What restrictions are there, if any, on companies’ use of arbitration clauses that prohibit class action arbitrations?  On February 27, the U.S. Supreme Court heard oral argument in a case that may address that question.  American Express Company v. Italian Colors Restaurant, No. 12-133 (transcript) is a sequel to the Supreme Court’s 2011 decision in AT&T v. Concepcion, which held that the Federal Arbitration Act preempted state law to the extent that state law on unconscionability invalidated an arbitration provision because it did not permit a class action arbitration procedure.  The Concepcion opinion contained significant discussion of the fact that AT&T’s arbitration provision was particularly consumer-friendly — AT&T agreed to pay all the costs of arbitration for non-frivolous claims, the arbitration would be held where the claimant resided or by telephone, and if the claimant received an award higher that AT&T’s last settlement offer, they would receive a minimum of $7,500 plus twice their attorneys’ fees.  The AmEx settlement provision, in contrast, does not have these provisions.

In American Express, the question presented is “Whether the Federal Arbitration Act permits courts, invoking the ‘federal substantive law of arbitrability,’ to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”  American Express is an antitrust case brought by merchants who allege that AmEx has used an illegal “tying arrangement” 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 in ruling in their favor relied on, testimony from an antitrust expert that the cost of an expert report in this case would be between $300,000 and $2 million, which far exceeded what any named plaintiff could recover in an individual proceeding.  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.  Justice Sotomayor is recused in the case because she was on the Second Circuit panel at an earlier point when it heard the case.

The oral argument in the Supreme Court focused heavily on whether it would truly be impossible for merchants to prove their antitrust claims in non-class arbitration proceedings, although it was suggested that this was a point that the Second Circuit had taken for granted.  Justice Breyer asked a number of questions suggesting that there are ways in which the arbitration could be completed without an expensive expert report, including by using an expert arbitrator with antitrust experience, or by using other evidence.  At one point, he suggested remanding the case for further exploration of that issue.  Chief Justice Roberts suggested that the merchants could have a trade association pay for the cost of an expert report that could then be used in many individual arbitrations.  Justice Kennedy also suggested that the arbitration could be a less formal and less costly proceeding, but he also pointed out that there was no factual record on that point.  There was also some suggestion that the parties had strayed to some degree from the question presented, and Justice Kagan suggested that perhaps the case was not properly framed.  Michael Kellogg argued for AmEx that there was no need for a remand because questions regarding what type of proof would suffice in arbitration, etc., would be for the arbitrator to decide in the first instance and thus not something the district court or court of appeals could answer definitively.  There was some discussion, however, about whether confidentiality requirements in the AmEx arbitration provision would present problems for using an expert report in multiple individual cases.  There was also discussion about whether the confidentiality provision could be severed.  Chief Justice Roberts also suggested that individuals bringing these arbitrations might take advantage of collateral estoppel to the extent it is available.  Kellogg responded that the law on that is unclear in the arbitration context.  Justice Ginsburg focused on how the AmEx arbitration provision did not have the type of plaintiff-friendly provisions that the AT&T agreement had.  Justice Scalia asked several questions focusing on the fact that the Sherman Act existed long before Rule 23, and thus to the extent that Sherman Act claims are costly to prove there was no right to bring them in a class proceeding when the statute was enacted.  Justice Scalia suggested that if the claim, as a practical matter, would be too expensive to bring on an individual basis in court, there is no special right to bring it in arbitration.  In response, Paul Clement argued for the plaintiffs that although there was no Rule 23 when the Sherman Act was enacted, procedures were in place at that time that would allow multiple claims to be heard together, and the AmEx arbitration provision does not allow joinder of multiple claims in arbitration.  Clement also argued that it was possible to construct an arbitration provision that could bar class actions and still allow for effective vindication of rights, but that the AmEx provision did not make the cut.  He used a Sovereign Bank arbitration provision as an example of one that would be adequate.

So what might the outcome be?  A New York Times article on the oral argument suggests that the Justices appear to be leaning in favor of AmEx’s position.  I don’t disagree with that.  The benefit here for companies also might be in the Court providing some further guidance on the contours of how companies can draft these arbitration provisions.  Whether the Court provides any real guidance, however, will depend on how the decision is written.  In the insurance industry there does not appear to have been much movement towards arbitration, perhaps because of some unique issues presented in the insurance context (see my August 22, 2011 blog post for some thoughts on that).  But if insurers do not move towards arbitration and other industries do, that could make insurers a heavier target for class action suits.  It will be interesting to see how things develop after this case is decided.

