Supreme Court Strictly Enforces the Federal Arbitration Act

Relatively unnoticed amidst more publicly-awaited rulings, the Supreme Court held that arbitration clauses in contracts which restrict or eliminate a party's right to seek class treatment will be strictly enforced under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq

In American Express Co. v. Italian Colors Restaurant, a number of merchants had a contract with American Express that contained a waiver of the right to seek class arbitration.  The merchants brought a class action in federal court asserting antitrust claims against the credit card company.  In holding that the class arbitration waiver was enforceable, the Supreme Court overturned a ruling by the Second Circuit which would have allowed class proceedings to go forward on the grounds that individual arbitration would place too high a burden on the individual plaintiffs.  

ScotusBlog explains:

The Court has repeatedly held that arbitration is a matter of contract and that the terms of arbitration agreements will be strictly enforced.  It began its analysis here by reaffirming these principles.  Citing its recent decision in CompuCredit Corp. v. Greenwood, the Court explained that these principles apply equally when federal statutory rights are involved, unless they are overridden by a contrary congressional command.  In this instance, there was no contrary command.  The Court considered the Sherman and Clayton Acts as well as Federal Rule of Civil Procedure 23, and found that neither the federal antitrust laws nor Rule 23 created an entitlement to class proceedings.  Congress did not intend to pursue its antitrust goals at any cost, and already provides for treble antitrust damages under 15 U.S.C. § 15 to advance its antitrust goals.  Furthermore, the antitrust laws predate the advent of class actions, and make no mention of class actions. Considering these factors leads to the conclusion that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”  Similarly, Rule 23 does not “establish an entitlement to class proceedings for the vindication of statutory rights,” because it has stringent requirements that are often not met.

The majority’s message was loud and clear:  Class proceedings are an exception to the usual rule, not an entitlement.  It would be “remarkable” for a court to “erase” an agreement to arbitrate pursuant to the “usual” rule.  This theme continued as the decision turned next to the “effective vindication” doctrine that the merchants had tried so hard to establish in their briefs and at oral argument.  While the majority did recognize the existence of a “judge-made” “effective vindication exception,” it noted that this exception originated as mere dictum in the Supreme Court’s Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. opinion and had never been applied to invalidate an arbitration agreement.  The Court further marginalized the exception through its analysis.  Focusing on language in Mitsubishi Motors indicating that the exception was designed to protect the “right to pursue statutory remedies,” the Court held that the exception barred provisions “forbidding the assertion of certain statutory rights” but did not apply to class action waivers or other provisions that simply increase the cost of proving a claim, because “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.”  If parties could effectively vindicate their individual federal antitrust rights before class actions ever existed, then the availability of class proceedings did not suddenly turn individual antitrust suits into an ineffective form of vindication.  Even Green Tree Financial Corp.-Alabama v. Randolph  was cast into doubt by the Court’s comment that the effective vindication exception would only “perhaps” cover the situation where high arbitration fees precluded access to arbitration.  The Court’s view of the effective vindication exception is so narrow that it may not serve a useful purpose going forward.  The only provision in an arbitration agreement that would clearly be barred by the exception is one that is easy to avoid or contract around – an express prohibition on the assertion of certain statutory rights.

What does this mean for businesspeople?  Great care and attention must be paid to agreements containing arbitration clauses.  A provision that waives the right to seek class arbitration, and requires individual arbitration instead, will be strictly enforced by the courts.  The only exceptions are (1) where the contract itself is held to be invalid (because, for example, it is so unfair or one-sided that it is unconscionable under state law, or (2) where a statute guarantees the right to class proceedings for a specific claim.