Second Circuit refuses to enforce class action waiver in arbitration provision

Abby Cohen Smutny (Partner) and Lee A. Steven (Counsel), Leah Witters (Associate), White & Case LLP

The Second Circuit Court of Appeals has found that a class action waiver in a commercial arbitration provision cannot be enforced when plaintiffs demonstrate that the waiver precludes them from enforcing statutory rights.

In In re American Express Merchants' Litigation, 2011 U.S. App. LEXIS 4507 (2d Cir. Mar. 8, 2011), a group of California and New York merchants who operate businesses that have contracted with the American Express Company (Amex) and the National Supermarkets Association (collectively plaintiffs) challenged a provision in the Amex Card Acceptance Agreement (agreement). The agreement is a standard form contract issued by Amex that governs the relationship between Amex and merchants that accept Amex charge cards. It includes a mandatory arbitration clause with a class action waiver that requires all claims be arbitrated on an individual basis.

The Second Circuit originally held that the agreement was unenforceable because the plaintiffs presented evidence showing that enforcing the class action waiver would provide Amex with immunity from antitrust liability because arbitrating claims individually would be prohibitively expensive. Amex filed a petition for certiorari, which the Supreme Court granted. The Supreme Court then vacated the Second Circuit's decision and remanded to the Second Circuit to reconsider the case in light of the decision in Stolt-Nielsen SA v AnimalFeeds Int'l Corp.

Upon reconsideration, the Second Circuit first explained that Stolt-Nielsen prohibits courts from forcing parties to an arbitration agreement to participate in a class arbitration when they did not contract to do so. It does not follow, however, that every agreement involving class arbitration is enforceable. Under the Federal Arbitration Act (www.practicallaw.com/6-501-6615) (FAA), the federal substantive law of arbitrability governs whether an agreement to arbitrate that includes a class arbitration waiver is enforceable. Thus, the question before the court was whether a mandatory class action waiver could be enforced when its effect was to prevent parties from enforcing a statutory right.

The Second Circuit then held that "each case which presents a question of the enforceability of a class action waiver in an arbitration agreement must be considered on its own merits...". It then found that the evidence presented by the plaintiffs showed that the costs of individually arbitrating their disputes would be prohibitively high and that class arbitration was the only way the plaintiffs' statutory rights could be enforced. Thus, the class arbitration waiver was unenforceable.

This case shows that courts are still grappling with the impact of Stolt-Nielsen on class arbitrations. In the Second Circuit, courts will continue to decide the enforceability of class action waivers based on the facts of the case and in light of the federal policy favouring arbitration.

 
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