Second Circuit Reaffirms Refusal to Enforce Class Action Waiver

February 13, 2012

Earlier this month, the Second Circuit Court of Appeals reaffirmed its prior holding that a class action waiver was unenforceable where it effectively precluded plaintiffs from vindicating their federal statutory rights.  In re Am. Express Merchants’ Litig., No. 06-1871, 2012 U.S. App. LEXIS 1871 (2d Cir. Feb. 1, 2012).  The Second Circuit’s decision, which applied binding, long-standing Supreme Court precedent, provides important guidance regarding the evidentiary record that plaintiffs should develop in order to overcome class waiver provisions.

The amended complaint alleges that defendants American Express Company and American Express Travel Related Services Co. (together, “Amex”), which issue general purpose and corporate charge cards to consumers and businesses and provide charge card services to merchants, violated certain antitrust laws by leveraging their market power in corporate and personal charge cards[1] to compel merchants to pay supracompetitive fees on Amex’s new revolving credit card products.  Plaintiffs seek to represent a class consisting of “all merchants that have accepted American Express charge cards . . . and have thus been forced to agree to accept American Express credit and debit cards.”

The relationship between Amex and the plaintiffs is governed by the “Terms and Conditions for American Express© Card Acceptance” (the “Card Acceptance Agreement”), a standard form contract issued by Amex.  The Card Acceptance Agreement contains a mandatory arbitration clause.  It also contains a class action waiver provision that precludes a merchant from bringing a class action lawsuit or having any claim arbitrated on anything other than an individual basis.

The February 1, 2012 decision is the third opinion that the Second Circuit has issued in this matter since the district court granted Amex’s motion to compel arbitration in March 2006.

In 2009, the Second Circuit refused to enforce the class action waiver because doing so would deprive plaintiffs of their “only reasonably feasible means of recovery,” and would therefore “grant Amex de facto immunity from antitrust liability.”  The Second Circuit found that the record, which included an economist’s affidavit detailing the “fiscal impracticality of pursuing individual claims,” demonstrated that plaintiffs’ claims could not reasonably be pursued as individual actions in either arbitration or litigation.  Accordingly, enforcement of the class action waiver would “flatly ensure[ ] that no small merchant may challenge American Express’s tying arrangements under the federal antitrust laws.”

The Supreme Court subsequently vacated the Second Circuit’s decision and remanded for further consideration in light of Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), in which the Supreme Court concluded that “‘a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.’”  On remand, the Second Circuit found that Stolt-Nielsen did not require it to depart from its original analysis.  Accordingly, the Second Circuit again reversed the district court’s decision and remanded for further proceedings.

The Second Circuit placed a hold on its mandate in April 2011 to allow Amex to file a petition seeking a writ of certiorari.  During the pendency of that hold, the Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), finding that the Federal Arbitration Act (“FAA”) preempted a California state law that deemed unconscionable most class action arbitration waivers in consumer contracts.  The parties submitted supplemental briefing to the Second Circuit to address what impact, if any, Concepcion had on the Second Circuit’s analysis.

In its third and most recent decision, the Second Circuit found that Concepcion did not alter its analysis, and it reaffirmed its refusal to enforce the class action waiver.  In so doing, the Second Circuit rejected a “facile reading” of Stolt-Nielsen and Concepcion that would render class action arbitration waivers per se enforceable.  Noting that neither case addressed the issue before it, the panel turned instead to Supreme Court precedent that addressed the issue of vindicating federal statutory rights in arbitration.

The panel found guidance in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632 (1985), in which arbitration was recognized as an effective vehicle for vindicating statutory rights “only ‘so long as the prospective litigant may effectively vindicate its statutory cause of action in the arbitral forum.’”  It noted that the Mitsubishi court indicated in dicta that it would have “little hesitation . . . condemning [an] agreement as against public policy” if contractual clauses were to “operate ‘as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations.’”  The panel further noted that the Supreme Court acknowledged in Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), that high arbitration costs could preclude a litigant from effectively vindicating his/her federal statutory rights in arbitration.  As the Second Circuit noted repeatedly in its opinion, this precedent requires that the party seeking to invalidate an arbitration agreement because the arbitral forum would be prohibitively expensive bears the burden of demonstrating the likelihood of incurring such costs.

The Second Circuit concluded that neither Stolt-Nielsen nor Concepcion overruled Mitsbusihi or Green Tree and, accordingly, that both cases retained their binding authority.  The panel stressed, however, that each class action waiver must be considered on its own merits and based on its own record, “with a healthy regard for the fact that the FAA ‘is a congressional declaration of a liberal federal policy favoring arbitration agreements.’”

On the facts of this case, the Second Circuit found that plaintiffs had demonstrated—largely through an economist’s affidavit—that the cost of individually arbitrating with Amex would be prohibitive, effectively denying plaintiffs the statutory protections of the antitrust laws. Specifically, plaintiff’s economist had indicated that the cost of his financial consulting firm’s assistance in individual plaintiff antitrust cases ranges from approximately $300,000 to more than $2 million, and that it was his opinion that his firm’s cost for this case would likely be in the middle of that range.  After assessing the damages that the merchants might expect to win, the economist concluded that it would not be worthwhile for an individual plaintiff to pursue individual litigation or arbitration where the costs for the expert economic analysis alone could exceed $1 million.

The Second Circuit found that Amex had “‘brought no serious challenge’” to the plaintiffs’ demonstration that they could not reasonably pursue their claims as individual actions.  It rejected the notion that the Clayton Act’s treble damages awards were likely to assist plaintiffs where, as here, the treble awards would still be insufficient to pay the expert fees necessary to make an individual plaintiff’s case.  It found the Clayton Act’s fee-shifting provisions to be similarly inadequate, given that plaintiffs must consider the risk of losing (and not recovering any fees) when evaluating a suit’s potential costs.

Thus, because the arbitration provision prohibited class arbitration and, if enforced, would prevent plaintiffs from vindicating their statutory rights, the Second Circuit found that the arbitration clause was unenforceable, and it directed the district court to deny Amex’s motion to compel arbitration.

Photo Credit: Andres Rueda

[1] A holder of a charge card is required to pay the full outstanding balance at the end of a standard billing cycle.  Plaintiffs allege that holders of charge cards are more attractive to merchants than holders of credit cards and, accordingly, that Amex has traditionally collected high fees from merchants in connection with purchases made with charge cards.


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