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Supreme Court Appears Poised To Reject Second Circuit’s Articulation of “Effective Vindication Of Federal Statutory Rights” Defense For Avoiding Class Arbitration Waivers

Posted in Arbitration, U.S. Supreme Court

Yesterday, my colleagues and I attended oral arguments before the Supreme Court in American Express Co. v. Italian Colors Restaurant, No. 12-133, in which we submitted an amicus brief on behalf of business groups.   As readers of the blog know, the issue in American Express is whether plaintiffs may avoid their agreements to arbitrate on an individual rather than class-wide basis by contending that they cannot “effectively vindicate” their federal claims without the use of the class device.   The Second Circuit held that a plaintiff who can prove that that it would be “economically irrational” to pursue his or her federal antitrust claims without resort to class actions may avoid arbitration.  From the oral arguments, a majority of the Supreme Court appears prepared to reject the Second Circuit’s conclusion.

(Update: An audio recording of the argument is available here.)

American Express had a bit of a head start in light of AT&T Mobility LLC v. Concepcion, in which the Court held two terms ago that the Federal Arbitration Act preempts state-law rules that would condition the enforceability of arbitration agreements on the availability of class procedures.  (We represented AT&T in Concepcion).  In our American Express amicus brief, we explained that Concepcion’sholding rested on this Court’s conclusion that class arbitration is ‘not arbitration as envisioned by the FAA,’ ‘lacks its benefits,’ and is therefore ‘inconsistent with the FAA.’ There is no basis for believing that the FAA views the fundamental—and therefore protected—characteristics of arbitration differently when a plaintiff’s claim arises under federal law.”

At oral argument, the Justices and parties seemed to take it as given that plaintiffs could not invoke the FAA or the Sherman Act to attack their arbitration agreements solely because they forbid class procedures.  Instead, the argument focused on the meaning and breadth of the language in prior Supreme Court decisions referring to whether a litigant may “effectively vindicate her federal statutory rights in the arbitral forum.”

The key Supreme Court case on the “effective vindication” theory, Green Tree Financial Corp. v. Randolph, referred to the potential that an arbitration agreement might impose prohibitively expensive costs—specifically mentioning arbitral “filing fees” and “arbitrators’ costs.”  In light of Randolph, most of the lower courts outside the Second Circuit have understood Randolph to apply only to the costs of utilizing the arbitral forum—filing fees and fees paid to the arbitrator.  As Justice Breyer (who dissented in Concepcion) noted, there’s “plenty of authority” to support the proposition that “you can’t make [a] person go to arbitration if the fees involved are too high.”  But the “effective vindication” analysis espoused by the Second Circuit (and plaintiffs) sweeps far more broadly; on this view, the relevant costs of arbitration would include costs that would be incurred in litigation as well, such as expert witness fees.

Addressing counsel for the United States (supporting the plaintiffs), Justice Breyer said:  “you’re quite an advance over [challenging high arbitral fees]. You are saying the thing that keeps [a plaintiff] out [of arbitration] is his own theory of wrong, which will involve hiring a lot of experts and others.”  Stated another way, the “more far out” a plaintiff’s “theory” of liability is, “the harder it is to prove,” and “the more you need expensive experts.”  Justice Breyer suggested that it would work a “significant erosion” of the Court’s precedents holding that federal causes of action could be arbitrated if “all you have to do to get out of the arbitration is to allege a theory of your case which is hard and complicated to prove,” and “[n]ow you are back in court.”  That concern is real; as we noted in our amicus brief in support of certiorari, plaintiffs’ lawyers have increasingly sought to avoid arbitration by attempting to recharacterize fairly straightforward consumer law (and other) claims as complex federal claims requiring expensive expert testimony.

