waiver to preclude AT&T Mobility customers from enforcing theirs?
The answer, apparently, is that AmEx, unlike Concepcion, was brought under a federal statute. “Concepcion plainly offers a path for analyzing whether a state contract law is preempted by the FAA,” wrote Judge Rosemary S. Pooler, who authored the Second Circuit opinion for a two-judge panel. (Sonia Sotomayor had been the third member prior to her elevation to the Supreme Court.) “Here, however, our holding rests squarely on a vindication of statutory rights analysis, which is part of the federal substantive law of arbitration.” (Emphases added; internal quotations omitted.) In this case, the court held that “[e]radicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statutes.”
Thus, under AmEx III, a class arbitration waiver will be invalid if it precludes plaintiffs from bringing a federal statutory claim, but not if it merely precludes them from bringing a state law claim. Will this distinction merit, and survive, Supreme Court review? Justice Scalia’s majority opinion in Concepcion had some choice words for class arbitration as a concept, calling arbitration “poorly suited to the higher stakes of class litigation.” Would the Concepcion majority uphold the invalidation of a company’s arbitration clause merely because it requires those who do business with the company to waive this “poorly suited” mechanism in a federal statutory suit?
Perhaps it will, given that the FAA’s preemption of state laws does not apply to other federal statutes. But reconciling Concepcion and AmEx III could lead to some strange results. Class counsel, who frequently find themselves fighting removal under CAFA on diversity grounds, would now have an incentive to invoke a federal question when litigating under contracts with class arbitration waivers. Meanwhile, dismissing federal claims prior to class certification could become critical for defendants. And if they are unable to do so, will courts, when asked to enforce class arbitration waivers on motions to compel arbitration, be required to evaluate the true federal nature of the claim in order to determine whether the waiver is valid?
Finally, the question remains as to how businesses can rely on class arbitration waivers with any certainty if the validity of the waiver will depend on the nature of the plaintiff’s claim. In AmEx III, the remedy imposed by the Second Circuit was not to order class arbitration, since to order American Express to submit to this procedure would have violated Stolt-Nielsen. Instead, the Second Circuit struck down the entire arbitration clause and permitted the plaintiffs to litigate the matter as a judicial class action. Thus, businesses who incorporate class arbitration waivers into their contracts may immunize themselves against class proceedings based in state law, but risk forfeiting arbitration altogether if the claim is brought under federal law.
Companies need not be in a hurry to amend their class arbitration waivers. If a class action is filed under state law, Concepcion will ensure the likely preemption of any state law limiting enforceability, and the waiver will be upheld. If a class action is filed under federal law, the defendant will be forced to litigate the class action, just as it would if there had been no class arbitration waiver. Nevertheless, the questionable enforceability of the waiver, and its potential impact on both sides’ litigation strategy, might lead some to wonder whether Concepcion and AmEx III, read together, create an optimal rule—let alone one that is likely to endure.