Just over two years ago, the Supreme Court issued its decision in AT&T Mobility, LLC v. Concepcion, holding that the Federal Arbitration Act preempted a state rule that class action waivers are unconscionable. Since that time, some courts have sought to limit that decision, either by finding that Concepcion is limited to state law claims or by concluding that Concepcion does not apply if plaintiffs can demonstrate that the high cost of individual arbitration and the limited nature of any award would effectively prevent plaintiffs from vindicating their rights. For instance, as described more fully in an earlier post by my colleague Don Frederico, the Massachusetts Supreme Judicial Court recently issued its decision in Feeney v. Dell, Inc., in which it concluded that Concepcion does not foreclose courts from “invalidating a class waiver where a plaintiff can demonstrate that he or she effectively cannot pursue a claim against the defendant in individual arbitration.” Just days later, the Supreme Court not only squarely rejected that conclusion but also applied Concepcion to a federal claim in American Express v. Italian Colors Restaurant.
American Express involved an alleged violation of federal antitrust laws. The defendant, American Express, moved to compel individual arbitration, but the plaintiffs – a group of merchants – argued that the cost of proving an individual antitrust claim vastly exceeded the potential recovery, and that, as a result, application of the arbitration clause would prevent the merchants from effectively vindicating their federal rights. The Second Circuit agreed, and concluded that individual arbitration could not be compelled.
The Supreme Court reversed in a 5-to-3 decision (Justice Sotomayor was recused). The Court first concluded that the principle that arbitration agreements should be “rigorously enforced” applies even when federal statutory rights are involved, absent a contrary congressional command. Finding no such congressional command in the antitrust laws or in Rule 23, the Court then went on to conclude that the “effective vindication” exception does not invalidate the class action waiver simply because it would be expensive to prove an individual claim. According to the Court, the effective vindication exception only protects a party’s right to pursue a statutory remedy, and “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.” To hold otherwise, the Court concluded, would be contrary to the spirit of the FAA. As the Court observed, requiring a federal court to determine, prior to arbitration, the legal requirements for success on the merits, the evidence necessary to meet those requirements, the cost of developing that evidence, and the likely damages would “undoubtedly destroy the prospect of speedy resolution that arbitration . . . was meant to secure.”
Justice Kagan, in a strongly worded dissent, argued that the “effective vindication” exception barred enforcement of any provision in an arbitration agreement that would effectively “confer immunity fom potentially meritorious federal claims.” In the dissent's view, an “arbitration clause may not thwart federal law, irrespective of exactly how it does so.” Further, as the majority found in Feeney, the dissent concluded that the plaintiffs had proved that the cost of pursuing individual claims was “prohibitive” in light of the potential recovery.
The majority's holding in American Express appears to implicitly overrule the Massachusetts’ court’s decision in Feeney, giving that case – and others like it – a short life. While the Massachusetts Supreme Judicial Court may well have to address Feeney again in light of American Express, one thing is certain: the Supreme Court is serious about enforcing arbitration agreements, including those containing class action waivers. American Express is perhaps the clearest indication yet from the Supreme Court to state courts and lower federal courts that the FAA mandates that parties are free to agree that class arbitration is prohibited.