It comes as no surprise that the United States Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013) is being hailed as a victory by class action defendants. The 5-3 decision authored by Justice Scalia held that a class-action waiver contained in an arbitration clause cannot be invalidated on the ground that the cost to a given plaintiff of proceeding individually on a federal statutory claim would far outstrip the possible recovery to that plaintiff. The Italian Colors decision comes on the heels of the Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act (“FAA”) pre-empted a state law barring enforcement of a class-action waiver in an arbitration clause. Whereas Concepcion affirmed the enforceability of class-action waivers, Italian Colors appears to make them virtually unassailable.
The arbitration provision at issue in the Italian Colors case appeared in a form contract between American Express and merchants that accept American Express credit cards and stated that there “shall be no right or authority for any Claims to be arbitrated on a class action basis.” A group of merchants nevertheless filed a class action against American Express claiming that it had violated the federal antitrust statutes by using its monopoly power to charge the merchants excessive fees on credit card transactions. In response to American Express’s motion to compel individual arbitration of these claims under the FAA, the merchants argued that the cost of proceeding individually on their antitrust claims (estimated by an economist to be at least several hundred thousand dollars based on the need for expert analysis) would far exceed the maximum individual recovery (estimated at less than $40,000). The district court rejected this argument and dismissed the merchants’ lawsuits, but the Second Circuit Court of Appeals reversed, holding that the prohibitive costs of pursuing individual claims made the class-action waivers unenforceable. The Supreme Court granted certiorari and reversed.
Justice Scalia’s majority opinion in Italian Colors rejected the notion that the FAA must yield when necessary to allow litigants to cost-effectively vindicate federal statutory rights. To the contrary, Justice Scalia noted, the FAA mandate to enforce arbitration clauses may be overridden only by a “contrary congressional command,” and no such contrary congressional command appears in the text of the antitrust statutes. Indeed, Justice Scalia wrote, “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”
Justice Scalia further rejected the merchants’ argument that the class-action waiver at issue was subject to invalidation under the judicially crafted “effective vindication” exception to the FAA. The “effective vindication” exception precludes enforcement of arbitration provisions that attempt to deprive a party of the “right to pursue” statutory remedies. Justice Scalia acknowledged that the “effective vindication” exception would thus prohibit arbitration provisions forbidding the assertion of statutory rights or imposing exorbitant arbitration costs that constructively deny access to the forum. But Justice Scalia refused to extend this logic to a situation in which it is merely uneconomical for a plaintiff to seek relief individually. “[T]he fact that it is not worth the expense involved in proving a statutory remedy,” Justice Scalia noted, “does not constitute the elimination of the right to pursue that remedy.”
The Italian Colors decision is a big win for employers, who are not only perennial class-action defendants but also face litigation exposure under a virtual alphabet soup of federal statutes. Prior to Italian Colors, it was uncertain whether class-action waivers contained in arbitration clauses of employment contracts would hold up in court to the argument that the class action device is necessary to allow employees to cost-effectively assert such federal claims. Now, employers should be able to rest assured that such clauses are enforceable regardless of the federal rights sought to be vindicated and regardless of the cost hurdles faced by employees in asserting such claims on an individual basis.