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Supreme Court Rejects Challenge to Arbitration Agreements

Posted in Arbitration, U.S. Supreme Court

The Supreme Court’s decision today in American Express Co. v. Italian Colors Restaurant (pdf), No. 12-133, eliminated the last significant obstacle to adoption of fair, efficient arbitration systems that increase access to justice for consumers while reducing transaction costs for everyone, particularly the huge legal fees of both plaintiffs’ lawyers and defense lawyers.

In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court held that the Federal Arbitration Act (FAA) prohibits courts from refusing to enforce arbitration agreements on the ground that they do not provide for class actions. Today’s ruling in American Express makes clear that Concepcion’s determination applies to claims under federal law as well. Mayer Brown represented AT&T Mobility in Concepcion and filed an amicus brief (pdf) for the Chamber of Commerce of the United States of America and Business Roundtable in American Express.

American Express has significant implications both for courts’ consideration of attempts to invalidate arbitration agreements and for the policy debate over the enforceability of those agreements. We discuss both, after explaining the grounds for the Supreme Court’s ruling.

The Decision

Justice Scalia authored the opinion for the Court, joined in full by Chief Justice Roberts and Justices Kennedy, Thomas, and Alito. The Court divided 5-3, with Justice Sotomayor recused because she had been on a Second Circuit panel in an earlier iteration of the case. 

The majority began by emphasizing that the FAA requires arbitration agreements to be rigorously enforced unless the FAA’s mandate has been overridden by a contrary congressional command. The plaintiffs in this case argued that it would be too costly to pursue their federal antitrust claims through individual arbitration because of the high expert-witness costs they contended were necessary to prove their claims. But the Court observed that the federal antitrust laws “do not guarantee an affordable procedural path to the vindication of every claim,” nor do they command that class action procedures be available despite the FAA’s requirement that arbitration agreements be enforced as written.

The Court went on to say that Federal Rule of Civil Procedure 23, which sets forth procedures for litigating class actions in federal court, does not establish an entitlement to class proceedings—nor could it without abridging or modifying the substantive rights under the FAA to have arbitration agreements enforced, something that likely would violate the Rules Enabling Act’s limitations on judicial rulemaking authority.

Finally, the Court also rejected the argument that language in prior opinions authorized courts to invalidate arbitration agreements with class waivers on the ground that they would prevent the “effective vindication” of federal statutory rights. As the Court explained, the language in those cases (Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), and Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79 (2000)) was dictum. The Court added that in any event the concerns with “effective vindication” were not implicated because “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.”

Justice Thomas filed a short concurrence stating that he “join[s] the Court’s opinion in full.” He added that he also would have rejected the decision below as contrary to the plain text of the FAA, which, in his view, authorizes courts to refuse to enforce arbitration agreements only if the plaintiff successfully challenges the formation of the agreement. Because the plaintiffs “voluntarily entered into a contract containing a bilateral arbitration provision,” Justice Thomas explained, they “cannot now escape its obligations merely because the claim [they] wish[] to bring might be economically infeasible” or for other policy reasons that do not relate to “whether the contract was properly made.”

The dissent, written by Justice Kagan, argued that the “effective vindication” cases “bar[] applying” an arbitration agreement “when (but only when) it operates to confer immunity from potentially meritorious federal claims.” Justice Kagan contended that American Express’s arbitration agreement did so because, for some plaintiffs, the costs of proving an antitrust claim were greater than the damages at stake.

Significantly, the dissent recognized that “non-class options abound” for feasibly pursuing antitrust claims through arbitration. But, in Justice Kagan’s view, because (among other things) the confidentiality provision of American Express’s arbitration agreement allegedly precluded plaintiffs from spreading lawyer and expert witness costs across multiple arbitrations, the avenues for cost-sharing had been cut off. (As the majority opinion pointed out in a footnote, American Express “denied that” cost-sharing was unavailable, and the court of appeals did not come to that conclusion either.)

Legal Implications

Since Concepcion was decided, the plaintiffs’ bar has aggressively fought to limit or evade that decision by arguing that arbitration agreements should not be enforceable when the value of individual claims is small relative to the cost of proving each claim. American Express rejects those efforts and reaffirms Concepcion’s holding that agreements to arbitrate on an individual basis are fully enforceable as a matter of federal law.

To be sure, neither American Express nor Concepcion open the door to unfair arbitration clauses. As the American Express court recognized, Mitsubishi Motors’ language addressing concerns with the “prospective waiver of a party’s right to pursue statutory remedies . . . would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” And the Court has previously noted that generally applicable state-law unconscionability principles can be applied to invalidate arbitration agreements. But American Express sends a clear message that—whether claims arise under federal or state law—courts cannot refuse to enforce arbitration agreements simply because they bar class actions.

