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.