Both Justices Breyer and Scalia pressed Paul Clement (counsel for plaintiffs) and the government’s lawyer to acknowledge that the plaintiff’s vindication test would require a fuller comparison of arbitration to litigation—something that would make the test unworkable.  Justice Scalia noted that, on the plaintiffs’ view, it would not matter if it were “impossible” for a plaintiff to bring a claim in federal court—with or without class procedures—so long as the claim also could not be vindicated in arbitration, the parties’ arbitration agreement would not be enforced.  But the only sensible comparison, Justice Scalia suggested, would require looking at how the plaintiffs’ claims would play out in court.  More specifically, if a plaintiff claims that it needs access to court (and the class action device) rather than arbitration to pursue its claims, a court “has to decide whether [the proposed] class would be certified, wouldn’t it?”

The government’s lawyer shied away from endorsing that unattractive proposition, and instead sought to assure the Justices that lawsuits would not be filed unless a plaintiff’s lawyer “at least believes that it would be feasible to vindicate the claim in court.”  He added that, “even if a plaintiff believes wrongly that he can proceed in court” and “class certification is denied under Rule 23, presumably at that point the plaintiff is going to give up and the outcome at the end of the day is going to be the same as if the arbitration agreement had been enforced.”  This argument did not appear to satisfy those Justices who were skeptical of the plaintiffs’ position—and for good reason:  The benefits of arbitration would be eliminated if a case had to be litigated all the way through class certification before an arbitration agreement would be enforced.  And in the real world of litigation, as opposed to the imaginary world that Mr. Clement and the government’s lawyer described, plaintiffs’ lawyers frequently file class action complaints that are dismissed, or that do not lead to certified classes.  So the “effective vindication” rule would provide a reliable means for avoiding arbitration, and attempting to use unjustified class action claims to coerce settlements.  The result will be unjustified litigation burdens—the very burdens that arbitration is designed to avoid.

To be sure, at least two Justices—Justices Kagan and Ginsburg—appeared to be aligned with the plaintiffs’ point of view.  Justice Kagan suggested that the arbitration agreements were analogous to a contract provision that expressly waived claims under the Sherman Act; if the claims could not be litigated economically under the clause, that clause in Justice Kagan’s view would be unenforceable per se—regardless of whether a plaintiff could as a practical matter vindicate the same claims in court.  But, as counsel for American Express pointed out, nothing in the arbitration agreement prevented plaintiffs from bringing any type of substantive claim; the clause therefore was not a “pure exculpatory clause” (to borrow a phrase used by the government’s lawyer).

And AmEx’s counsel made the critical point that a rejection of the Second Circuit’s “effective vindication” approach would not insulate arbitration agreements from review for fairness.  In response to a hypothetical by Justice Kagan about whether an arbitration provision that precluded the introduction of certain kinds of evidence could be enforced, he explained that any such claimed defect in arbitral procedures can be addressed through generally applicable contract-law defenses (including unconscionability), as the FAA itself contemplates.

Both Justice Kagan and Justice Ginsburg asked a number of questions about the feasibility of arbitration, and in particular whether multiple plaintiffs could share the costs of pursuing claims (such as the fees charged by an expert witness) under American Express’s arbitration agreement.  The plaintiffs had contended that a confidentiality requirement in the agreement precluded such cost-sharing—and indeed, conceded in their merits brief that if cost-sharing were available, they would be prepared to pursue arbitration of their claims. American Express argued that the confidentiality requirement imposed no limits on cost-sharing.  In response to a question by Chief Justice Roberts, its counsel stated unequivocally:  “Our position is that multiple claimants in arbitration could share the costs of an expert for preparation of a report.”  And the Chief Justice, in turn, asked Clement (plaintiffs’ counsel) a number of questions about why the plaintiffs (merchants who accept American Express cards) could not do so, expressing skepticism towards Clement’s argument that the confidentiality provision would in fact restrict merchants from jointly obtaining an expert report and making use of it in a series of arbitrations.

In short, it seems likely to me likely—at least based on the argument—that the Second Circuit’s holding will be rejected for three reasons:  (1) the weight of Concepcion’s interpretation of the FAA; (2) the severe practical difficulties with the Second Circuit’s “effective vindication” test, which would require assessing the merits of a plaintiffs’ claims and the likelihood of class certification at the very outset of a case; and (3) the plaintiffs’ concession that if cost-sharing were available, they can feasibly vindicate their claims in individual arbitration.