It is unlikely that today’s decision will put an end to efforts to invalidate arbitration agreements. We anticipate that the plaintiffs’ bar will instead switch its focus to other issues. Even before today’s decision, challenges to arbitration agreements have increasingly targeted the issue of contract formation—asserting that the customer or employee did not properly assent to the arbitration agreement. That trend is likely to accelerate.

In addition, plaintiffs are reviving challenges under general state unconscionability principles, claiming that the method of selecting the arbitrator, or the amount of the arbitration fees, or the location for arbitrations violates those standards. And unfortunately some courts (particularly state courts) have applied unconscionability standards that discriminate against arbitration agreements—holding them invalid on grounds that do not apply to other kinds of contracts. As the Supreme Court cautioned in its recent decision in Marmet Health Care Center, Inc. v. Brown, 132 S. Ct. 1201 (2012), arbitration agreements may be invalidated only “under state common law principles that are not specific to arbitration” because arbitration-specific principles are “pre-empted by the FAA.” The Court is likely to intervene—as it did in Marmet, where a state court had invalidated an arbitration agreement on policy grounds—if the Court concludes that a state court is striking down arbitration agreements by invoking biased unconscionability standards.

Policy Implications

The Supreme Court’s decision is not only right on the law, it is also right as a matter of policy. Our overcrowded, labyrinthine court system simply doesn’t work for consumers and employees seeking to redress the everyday wrongs that they suffer, and lawyers are far too expensive for the overwhelming majority of those claims. Fair, user-friendly arbitration provides a real opportunity to obtain a ruling on the merits by an impartial decisionmaker.

Critics assert that individualized arbitration doesn’t work because it precludes the filing of class actions. And perhaps—if class actions truly offered real benefits to consumers and employees, and small claims cognizable in class actions could not be asserted in arbitration—a difficult policy question might be posed: whether the additional access to justice for individual claims is worth a reduction in the ability to bring class actions.

But those are some big “ifs”: The assertion that the class action system as a whole benefits anyone other than lawyers is highly questionable. Many class actions are dismissed, and many are not certified. As the Supreme Court correctly pointed out in American Express, “stringent requirements for certification . . . in practice exclude most claims” from proceeding on a class-wide basis. Those that are certified virtually always produce a settlement that provides large fees for lawyers, but—to the extent the cloak of secrecy over the distribution of money to class members can be penetrated—frequently deliver little, if any, benefit to those who the lawyers represent.

Moreover, small claims can be—and increasingly are—brought in arbitration by lawyers making a business of recruiting large numbers of clients using the Internet and social media. In American Express, for example, the plaintiffs acknowledged that they could bring their claims effectively in arbitration as long as they could share the same lawyers and experts—and American Express agreed that such cost-sharing is completely permissible. The plaintiffs’ lawyers have stated publicly that they intended to follow that exact plan if the Supreme Court rejected their effort to invalidate the arbitration agreement.

Significantly, the dissenting Justices in American Express recognized that cost-sharing in this manner enables the vindication of small claims through individualized arbitration. In fact, they concluded that an arbitration agreement may “prohibit[] class arbitration without offending the effective-vindication rule if it . . . provide[s] an alternative mechanism to share, shift, or reduce the necessary costs,” such as cost-sharing by claimants asserting similar claims. The dissenting justices would have invalidated American Express’s arbitration provision because they believed that it precluded such sharing. But American Express explicitly stated in its brief and at oral argument that the plaintiffs could use common lawyers and experts. Indeed, in our experience virtually all arbitration agreements permit cost sharing. As a practical matter, therefore, there is little difference between the majority and the dissent—the dissenters would uphold class waivers in virtually all cases, because individual plaintiffs would be able to share the costs of litigation.

Finally, class actions cannot be justified on the theory that they deter misconduct. Government enforcement actions, as well as the increasingly prevalent practice of calling out unjustified corporate conduct through social media and the Internet, provide much more deterrence of wrongful conduct than class actions whose resolution has little to do with the legitimacy of the underlying claims.

In short, arbitration significantly increases access to justice for individual claims and keeps the door open for ordinary consumers and employees to assert small claims that otherwise would be brought as class actions. It benefits consumers, businesses—indeed, everyone other than the lawyers (both those representing plaintiffs and those representing defendants), who have long profited from the complexity of the litigation system.