Another Blow to Class Arbitration Waiver Provisions

The U.S. Court of Appeals for the Second Circuit dealt yet another blow to the enforceability of the increasingly common class arbitration waiver provision in its recent March 8, 2011 ruling in In re: American Express Merchants’ Litigation, No. 06-1871-cv.

A class arbitration waiver provision requires parties to the agreement to proceed with arbitration on an individual basis, rather than on a representative basis or a class basis. They are often paired with a mandatory arbitration provision requiring parties to arbitrate disputes with mediators rather than litigate them in court as in the agreement at issue in In re: American Express Merchants’ Litigation.

The “conundrum” this particular class arbitration waiver provision presented, as the Court explained, was “whether the mandatory class action waiver in the Card Acceptance Agreement is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement of the waiver would be to preclude their bring Sherman Act claims against Amex in either an individual or collective capacity.” Slip op. at 15.

Although the Court did not conclude that class action waivers in arbitration agreements are per se unenforceable or that they are per se unenforceable in the context of antitrust actions, it did find that this particular provision was unenforceable, largely affirming its earlier ruling in In re: American Express Merchants’ Litigation, 554 F.3d 300 (2009). The Court’s reasoning in its most recent ruling begins with the recognition that class action lawsuits are well-recognized by the Supreme Court as a vehicle for vindicating statutory rights, which is especially true when a large group of individuals has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action.

Plaintiffs presented evidence that the cost of litigating their claims more than eclipsed the awards to which they would be entitled if they were successful, and the Court found that “Amex has brought no serious challenge to the plaintiffs’ demonstration that their claims cannot reasonably be pursued as individual actions, whether in federal court or in arbitration”. Slip op. at 20. As a result, the Court found that “enforcement of the class action waiver in the Card Acceptance Agreement flatly ensures that no small merchant may challenge American Express’s tying arrangements under the federal antitrust laws.” Id. The Court explained that “[e]radicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statues.” Id. “Thus,” the Court ultimately held, “as the class action waiver in this case precludes plaintiffs from enforcing their statutory rights, we find the arbitration provision unenforceable.” Id.