The U.S. Supreme Court recently issued its opinion in American Express Company v. Italian Colors Restaurant, No. 12-133, addressing whether an arbitration clause prohibiting class-action arbitrations is enforceable when the cost of arbitrating a federal statutory claim on an individual basis exceeds the potential recovery. The Court held, 5-3, that such prohibitions on class arbitrations are permissible. I expect this decision will result in an expansion of the use of arbitration by companies facing class action exposure. Insurance companies to date have not significantly increased their use of arbitration following the Supreme Court’s decision two years ago in AT&T v. Concepcion, 131 S. Ct. 1740 (2011). While insurers today appear to face somewhat smaller class action exposure than some other industries that deal with consumers, if insurers continue to stay on the sidelines with respect to arbitration, and other industries continue to adopt it, insurers might become larger targets for class actions. That risk might lead to some efforts by insurers to increase the use of arbitration.
In American Express, merchants brought a putative antitrust class action against AmEx, alleging that it exercised monopoly power with respect to charge cards (where the full bill must be paid every month) to force merchants to accept AmEx credit cards at higher fees than those charged for other credit cards. (Slip op. at 1-2.) AmEx sought to compel an individual, non-class arbitration. The merchants asserted that the class-action waiver in the arbitration provision was unenforceable because the cost of an individual arbitration, requiring an economic expert report that would cost “at least several hundred thousand dollars,” and this would far exceed the maximum potential individual recovery ($38,549 including treble damages). (Id. at 2.)
Justice Scalia’s relatively short majority opinion (joined by Chief Justice Roberts, and Justices Kennedy, Thomas and Alito) concluded that: (1) “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim”: (2) Rule 23 does not “establish an entitlement to class proceedings for the vindication of statutory rights”; (3) “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy”; and (4) AT&T Mobility “specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’” (Id. at 4-9.) Justice Thomas joined the majority opinion but also wrote a concurrence reiterating his view that, under the plain language of the Federal Arbitration Act, only a defense to the formation of an arbitration agreement (such as fraud or duress) can prevent enforcement of the arbitration agreement. Justice Kagan wrote a dissent, joined by Justices Ginsburg and Breyer. The dissenters would have held that, under the “effective vindication rule” previously articulated by the Court (which the majority opinion characterized as merely dictum), the class-action waiver was invalid because there was no effective means of pursuing the antitrust claims in arbitration. The dissent hinted that the class-action waiver might have been permissible if the arbitration clause had allowed joinder or consolidation of multiple claims, or sharing of expert reports between arbitrations (which apparently was precluded by a confidentiality provision in the AmEx arbitration agreement), or allowed shifting of costs if the merchants prevailed. (Slip op., Kagan, J., dissenting, at 7.)
At the most basic, technical level this case is unlikely to have a direct impact on insurance class actions involving claims or underwriting issues, because those are governed by state law, and American Express focuses on arbitrations of federal statutory claims (whereas AT&T Mobility addressed federal preemption, under the FAA, of state law invalidating a class-action waiver). Where I see a greater potential impact here is from the relatively strong reaffirmance of the basic principles of AT&T Mobility (in a case which did not involve a consumer-friendly arbitration clause), and the potential for a decrease in class actions against other industries. If there are fewer employment class actions, and fewer class actions against banks and credit card companies, and perhaps even against product manufacturers, then the plaintiffs’ class action bar will either largely give up their line of work (which seems unlikely), or they will focus more intently on the industries that have not adopted arbitration. If insurance remains one of those industries, it could become a larger target.
I’ve written previously here about some of the regulatory and practical obstacles that insurers face in expanding the use of arbitration, and some potential downsides – see my August 22, 2011 blog post. I expect that insurers will be giving the idea of arbitration further thought following this decision. American Express also raises some interesting questions about how to draft an arbitration clause, given the substantial difference between the clause at issue in American Express and the more consumer-friendly clause at issue in AT&T Mobility.