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Photo of Wystan Ackerman Wystan Ackerman

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you…

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you have something to say.  For those looking for my detailed law firm bio, click here.  If you want a more light-hearted and hopefully more interesting summary, read on:

People often ask about my unusual first name, Wystan.  It’s pronounced WISS-ten.  It’s not Winston.  There is no “n” in the middle.  It comes from my father’s favorite poet, W.H. (Wystan Hugh) Auden.  I’ve grown to like the fact that because my name is unusual people tend to remember it better, even if they don’t pronounce it right (and there is no need for anyone to use my last name because I’m always the only Wystan).

I grew up in Deep River, Connecticut, a small town on the west side of the Connecticut River in the south central part of the state.  I’ve always had strong interests in history, politics and baseball.  My heroes growing up were Abraham Lincoln and Wade Boggs (at that time the third baseman for the Boston Red Sox).  I think it was my early fascination with Lincoln that drove me to practice law.  I went to high school at The Williams School in New London, Connecticut, where I edited the school newspaper, played baseball, and was primarily responsible for the installation of a flag pole near the school entrance (it seemed like every other school had one but until my class raised the money and bought one at my urging, Williams had no flag pole).  As a high school senior, my interest in history and politics led me to score high enough on a test of those subjects to be chosen as one of Connecticut’s two delegates to the U.S. Senate Youth Program, which further solidified my interest in law and government.  One of my mentors at Williams was of the view that there were far too many lawyers and I should find something more useful to do, but if I really had to be a lawyer there was always room for one more.  I eventually decided to be that “one more.”  I went on to Bowdoin College, where I wrote for the Bowdoin Orient and majored in government, but took a lot of math classes because I found college math interesting and challenging.  I then went to Columbia Law School, where I was lucky enough to be selected as one of the minions who spent their time fastidiously cite-checking and Blue booking hundred-plus-page articles in the Columbia Law Review.  I also interned in the chambers of then-Judge Sonia Sotomayor when she was a relatively new judge on the Second Circuit, my only connection to someone who now has one-ninth of the last word on what constitutes the law of our land.  I graduated from Columbia in 2001, then worked at Skadden Arps in Boston before returning to Connecticut and joining Robinson+Cole, one of the largest Connecticut-based law firms.  At the end of 2008, I was elected a partner at Robinson+Cole.

I’ve worked on class actions since the start of my career at Skadden.  Being in the insurance capital of Hartford, we have a national insurance litigation practice and I was fortunate to have the opportunity to work on some prominent class actions arising from the 2004 hurricanes in Florida and later Hurricane Katrina, including cases involving the applicability of the flood exclusion, statutes known as valued policy laws, and various other issues.  My interest and experience in class actions gradually led me to focus on that area.

In Connecticut courts I’ve defended various kinds of class actions that go beyond insurance, including cases involving products liability, securities, financial services and consumer contracts.

My insurance class action practice usually takes me outside of Connecticut.  I’ve had the pleasure of working on cases in various federal and state courts and collaborating with great lawyers across the country.  While class actions are an increasingly large part of my practice, I don’t do exclusively class action work.  The rest of my practice involves litigating insurance coverage cases, often at the appellate level.  That also frequently takes me outside of Connecticut.  A highlight of my career thus far was working on Standard Fire Ins. Co. v. Knowles, the U.S. Supreme Court’s first Class Action Fairness Act case.  I was Counsel of Record for Standard Fire on the cert petition, and had the pleasure of working with Ted Boutrous on the merits briefing and oral argument.

I started this blog because writing is one of my favorite things to do and I enjoy following developments in class action law, writing about them and engaging in discussion with others who have an in interest in this area.  It’s a welcome break from day-to-day practice, keeps me current, broadens my network and results in some new business.

When I’m not at my desk or flying around the country trying to save insurance companies from the plaintiffs’ bar, or attending a conference on class actions or insurance litigation (for more on those, see the Seminars/Programs page of this blog), I often can be found playing or reading with my young daughter, helping my wife with her real estate and mortgage businesses, reading a book about history or politics, or watching the Boston Red Sox (I managed to find bleacher seats for Game 2 of the 2004 World Series when Curt Schilling pitched with the bloody sock).  When the weather is good I also love to take the ferry to Block Island, Rhode Island and ride a bike or walk the trails there. If you go, I highly recommend the Clay Head Trail.