Second Circuit Rejects Class Action Waiver in Antitrust Case Against American Express

Once again, a United States Court of Appeals has rejected an effort to bar class action relief.  The Second Circuit, in In re American Express Merchants' Litigation, _ F.3d. _, 2009 WL 214525 (2nd Cir. Jan. 30, 2009), held that the enforceability of a class action waiver was for the court to decide rather than the arbitrator, and that this waiver was unenforceable because it would grant the defendant de facto immunity from federal antitrust liability.  Unlike some other courts that have evaluated class action waivers under state unconscionability law, the Second Circuit evaluated the class action waiver under the federal substantive law of arbitrability because as vindication of a federal statutory right was involved.

Case Background

American Express Merchants' Litigation involved an antitrust class action filed by merchants against the charge card issuer.  The merchants had accepted American Express credit cards and charge cards and signed agreements with American Express in order to do so.  The merchants alleged that American Express was leveraging its strong position in the charge card market to compel merchants to accept credit card transactions with high merchant fees.  The Card Acceptance Agreement contained an arbitration clause that prohibited the parties from pursuing any claims other than individual claims in arbitration.  The United States District Court for the Southern District of New York, 2006 WL 662341 (Mar. 16, 2006), dismissed the underlying claims and declined to address the validity of the class action waiver, ordering arbitration and holding that “[t]he enforceability of the collective action waivers is a claim for the arbitrator to resolve. Issues relating to the enforceability of the contract and its specific provisions are for the arbitrator, once arbitrability is established.”   The merchants appealed.

Second Circuit Decision

The Second Circuit confronted two issues:

(1) Whether the enforceability of a class action waiver provision in an arbitration clause in the Card Acceptance Agreement was a question for the court, rather than an arbitrator, and

(2) If the enforceability of this provision was a question for the court, whether the mandatory class action waiver provision was enforceable.

On the first question, the Court noted that there are two types of challenges to the validity of arbitration agreements.  One type involves a challenge to the agreement to arbitrate.  The other type involves challenging the contract as a whole.  The court then reiterated the United States Supreme Court's ruling in Buckeye Cashing Inc. v. Cardegna, 546 U.S. 440 (2006), that if there is a challenge to “‘the arbitration clause itself -- an issue which goes to the making of the agreement to arbitrate -- the federal court may proceed to adjudicate it. But [the Federal Arbitration ActFAA] does not permit the federal court to consider claims [which challenge] the contract generally.’“  Since plaintiffs were challenging only the arbitration clause, rather than the entirety of the Card Acceptance Agreement, its enforceability was a question that was properly addressed to the court, not the arbitrator.

As to the second question, the Court accepted plaintiffs' contention that, given the small size of each individual claim, requiring each merchant to pursue individual arbitration would prove prohibitively expensive.  The plaintiffs had submitted a detailed affidavit from an economist, who concluded that it would not be worthwhile for an individual plaintiff to pursue arbitration or litigation where the out-of-pocket costs, just for an expert's economic study and services, would be at least several hundred thousand dollars and might even exceed $1 million.  Based on this affidavit, the Court noted that "[t]he Card Acceptance Agreement therefore entails more than a speculative risk that enforcement of the ban will deprive them of substantive rights under the federal antitrust statutes."   As such, the Court held that the class action waiver in the Card Acceptance Agreement could not be enforced in this particular case because to do so would grant American Express "de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery."

The court offered two caveats in reaching its decision.  The first caveat was that the decision was not based on the size of the plaintiff merchants, nor on their claims of being "small businesses."  The Court specifically noted that the fact that plaintiffs were mainly small businesses did not put them in a similar bargaining position to individuals.  Recent litigation has resulted in some class action waivers being rejected due to the unfair bargaining position between an individual and a corporation.  See, e.g.,  Lowden v. T-Mobile USA, Inc., 512 F.3d 1213, 1219 (9th Cir. 2008).  The Court noted that such cases have relied on findings of unconscionability under state law, while the current case was relying on a vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability.

The second caveat noted by the Court was to make clear that they did not "hold here that class action waivers in arbitration agreements are per se unenforceable. We also do not hold that they are per se unenforceable in the context of antitrust actions."  Rather, each case that presents a question of the enforceability of a class action waiver in an arbitration agreement must be considered on its own merits, governed with a healthy regard for the fact that the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements."

The plaintiff merchants had declared themselves amenable to class action proceedings in arbitration.  Because American Express, however, had said that it would reconsider its intention to proceed to arbitration should the Court not enforce the class action waiver, the Court remanded to the district court to allow American Express the opportunity to withdraw its motion to compel arbitration.

This decision parallels the decision by the United States Court of Appeals for the First Circuit in Kristian v. Comcast Corp, 446 F.3d 25 (1st Cir. 2006).  Like others discussed in our earlier update, it underscores the difficulty in drafting a class action waiver that a court will sustain.