By Thomas Kaufman

Do you hear that? . . . .  It is the wailing and moaning of plaintiff’s attorneys across the country.

This morning, in a 5-3 decision (Sotomayor recused herself), the United States Supreme Court issued a pro-arbitration decision in American Express Co. v. Italian Colors.  The forceful opinion from Justice Scalia continues to build on the edifice of Stolt-Neilsen (2010), Concepcion (2011), and Greenwood (2012) in holding that a class action waiver in an arbitration agreement is enforceable, even as to federal anti-trust claims.

In Stolt-Neilsen, the Court held that where an agreement was silent on the availability of class arbitration, only individual arbitration was allowed. In Concepcion, the court held state law invalidating class action waivers in the consumer arbitration agreements to be preempted by the Federal Arbitration Act and unenforceable.  In Greenwood, the Court held that the presumption in favor of arbitration was so strong that a conclusion that a federal statute barred arbitration of a federal claim would only be found if it was clearly reflected in the statute (which is rarely the case).

And now, in American Express the Court holds that a party cannot bypass a class action waiver in an arbitration agreement by showing that the cost of proving up a particular type of federal claim is likely (or even certain) to exceed any possible economic recovery in the absence of the class action mechanism.  As explained below, this decision should push the remaining holdouts to accept the enforceability of class action waivers.

The Decision

This action arose from an antitrust claim brought by merchants against American Express.  The Second Circuit held that, because the antitrust claims were economically viable only if brought as a class action, then the class action waiver in the merchants’ arbitration agreement with American Express had to be set aside. The basis for the lower court was both that (1) the antitrust statute is a federal law, so it is not subject to FAA preemption; and (2) previous Supreme Court precedent had allowed an invalidation of terms in an arbitration agreement that effectively preclude the enforcement of a federal claim. The Supreme Court granted cert.

Justice Scalia’s decision seems to be written to clear away various arguments that had been asserted in the wake of Concepcion intended to limit the scope of that decision.  Instead, Justice Scalia reaffirms how sweeping the Supreme Court majority had intended the decision to be.  Paragraph by paragraph, Justice Scalia takes on and rejects those sorts of arguments.

First, Justice Scalia rejects the notion that Concepcion was just a federal preemption decision with no application to other federal statutes (which should have already been dispelled by Greenwood).  He explains that antitrust claims actually pre-date the enactment of the federal class action statute, Rule 23 of the Federal Rules of Civil Procedure, which undercuts the notion that antitrust actions were always intended to be enforced through the class action device.  Justice Scalia further notes that Congress enacted certain provisions within the antitrust laws to ease their enforcement, such as allowing treble damage recoveries.  But the mere fact that a class action device would aid the enforcement is not equivalent to showing a Congressional intent to set aside FAA principles merely because it would allow the statute to be enforced more aggressively:

“In enacting such measures [e.g. treble damages], Congress has told us that it is willing to go, in certain respects, beyond the normal limits of law in advancing its goals of deterring and remedying unlawful trade practice. But to say that Congress must have intended whatever departures from those normal limits advance antitrust goals is simply irrational. ‘[N]o legislation pursues its purposes at all costs.’”

In this section, Justice Scalia also reiterates the Court’s rejection of the notion that Rule 23 created a federal public policy to allow class actions in any case where the requirements of Rule 23 are met.  He notes that this argument was already rejected in Concepcion.

Second, Justice Scalia rejects the underlying premise to the notion that “class action waivers must be set aside if they interfere with the enforcement of federal rights,” a proposition plaintiffs attempted to draw from an earlier Supreme Court precedent, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.  Justice Scalia explains that the sentence plaintiffs repeatedly quote from the Mitsubishi decision was dictum and was only intended to apply to cases where an arbitration agreement precludes the assertion of a type of claim altogether, not merely where the cost of proving an individual violation of the statute exceeds the economic value of the claim:

"The ‘effective vindication’ exception to which respondents allude originated as dictum in Mitsubishi Motors, where we expressed a willingness to invalidate, on ‘public policy’ grounds, arbitration agreements that ‘operat[e] . . . as a prospective waiver of a party’s right to pursue statutory remedies.’ (emphasis in the opinion).  Dismissing concerns that the arbitral forum was inadequate, we said that ‘so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.’ Subsequent cases have similarly asserted the existence of an ‘effective vindication’ exception, but have similarly declined to apply it to invalidate the arbitration agreement at issue.  And we do so again here. As we have described, the exception finds its origin in the desire to prevent ‘prospective waiver of a party’s right to pursue statutory remedies,’ That would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable. But 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.”  (my emphasis)

Next, Justice Scalia points out two precedents that are intended to show how narrow the “effective vindication” exception is meant to be.  He notes that in Gilmer v. Interstate/Johnson Lane Corp., the Court had no qualms about enforcing a class action waiver in an arbitration agreement even though it was applied to an age discrimination claim notwithstanding that the ADEA expressly allows for collective actions (since it was modeled structurally on the FLSA): “statutory permission did ‘not mean that individual attempts at conciliation were intended to be barred.” 

Similarly, in Vimar Seguros y Reaseguros v. M/V Sky Reefer, the Supreme Court enforced a forum selection clause requiring arbitration in a foreign country where the underlying action asserted a claim under the Carriage of Good by Sea Act.  That statute precluded any agreement “‘relieving’ or ‘lessening’ the liability of a carrier for damaged goods” which a lower court held invalidated an agreement that made arbitration expensive by requiring it occur so far from the residence of the plaintiff.  Justice Scalia notes that the Supreme Court reversed, rejecting the argument that this forum selection clause was unenforceable because it made the claim economically unviable:

"‘[i]t would be unwieldy and unsupported by the terms or policy of the statute to require courts to pro­ceed case by case to tally the costs and burdens to particu­lar plaintiffs in light of their means, the size of their claims, and the relative burden on the carrier.”

Finally, Justice Scalia goes back to Concepcion and points out that if people just read the decision, they would not continue to assert the arguments they have been asserting about what it means.  As I wrote at the time, the decision seemed pretty clear in holding that the mere fact that enforcing arbitration agreements with class action waivers would cause certain claims to no longer be economically viable to pursue was not a proper basis to refuse to enforce a class action waiver in an arbitration agreement: 

Truth to tell, our decision in AT&T Mobility all but resolves this case.  (my emphasis).  There we invalidated a law conditioning enforcement of arbitration on the availability of class procedure because that law ‘interfere[d] with fundamental attributes of arbitration. . . . We specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

Application of American Express Decision to Wage/Hour Cases

So, how does this decision impact the existing disputes in wage and hour cases?  First, any argument that Concepcion was limited to cases where the arbitration agreement contained overgenerous provisions designed to make individual arbitration economically viable is now effectively dead.  Second, any argument that FLSA collective actions are immune from class/collective action waivers because the FLSA (like the ADEA in Gilmer) itself provides for collective actions is also dead.  Farewell also to the argument that Gentry is distinguishable from Concepcion because it involved some kind of unwaivable statutory right.  To win on the argument that PAGA claims are saved from class action waivers, Plaintiffs will need to establish that there is no such claim as an individual PAGA claim, an argument that has extremely weak support in the text and history of PAGA.

It appears the last refuge for plaintiffs will be in arguing that unconscionability still exists as a defense and trying to craft arguments that an agreement is unconscionable for some reason other than the existence of the class action waiver.  To do so successfully, however, they will need to come up with a way that the agreement is unconscionable that it no way frustrates the primary purposes of the FAA.  It seems that companies should be able to craft arbitration agreements that will survive such challenges.