U.S. Supreme Court Upholds Class Action Waivers Under The Federal Arbitration Act

June 28, 2013

On June 20, 2013, the United States Supreme Court upheld the enforceability of class action waivers under the Federal Arbitration Act.

Background and Decision

In American Express Co. v. Italian Colors Rest., 2013 U.S. LEXIS 4700 (U.S. June 20, 2013), a group of merchants filed a lawsuit against American Express claiming that it forced them to accept a credit card rate much higher than those of competing cards. They sought to pursue the case as a class action on behalf of all other merchants. However, American Express moved to compel the lawsuit to individual arbitration pursuant to its written agreement with the merchants that (1) required all disputes be resolved by arbitration; and (2) prohibited disputes from being arbitrated “on a class action basis.”

The U.S. Court of Appeals for the 2nd Circuit ruled that the class action waiver was unenforceable, noting that the high cost of pursuing individual arbitrations would far outweigh any potential recovery. Thus, according to the 2nd Circuit, such expenses would prevent the “effective vindication” of statutory rights and essentially insulate American Express from liability. In a 5-3 ruling, the United States Supreme Court reversed the 2nd Circuit and held that a class action waiver in an arbitration agreement cannot be invalidated based on such considerations.

The Supreme Court specifically rejected the application of the “effective vindication” doctrine on which lower courts have relied to invalidate arbitration agreements with class action waivers when the costs of individual arbitration eliminated any economic incentive to pursue claims. The Court reasoned that the “effective vindication” doctrine was meant to protect a party’s right to pursue statutory remedies, not necessarily prove them. Thus, even if the cost to prove a case may be prohibitive, plaintiffs can still pursue their statutory rights in individual arbitration.

Employer Take-Aways

American Express is an example of recent decisions showing the Supreme Court’s willingness to enforce the terms of parties’ agreements to arbitrate. While the American Express case was in the context of an antitrust action, the decision appears to be a win for employers seeking to enforce arbitration agreements with class waivers, as it eliminates an argument that has formed the basis for numerous courts to invalidate employment arbitration agreements. However, it remains unclear how lower courts (and, in particular, courts in California, which have demonstrated a strong aversion to eliminating the ability of employees to sue their employers in class actions) will interpret and apply this decision. Employers should consult their legal counsel to determine the appropriateness and effectiveness of using arbitration agreements and class action waivers with their employees.

For questions regarding this case or assistance in reviewing, revising or drafting employment-related arbitration agreements, please contact the authors or any other members of the McGuireWoods Labor and Employment Group.