2d Cir.: Contractual ban on class actions unenforceable

The Second Circuit held that a ban on class actions in a commercial contract violated the Federal Arbitration Act (FAA) because it essentially immunized the defendant from antitrust claims.

Notably, the decision is not based on the state law of unconscionability, but rather holds that the FAA forbids clauses that are virtually exculpatory. The court did not say that all class action waivers are invalid, but focused on the nature of the claims involved. In re Amer. Express Merchants' Litig., --- F.3d ---, 2009 WL 214525 (2d Cir. Jan. 30, 2009) (No. 06-1871).

 

          Plaintiffs are merchants who claimed that American Express (Amex) committed antitrust violations with regard to its Card Acceptance Agreements. Amex sought to force them into individual arbitration, citing the Agreement’s mandatory arbitration provision, which contains a ban on class actions. The merchants challenged this provision, arguing they should be allowed to pursue arbitration as a class.

 

          The court noted that the Supreme Court “has at least implicitly held” that class action bans are not per se unenforceable. See Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003) (whether arbitration clause included class action ban was question for arbitrator). But the panel rejected the view that dicta in other Supreme Court decisions have signaled general acceptance of class action bans. Moreover, the Court has said in dicta that if arbitration provisions “operated … as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.” Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 61 (1985).

 

          Here, the court found that “the record abundantly supports the plaintiffs’ argument that they would incur prohibitive costs if compelled to arbitrate under the class action waiver.” In particular, plaintiffs presented testimony from an economist, who said that the research and expert costs required to litigate their antitrust claims would far exceed the value of most merchants’ individual claims. Moreover, the court found that the fee-shifting statute and treble damages for antitrust suits would not remedy this problem, because (1) the disparity between costs and damages would be so great, (2) the statute limits expert fees to a $40 per diem, and (3) the arbitration rules used by Amex-designated bodies do not provide for higher expert fees, and (4) plaintiffs still must bear the risk of losing. Accordingly, the court said that the class action ban “flatly ensures that no small merchant may challenge American Express’s [actions here] under the federal antitrust laws.”

 

          The court emphasized that its holding was based on the record in this case, and plaintiffs in any given case would have to demonstrate the unfairness of a class action ban. The court also indicated that although based on the federal law of arbitrability, its approach was similar to many courts’ analysis under state law unconscionability principles. The First Circuit invalidated a class action ban based on a similar federal analysis in Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006).

 

Other circuits have so far enforced class action bans, save for some decisions based on state law. Compare, e.g., Johnson v. W. Suburban Bank, 225 F.3d 366 (3d Cir. 2000) (federal law does not prohibit class action ban), with Dale v. Comcast Corp., 498 F.3d 1216 (11th Cir. 2007) (class action ban unconscionable under Georgia law). However, it is not clear that there is a true circuit split here, because in prior cases it appears that plaintiffs have not presented arguments and evidence regarding the practical impossibility of pursuing individual claims.