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Arbitration Agreement Waiving Class Claims Upheld - What it Means for Employers

Submitted By Firm: Holland & Hart LLP

Contact(s): Bradley T. Cave, Judith A. Biggs, Roger Y. Tsai


Jeffrey T. Johnson

Date Published: 6/20/2013

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Arbitration is a matter of contract between the parties and courts are not permitted to invalidate an agreed-upon provision that prohibits claims from being arbitrated on a class action basis, the U.S. Supreme Court ruled in its June 20, 2013 opinion in American Express Co. v. Italian Colors Restaurant. Employers can benefit from this ruling by crafting arbitration agreements that limit an employee's right to pursue employment claims on behalf of a class of employees.

Cost to Pursue Individual Arbitration Not a Factor

At issue in the American Express case was an arbitration agreement between American Express and merchants who accept its charge cards that required the parties to arbitrate all disputes. The agreement further stated that "there shall be no right or authority for any Claims to be arbitrated on a class action basis."

When numerous merchants filed a class action lawsuit against American Express alleging violations of federal antitrust laws due to American Express’ alleged high card fees, American Express moved to dismiss the lawsuit and instead force each merchant to arbitrate its claim individually, as required by the arbitration agreement. The District Court agreed with American Express and dismissed the class action lawsuit. The merchants appealed the dismissal to the Second Circuit Court of Appeals, arguing that the cost to prove the antitrust claims by each individual merchant would far exceed the amount they could recover as an individual plaintiff. The merchants submitted a declaration from an economist who estimated that the cost of expert analysis on the antitrust claims would be “at least several hundred thousand dollars, and might exceed $1 million.” The maximum amount of damages that each individual plaintiff could expect to recover was $38,549 as treble damages. The Second Circuit reversed the dismissal, ruling that because the cost for each merchant to arbitrate their claim individually was prohibitive, the class-action waiver in the arbitration agreement was unenforceable and arbitration could not proceed. American Express sought review by the Supreme Court.

In a 5-3 ruling, the Supreme Court held that the Federal Arbitration Act (FAA) does not allow courts to invalidate a contractual waiver of class actions on the ground that the plaintiffs’ cost to arbitrate a federal statutory claim individually exceeds the potential recovery. Justice Antonin Scalia, writing for the majority, rejected the merchants’ argument that cost vs. recovery should factor into the enforceability of an arbitration agreement. He wrote that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” The Court drew a distinction between contract provisions that prohibit an individual from asserting their statutory rights at all (e.g., a waiver of certain claims) and prohibiting class claims. Relying on earlier precedent, the Court reiterated that it may invalidate arbitration agreements that operate as a prospective waiver of a party’s right to pursue statutory remedies, but will not invalidate an agreement because it is not worth the expense involved in a party proving a statutory remedy. The Court also refused to create preliminary hurdles before a plaintiff could be held to contractually-agreed arbitration, such as requiring a court to evaluate the cost to prove claims as well as the damages that could be recovered if the plaintiff is successful. Justice Scalia wrote that “such a judicially created superstructure” would “undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure.”

Dissent: Majority’s Response to Merchants Was “Too Darn Bad”

Justice Elena Kagen, joined by Justices Ruth Bader Ginsburg and Steven Breyer (Justice Sotomayor did not take part in the decision), wrote a stinging dissent in which she characterized the case as small business owners who were forced to accept a form contract by a monopolizing credit card company that violated antitrust laws. The dissent states that if the arbitration clause is enforceable, American Express has insulated itself from antitrust liability because it used its monopoly power to insist on a contract that “effectively deprives its victims of all legal recourse.” Justice Kagen wrote: the “nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.” The three dissenting justices believe that the FAA was never meant to produce the outcome arrived at by the majority, and that the majority decision blocks the vindication of meritorious federal claims and insulates wrongdoers from liability. The dissent instead would rely on the “effective vindication” rule, namely that an arbitration clause will not be enforced if it prevents the effective vindication of federal statutory rights, however it achieves that result, to invalidate the bar on class arbitration in the American Express agreement.

Employment Arbitration Agreements

Recent Supreme Court decisions upholding arbitration agreements, such as the American Express opinion, may bolster efforts to use arbitration agreements in the employment context. Although there are pros and cons to utilizing arbitration agreements with employees, a significant advantage is the ability to prohibit class actions by requiring employees to arbitrate their employment disputes on an individual basis. In addition, arbitration can be less costly than litigating in court, and more confidential as most arbitration filings are not public records. Perhaps most significantly, arbitration allows employment cases to be heard by arbitrators, not juries, thereby reducing the risk of runaway verdicts. Employers should consult with employment counsel to determine if arbitration agreements are warranted with their workforce and if so, what provisions will best protect the company’s interests.

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