Take Advantage of Class Action Waiver Protections


Ronald L. Hicks, The Legal Intelligencer

January 20, 2015


Companies have new protections against class action lawsuits, thanks to two recent decisions by the U.S. Supreme Court. The court’s decisions in American Express v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), and Oxford Health Plans v. Sutter, 133 S. Ct. 2064 (2013), provide significant support for companies to incorporate class action waivers in their standard form contracts with investors, customers and vendors. Attorneys should pay close attention, as the effects of these decisions play out in lower courts, and carefully draft arbitration provisions to take full advantage of the new protections.

In American Express, the Supreme Court addressed “whether a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act when the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.”

Italian Colors Restaurant and other similarly situated merchants brought a class action lawsuit against American Express, asserting that the company had violated Section 1 of the Sherman Act, which prohibits anti-competitive practices, by using its monopoly power to force merchants to accept credit cards with fees that were significantly higher than the fees of American Express’ competitors. Shortly after the suit commenced, American Express moved to compel individual arbitration under the FAA and under the parties’ contracts, which required not only that all disputes be resolved in arbitration but also explicitly waived the merchants’ right to arbitrate claims on a classwide basis. In their response, the merchants argued that the costs of litigating their antitrust claims individually far outweighed their expected individual recoveries under the Sherman Act and that they should therefore be permitted to litigate as a class.

The district court sided with American Express and dismissed the merchants’ class action lawsuit. On appeal, the U.S. Court of Appeals for the Second Circuit reversed, holding that the class action waiver was unenforceable because it created a situation in which the merchants “would incur prohibitive costs” when exercising their federal statutory rights, effectively amounting to a forfeiture of those rights. In a 5-3 decision authored by Justice Antonin Scalia, the Supreme Court reversed the Second Circuit, holding that the parties’ contractual class action waiver was enforceable despite the fact that the waiver made it economically inefficient.

The Supreme Court majority in American Express began its analysis by emphasizing that “arbitration is a matter of contract.” Under the FAA, the courts “must ‘rigorously enforce’ arbitration agreements according to their terms.” Nevertheless, the majority acknowledged that there are two exceptions to the enforceability of arbitration agreements: (1) a contrary congressional command exists that overrides the FAA, or (2) the parties’ agreement includes a prospective waiver of a federal statutory right, the so-called “effective vindication” exception to the FAA.

As to the first exception, the Supreme Court majority found that there was “no contrary congressional command” in the federal antitrust laws overriding the FAA.

The Supreme Court then analyzed the effective vindication exception to the FAA. Following the lead of several other federal courts, the majority held that “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.” Thus, the majority ruled that the parties’ arbitration agreement with American Express did not fall within the effective vindication exception because it did not bar a merchant from pursuing its antitrust claim individually, and instead only made it economically inefficient to do so. Accordingly, the majority reinstated the district court’s decision dismissing the merchants’ class action lawsuit based on the parties’ contractual waiver provision.

In a dissenting opinion joined by Justices Stephen Breyer and Ruth Bader Ginsburg, Justice Elena Kagan criticized the majority for failing to properly apply the effective vindication exception to the FAA. According to Kagan, the exception was not intended to apply solely to “baldly exculpatory” arbitration provisions—clauses that expressly preclude the plaintiff from asserting specific federal statutory claims. Instead, “the rule against prospective waivers of federal rights can work only if it applies not just to a contract clause explicitly barring a claim, but to others that operate to do so.” Accordingly, Kagan concluded that the Second Circuit’s decision should have been affirmed.

In Oxford Health Plans, the Supreme Court reviewed the issue of whether an arbitrator had exceeded his powers under the FAA when he interpreted the parties’ arbitration clause to authorize class arbitration. In affirming the lower courts’ rulings, the Supreme Court held that under the limited judicial review provided by the FAA, the arbitrator’s interpretation of the parties’ agreement must stand, regardless of whether a court agrees with the interpretation or not.

In the case, a pediatrician filed a class action suit in New Jersey Superior Court alleging that Oxford Health Plans had failed to make full and prompt payment to the class of doctors, in violation of the parties’ agreement and various state laws. Oxford moved to compel arbitration of the claim and the parties agreed that the arbitrator should decide whether their agreement authorized class arbitration. The arbitrator interpreted the contract to say that both parties agreed to authorize class arbitration. Following the arbitrator’s decision, Oxford moved to vacate the arbitrator’s ruling in federal court. Both the district court and the Third Circuit declined to vacate the decision.

On appeal, the Supreme Court addressed whether a court may validly vacate an arbitral award under the FAA. As Kagan explained in the court’s unanimous decision, “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Kagan further commented that the possibility that an arbitrator may interpret a contract incorrectly is “the price of agreeing to arbitration,” and that the arbitral award stands, “however good, bad, or ugly.”

In her opinion, Kagan stressed that Oxford never presented the issue of whether the availability of class arbitration is a question that may be determined by the arbitrator, which is an issue the court could have reviewed de novo. As such, the outcome may have been different had the parties not conceded that the arbitrator should determine whether the agreement authorized class proceedings.

The concurring opinion, announced by Justice Samuel A. Alito Jr. and joined by Justice Clarence Thomas, noted outright that if de novo review had applied, the Supreme Court would have reached an opposite conclusion and ruled that the arbitrator’s interpretation was incorrect. The concurrence agreed, however, that de novo was not applicable in light of Oxford’s concession to arbitration. Alito wrote separately to stress his concern over the absence of class members in the case and questioned whether absent class members can be bound by an arbitrator’s decision to conduct class procedures.

The full impact of the Supreme Court’s decisions in American Express and Oxford Health Plans is still being played out in courts. Several federal courts, including the Second Circuit, have since upheld class action waiver provisions in arbitration agreements. Also, courts have relied upon the American Express and Oxford Health Plans decisions to compel individual arbitration in cases in which the arbitration provision was silent on whether class procedures were available.

But not all courts have found that the decisions compel the conclusion that class arbitration is unavailable. For example, in Lloyd v. JPMorgan Chase & Co., Nos. 11 Civ. 9305 (LTS), 12 Civ. 2197 (LTS), the U.S. District Court for the Southern District of New York granted a motion to compel individual arbitration as to certain JPMorgan employee-plaintiffs but denied it for a different set of employee-plaintiffs who had signed a different employment contract. The latter employee-plaintiffs’ arbitration agreement contained a term that stated only claims or controversies required to be arbitrated by Financial Industry Regulatory Authority rules would be “resolved by individual (not class or collective) arbitration.” FINRA rules prohibit the enforcement of arbitration agreements against a member of a putative class or collective action until class or collective certification has been denied or decertified. Thus, according to the Southern District of New York, the arbitration agreement signed by the second set of JPMorgan employee-plaintiffs meant that class procedures were available under FINRA’s rules, thereby warranting a denial of defendant’s motion to compel.

The decisions in LloydAmerican Express and Oxford Health Plans remind attorneys that arbitration is a creature of contract and parties seeking to preclude class action lawsuits need to make that clear. Moreover, parties wishing to preserve the question of arbitrability of class action claims for the courts rather than the arbitrator need to include specific reservations in their arbitration agreements. Hence, while the American Express and Oxford Health Plans decisions provide companies with significant means to protect themselves against class action claims and the costs entailed in defending such lawsuits, attorneys must carefully and clearly draft contracts to realize the benefit of these decisions.

Ronald L. Hicks handles corporate litigation, oil and gas rights and other business matters at Pittsburghbased Meyer, Unkovic & Scott. Contact him at rlh@muslaw.com.

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