On January 30, I published a blog post about a Southern District of New York decision holding that an arbitration clause barring class actions was unenforceable because the costs of an individual arbitration effectively would preclude the plaintiff from pursuing her statutory rights under the Fair Labor Standards Act.  The Second Circuit has now reached a similar result in In re American Express Merchants’ Litigation, No. 06-1871-cv, 2012 U.S. App. LEXIS 1871 (2d Cir. Feb. 1, 2012).  I’m not sure this result or the court’s rationale has much, if any, application to insurance, for reasons I’ll explain below.  But it’s nevertheless important to take this decision into account as insurers consider expanding the use of arbitration after Concepcion.

The American Express Opinion

American Express is a long-running antitrust case brought by merchants who allege that AmEx has used an illegal “tying arrangement,” in violation of the Sherman Act, under which merchants must accept AmEx revolving credit cards and pay higher fees to AmEx for those transactions than are charged by Visa or MasterCard.  AmEx’s ability to charge these higher fees is allegedly tied to its charge card business (i.e., cards requiring payment in full every month), which has more corporate cardholders and affluent individual cardholders.  AmEx’s contract with merchants requires them to accept all AmEx cards, and it has an arbitration clause with a class action waiver in it.  The plaintiffs argued that the class action waiver was unenforceable because it effectively deprives merchants of the ability to bring any antitrust claims, on the theory that the cost of bringing an individual antitrust suit far outweighs the potential individual recovery.  The plaintiffs presented, and the Second Circuit relied on, testimony from an antitrust expert that the cost of an expert report in this case would be roughly in the middle of a range between $300,000 and $2 million, which far exceeded what any named plaintiff could recover in an individual proceeding.

The Second Circuit concluded that the issue presented by the American Express case was not decided or even addressed by the Supreme Court in AT&T v. Concepcion or Compucredit Corp. v. Greenwood.  The Second Circuit noted that “Supreme Court precedent recognizes that the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action.”  Id. at *25.  The court also found guidance from the Supreme Court in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) and Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).  The court interpreted these three opinions, particularly Green Tree, as recognizing that class action waivers in arbitration clauses are unenforceable if the plaintiff can establish, with convincing proof, that “class-action waivers barred them from vindicating their statutory rights.”  Id. at *34.  The Second Circuit found AmEx’s class action waiver unenforceable because the cost of expert testimony to prosecute an individual antitrust arbitration would make it impossible for an individual plaintiff to pursue an antitrust claim and AmEx would have essentially immunized itself against any and all such claims.  The result, given that parties cannot be forced to arbitrate in a class proceeding (under the Supreme Court’s decision in Stolt-Nielsen) was that a class action can proceed in court.

Applicability to Insurance

I’d expect plaintiff’s lawyers to attempt to develop factual support similar to that used in American Express and then rely on this case in opposition to defendants’ efforts to invoke AT&T v. Concepcion.  However, I’m not sure this decision will apply in the insurance context for several reasons:

  • Insurance class actions hardly ever involve federal statutory rights because the states control insurance regulation.  Even if Congressional intent behind other federal statutes may control vis-à-vis the Federal Arbitration Act (FAA) in this circumstance, I’m not sure the same would be true of state common law or statutory rights that may conflict with the FAA.
  • Insurance class actions on claims or underwriting issues rarely involve circumstances where it would be impossible for an individual plaintiff to arbitrate an individual claim because the cost of arbitration would exceed the potential recovery.  The kind of expensive expert testimony that is required for an antitrust case is rarely necessary in an insurance class action.  State law also frequently provides mechanisms whereby statutory penalties or attorneys’ fees potentially become available that make individual disputes practical to arbitrate or litigate.  AmEx’s arbitration clause exempts small claims lawsuits from the arbitration requirement, which is something insurers may wish to consider as well.
  • Even where individual claims are small and dispute resolution costs large, it may not be impossible to vindicate individual claimants’ rights outside of the class action mechanism, if a large number of claimants wish to pursue claims and they do so in a coordinated fashion (but not through a formal class action mechanism).  Individual claimants and their attorneys generally are free to join resources and jointly retain and pay for experts or other collective costs.  An arbitration clause with a class action waiver cannot bar numerous claimants from signing up with the same lawyer and filing thousands of individual arbitrations.  They can also take advantage of collateral estoppel against the defendant where it is available under applicable law in the arbitration context.  Even in the American Express case that would seem to me to be a potential option not considered by the Second Circuit (although I’m not an authority on antitrust law or how those cases proceed).  What this means, as a practical matter, is that plaintiffs’ lawyers need to sign up a large number of clients who want to pursue claims rather than just finding one client and bringing a class proceeding.  Requiring this to happen in order for a large proceeding to go forward effectively limits mass proceedings to those driven somewhat more by the plaintiffs than by their lawyers.  If the mass proceeding is not viable unless thousands of people who feel they have been harmed sign up to pursue their claims, plaintiffs’ lawyers are more limited in their ability to pursue claims that have less merit because they will not be able to find enough clients to make it worthwhile.  But defendants who have engaged in an improper practice that harms many consumers who have meritorious grievances will not escape unscathed if plaintiffs’ lawyers can aggregate claims in this fashion.