Class Action Arbitration Waiver Rejected By Federal Appellate Court

Second Circuit sidesteps Concepcion and holds that the ability to enforce federal statutory rights mandates that a plaintiff be allowed to pursue a class action in court notwithstanding the parties' agreement to mandatory arbitration.

Just when it appeared that the U.S. Supreme Court's recent series of arbitration decisions had firmly established that class action waivers in arbitration clauses are enforceable, in a closely watched case the U.S. Court of Appeals for the Second Circuit held on February 1 that an arbitration clause is void if individual arbitration would make it financially unfeasible for a plaintiff to vindicate federal statutory rights. The decision in In re American Express Merchants' Litigation, No. 06-1871, — F.3d —(2d Cir. Feb. 1, 2012)—the Second Circuit's third rejection of the arbitration clause in this case in just over three years—is in marked contrast to the series of recent decisions by the Supreme Court enforcing the express terms of arbitration agreements consistent with the Federal Arbitration Act's liberal policy favoring arbitration. The decision in American Express will likely be reviewed by the Supreme Court and raises a number of important questions for businesses that have attempted to reduce their litigation expense though mandatory arbitration programs.

Background

In 2003, several California- and New York-based merchants, as well as a national trade association representing independently owned supermarkets, brought a series of class action lawsuits contending that American Express charged exorbitant "merchant discount fees" for new credit card products, forcing merchants to pay the same fees for credit card purchases as for purchases made with the more traditional (and allegedly more profitable) charge cards. The plaintiffs alleged that, because of American Express's market power, the requirement that merchants pay the same fees for all American Express card transactions was an illegal "tying arrangement" in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1.

Each member of the proposed class had previously executed a Card Acceptance Agreement with American Express containing a mandatory arbitration clause. The arbitration clause precluded a merchant from litigating in court or participating as a representative or member of any class of claimants pertaining to claims against American Express.

The district court granted American Express's motion to compel arbitration, holding that the issue of enforcing the class action waiver was for the arbitrator to resolve. In dicta, the district court also rejected the plaintiffs' contention that the costs of bringing individual claims would effectively strip the plaintiffs of their ability to bring small dollar-value claims (averaging only $5,000 in this case). Notably, the plaintiffs submitted an affidavit from an expert witness that the cost of performing an economic study of the type needed to support the plaintiffs' antitrust claims would be at least hundreds of thousands of dollars.

Prior Rulings of the Second Circuit

Following the district court's order compelling arbitration, the plaintiffs appealed. The Second Circuit reversed, holding that the plaintiffs' challenge to the enforcement of the arbitration clause raised a question of arbitrability, which under Supreme Court precedent was to be resolved by the court as opposed to by the arbitrator. In re American Express Merchants' Litig...