In AT&T Mobility v. Concepcion, the U.S. Supreme Court last term held that the Federal Arbitration Act preempted California common law deeming class action arbitration waivers in consumer contracts unconscionable. Since that time, a number of courts -- many of them in California -- have sought to distinguish Concepcion and otherwise wriggle free from its holding.
Last week a two-judge panel of the Second Circuit issued a third decision in In re American Express Merchants' Litigation, 2012 WL 284518 (2d Cir. Feb. 1, 2012), an antitrust tying case challenging the defendant's pricing for members' use of charge cards, credit cards, and debit cards with affiliated merchants. Some will consider the opinion in AmEx 3 a roadmap for avoiding what some have described as the "harsh effect" of Concepcion in consumer fraud litigation. But AmEx 3 has important limitations. It also is instructive for product sellers who may be reevaluating their consumer contracts.
The key fact to note about AmEx 3 is that it involved an underlying federal statute: the antitrust statute. Thus, the "preemptive" effect of the FAA had to be balanced against the legislative objectives of the other federal statute at issue, the antitrust statute.
This is a very important fact. Even the two-judge panel in AmEx 3 recognized that this was a very different situation from what was at issue in Concepcion: namely, state common law that was conflicting with the Federal Arbitration Act. See AmEx 3, 2012 WL 284518 at *8 ("Concepcion plainly offers a path for analyzing whether a state contract law is preempted by the FAA. Here, however, our holding rests squarely on a 'vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability.'") (citation omitted). The panel in AmEx 3 clearly understood that its analysis (applying the FAA to a federal statute) could not be applied to invalidate a federally-recognized arbitration provision where the underlying right being enforced was one of state law.
The AmEx 3 court's analysis of the applicable federal principles was relatively straightforward. The antitrust statute creates statutory rights that should be enforced. Sometimes, "the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action." Id.
The court recognized that "[a]rbitration is also recognized as an effective vehicle for vindicating statutory rights, but only 'so long as the prospective litigant may effectively vindicate its statutory cause of action in the arbitral forum." Id. at *9 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) and its dicta that where the agreement precludes the right to pursue statutory antitrust remedies, the court would condemn it as against public policy). See also id. at *10-*11 (citing Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), for the proposition that large arbitration costs could prevent a litigant from vindicating her federal statutory rights in an arbitral forum).
Here was the crux of the matter for the court in AmEx 3: plaintiffs' expert testified that although the average four-year loss suffered by a plaintiff was $1,751 (or $5,252 when trebled), and the largest four year loss might be expected to be $12,850 (or $38,549 when trebled), the cost of an expert to help a plaintiff prove its claim would fall between $300,000 and $2 million. In effect, no individual plaintiff could be expected to assert its claims because to do so simply was not cost-effective. The court concluded that the class action waiver in the arbitration agreement thus made it unlikely that the statutory rights granted under the federal antitrust act would be asserted at all:
Thus, as the class action waiver in this case precludes plaintiffs from enforcing their statutory rights, we find the arbitration provision to be unenforceable. We again emphasize our holding comes with caveats. Our decision in no way relies upon the status of plaintiffs as "small" merchants. We rely instead on the need for plaintiffs to have the opportunity to vindicate their statutory rights.
We do not hold today that class action waivers in arbitration agreements are per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions. Rather, as demonstrated by the different outcomes in our sister Circuits, we hold that each waiver must be considered on its own merits, based on its own record, and governed with a healthy regard for the fact that the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements."
Id. at *13-*14 (citations omitted). The court was clear that the party opposing arbitration bears a heavy burden of proving that enforcement of the arbitration clause will make it impossible to enforce the statutory rights granted by the underlying federal statute. See id. at *8, *11.
The court concluded that under Concepcion and Stolt-Nielsen, it had no power to order the defendant to engage in class action arbitration where it had not agreed to do so. Therefore, the court remanded the case to the district court with the instruction to deny the defendant's motion to compel arbitration, leaving the plaintiffs the avenue of attempting to pursue a class action in a judicial forum.
As is demonstrated above, the fact that there was a federal statute at issue in this case makes it fundamentally different from a state-law consumer fraud case like Concepcion. And yet, for those companies taking a second look at their arbitration provisions, AmEx 3 certainly provides some encouragement for including in such agreements some cost-sharing or cost-shifting mechanisms, evidentiary presumptions, or other rules that make it less expensive for potential claimants to litigate an individual claim in arbitration. Indeed, many of those decisions that are refusing to apply Concepcion in the consumer context appear to do so because of a belief that individual claims cannot be affordably prosecuted in arbitration. The more that the arbitration agreement can minimize transaction costs and guarantee some reasonable settlement offer or other form of recovery, the more effectively such "negative value class action" arguments can be addressed.