In the latest of a series of decisions dealing with the enforceability of arbitration agreements, the U.S. Supreme Court in its 2011 decision in the AT&T Mobility LLC v Concepcion case held that the Federal Arbitration Act preempts state laws that refuse to enforce class action waivers in consumer arbitration agreements as unconscionable or against public policy.
The Concepcion decision has had a sweeping impact, as was seen most recently in a February 21, 2013 FINRA Hearing Panel decision in a enforcement action involving Charles Schwab & Company. The FINRA enforcement department had brought an action against Schwab challenging the company’s new customer agreement in which the customer was required to agree to arbitrate any disputes and waive any ability to assert a claim by means of a judicial class action. The Hearing Panel concluded that the agreement violated FINRA’s rules. However, it also concluded, in reliance on Concepcion, that the Rules are unenforceable because they conflict with the Federal Arbitration Act. (The Hearing Panel did find the agreement did violate the Rules by attempting to limit the powers of FINRA arbitrators to consolidate individual claims in arbitration.) FINRA has appealed the Hearing Panel ruling, but the Ruling does show the Concepcion decision’s significant impact.
And now, the question of the enforceability of arbitration agreements is back before the U.S. Supreme Court again. On February 27, 2013, the Court heard oral argument in yet another case examining the enforceability of arbitration agreements. The case is styled as American Express v. Italian Colors Restaurant. Background regarding the case can be found here. The case involves a purported class action antitrust action filed by a group of vendors against American Express in which the vendors allege that AmEx’s credit card policy constitutes an illegal tying arrangement because it forces the vendors to accept debit and credit cards at the same fee level. American Express sought to invoke the arbitration clause in its contractual agreement with the vendors.
The case has been procedurally complicated and the specific decision on appeal to the Supreme Court represented the third separate opinion by the Second Circuit in the case. In what as known as the American Express III decision (here), the Second Circuit refused to enforce the class action waiver in the AmEx contractual agreement on the ground that it would effectively preclude the plaintiffs from prosecuting their federal antitrust claims because individual arbitrations would make the expert witness expense cost prohibitive.
As a Ballard Spahr law firm points out in a memo about the case, the Third, Ninth and Eleventh Circuits disagree with the Second Circuit on whether or not the “vindication of statutory rights” theory is still viable in light of Concepcion. Those courts have found that Concepcion requires the enforcement of a class action waiver notwithstanding arguments that the plaintiffs would be unable to vindicate their statutory rights without a class action because their claims were worth less than the cost of litigating them.
The vendor plaintiffs’ were represented before the Supreme Court by former Solicitor General Paul Clement, who argued that it would not make economic sense for the vendors to pursue their claims individually because the costs of economic experts would be far in excess of their individual damages, and thus they would be effectively precluded from asserting their claims. As described in Daniel Fischer’s account of the oral argument in a February 27, 2013 Forbes article, the vendors’ contentions “did not seem to make much headway with the Justices.” Even liberal Justice Stephen Breyer expressed skepticism and lack of sympathy for the vendors.
The outcome of the pending Italian Colors case remains to be seen. But if as seems likely the Supreme Court continues to follow its now established pattern of supporting the enforceability of arbitration clauses, it seems likely that the vendors’ efforts to avoid AmEx’s arbitration clause, including the class action waiver, will fail. Of course, until the Supreme Court issues its decision in the Italian Colors case there is no way of knowing this for sure.
If American Express prevails in the Italian Colors case and the Supreme Court holds that the class action wavier in the AmEx customer agreement is enforceable, it raises the question of what may be next in the Supreme Court’s recognition of arbitration agreement and class action waiver enforceability. In particular it raises the question (that Daniel Fischer noted in his Forbes article) that the next step may be the question of enforceability of arbitration requirements in corporate articles of incorporation or by-laws.
The question of whether or not a company can impose an arbitration requirement through its articles of incorporation or its by-laws drew a great deal of attention when The Carlyle Group, which was preparing to go public at the time, specified in its partnership agreement that all limited partners would be required to submit any claims to binding arbitration. (I discussed Carlyle’s initiative in a prior blog post, here.) Ultimately, the SEC used its control of the registration process to prevent Carlyle from including this provision. But as illustrated in an April 22, 2012 article by Carl Schneider of the Ballard Spahr law firm on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here), the idea continues to have its advocates and it seems likely that sooner or later there will be a case or circumstance testing the permissibility of arbitration provision in articles of incorporation or corporate by-laws.
For now, the questions of whether or not an arbitration clause in a corporate governance document would be enforceable will have to await another day. If the Supreme Court follows the trend of its own cases and upholds AmEx’s class action waiver in the Italian Colors case, we can certainly expect to see arbitration clauses with class action waivers proliferating in commercial documents. Unless and until Congress intervenes, arbitration provisions including class action waivers would likely become an increasingly common provision of transaction documents. Whether AmEx will prevail and whether that would lead to a test case involving articles of incorporation ad corporate by-laws remain to be seen. Until things change, it seems likely that we will all have to become increasingly more accustomed to dispute resolution through arbitration.