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Arbitration: Second Circuit, Sticking to Its Earlier Stance, Invalidates a Class Arbitration Waiver, Despite Stolt-Nielsen and AT&T Mobility (Feb. 2).

The Second U.S. Circuit Court of Appeals won’t budge.  It won't be surprising if its new class arbitration decision winds up before the U.S. Supreme Court.  The case already has been there.

And the latest decision is the Second Circuit's third in the matter. 

On Wednesday, it held that a waiver of class proceedings in an arbitration provision that American Express Co. uses in its agreements with merchants who accept the company’s credit cards is unenforceable. In re: American Express Merchants’ Litigation, Docket No. 06-1871-cv (Feb. 1, 2012).

The Second Circuit had struck the class arbitration waiver before the Supreme Court held that commercial parties can’t be forced into class arbitration unless they have agreed to the process, in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).
The nation’s top Court accepted Amex, and then remanded it to the appellate court in the wake of Stolt-Nielsen.  The Second Circuit still upheld its decision, but withheld its order so Amex could petition again.

Before a decision could be made, the Supreme Court issued AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), which held that the Federal Arbitration Act preempted California law barring the enforcement of class action waivers in consumer contracts.

The parties re-briefed, and yesterday the Second Circuit said that AT&T Mobility doesn’t affect Amex either.  “[AT&T Mobility] does not alter our analysis,” notes the opinion, written by Circuit Judge Rosemary S. Pooler, “and we again reverse the district court’s decision and remand for further proceedings.”

In fact, the only thing that has changed on the Second Circuit in Amex is the court’s composition.  Original panel member Sonia Sotomayor was elevated to the Supreme Court in 2009; Pooler is joined in the two-judge opinion by Circuit Judge Robert D. Sack.

The new decision likely will be the subject of a cert petition.  Sotomayor, who joined with Pooler and Sack in the original decision--at 554 F.3d 300 (2009)--almost certainly would have to recuse herself if the Court agreed to take the case.
The current decision finds that the use of a class action waiver in a mandatory arbitration clause is unconscionable where a party can show that it effectively bars the exercise of its statutory rights. The opinion holds that the cost evidence produced--that the case could not pursued by individual plaintiffs--satisfies the requirements of Green Tree Financial Corp.-Alabama v Randolph, 531 U.S. 79 (2000). 

As a result, the merchants would have no recourse in their claims against Amex for card agreements they say are too restrictive, and fees that they claim are too high.

Green Tree Financial places the burden of proof on the party seeking to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive.

Since 1999, Amex’s Card Acceptance Agreement has contained a mandatory arbitration clause that widely covers all claims, and prohibits parties from pursuing anything other than individual claims where arbitration has been initiated.

In 2006, a New York federal district court recognized the arbitrability of a dispute between Amex and Italian Colors Restaurant, granting Amex’s motion to compel arbitration.  See In re American Express Merchants Litig., No. 03cv9592, 2006 WL 662341 (S.D.N.Y. March 16, 2006)

The plaintiffs appealed, and the appellate panel found in its original decision that they met their Green Tree Financial burden of showing that their claims could not be reasonably pursued as individual actions. 

The Second Circuit panel found, in reversing the lower court, that the effect of Amex’s arbitration clause, containing the class arbitration waiver, was to immunize itself from claims. The panel invalidated the class action waiver.

Unlike Stolt-Nielsen, where the agreement was silent on class arbitration, which had been ordered by arbitrators, in Amex, the parties had agreed to a class arbitration waiver clause. 

“The key issue,” according to the new opinion, “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 bringing Sherman Act claims against Amex. In re American Express Merchants’ Litigation, 634 F.3d 187, 196 (2d Cir. 2011).”

The Amex plaintiffs’ allegations were based on antitrust claims under the Sherman and Clayton Acts, 15 U.S.C. § 1 et seq., which bar certain anticompetitive business practices.

In upholding its earlier decisions and discounting Stolt-Nielsen and AT&T Mobility, the Second Circuit relied on Green Tree Financial, as well as the arbitrability of federal statutory claims allowed in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632 (1985), and Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). Neither of the two recent Supreme Court decisions affected those earlier cases, the new Pooler Second Circuit opinion points out.

The latest decision finds that class action suits are appropriate and sometimes the only economically rational choice for vindicating statutory rights. There also is a presumption in favor of the arbitrability of statutory claims, so long as the arbitration allows full recovery as intended by the statute.
But, according to the Second Circuit, such full vindication of statutory rights is not always possible through arbitration where the cost of arbitration can be demonstrated under Green Tree Financial to effectively prohibit such vindication.  In Amex, the statutory remedy was in fact undermined by a class arbitration waver clause, given the parties ‘ circumstances.

Although there is broad judicial support for the use of arbitration clauses, the new opinion notes, the rights they provide are not absolute.  They cannot be used as a mechanism to avoid liability.

And the case does not declare arbitration waivers per se unenforceable.  Pooler writes,

[A]s the class action waiver in this case precludes plaintiffs from enforcing their statutory rights, we find the arbitration provision unenforceable. We again emphasize our holding comes with caveats. See Amex, 554 F.3d at 320 (“We emphasize two important limitations upon our holding.”) Our decision in no way relies upon the status of plaintiffs as “small” merchants. We rely instead on the need for plaintiffs to have the opportunity to vindicate their statutory rights.

So if the plaintiffs can't vindicate their rights without a class process, and the Second Circuit can't order class arbitration under Stolt-Nielsen, what's next on remand? 

Apparently, litigation.  "We conclude that this arbitration clause is unenforceable," writes Circuit Judge Pooler. "We remand to the district court with the instruction to deny the defendant's motion
to compel arbitration."
--Russ Bleemer, Editor, Alternatives, & Magda Laszlo, CPR Intern