Supreme Court Rules Class Action Waivers in Arbitration Agreements Are Enforceable: What It Means for Employment Cases

In a split, 5-3 decision, the US Supreme Court held that “class action waiver” provisions in arbitration agreements remain valid and enforceable, even if the alternative—individual arbitration claims—is so costly that plaintiffs are deterred from pursuing them. The plaintiffs and respondents in American Express Co. v. Italian Colors Restaurant were merchants who accept American Express cards. They sued American Express (AmEx) and a wholly-owned subsidiary claiming that AmEx charged excessive rates for the use of its credit cards, violating antitrust laws. The agreements between the plaintiff-merchants and AmEx required that all disputes be resolved by arbitration, and expressly prohibited the arbitration of any claims on a class-wide basis, thus constituting “class action waivers.”

The plaintiff-merchants argued that the class action waivers must be invalidated because to enforce them would require each merchant to incur costs litigating an individual case that so far outweighed the potential benefit (up to $1 million versus $38,549). Thus, they argued that the waivers prevented the “effective vindication” of their antitrust claims, which itself contravened the antitrust laws.

Writing for the Court, Justice Antonin Scalia observed initially that the Federal Arbitration Act “reflects the overarching principle that arbitration is a matter of contract,” and that courts must “vigorously enforce” arbitration agreements unless compelled otherwise by a “contrary congressional command.” He then noted not only the absence of any contrary congressional command compelling the rejection of class arbitration waivers, but that “antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” The majority opinion further noted that the right to pursue a statutory remedy is not eliminated simply because a plaintiff might not find the “expense involved in proving a statutory remedy” to be worthwhile (emphasis in original). The opinion essentially restricted the “effective vindication” principle — a standard used by some courts in the past to determine whether class action waiver agreements should be enforced solely by reference to whether individual claims would be too burdensome to “vindicate” — to situations where the arbitration agreement itself imposes high filing fees or forum costs rather than situations like in American Express where the economics of litigating a particular claim on an individual basis are unlikely.

The Supreme Court’s decision is closely aligned with its recent decisions upholding arbitration agreements, most notably AT&T Mobility v. Concepcion, 563 U.S. ___ , 131 S. Ct. 1740 (2011). Specifically, the Court reasoned that AT&T Mobility “all but resolves this case.” Invalidating a state law that required the availability of class arbitration on the ground that such law “interfered with fundamental attributes of arbitration,” the Court noted that AT&T Mobility “specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

Writing for the dissent, Justice Elena Kagan wrote that the effective vindication doctrine was created specifically for situations like this case – where an arbitration clause “operates to confer immunity from potentially meritorious federal claims.” In the dissent’s view, the class arbitration waiver in the arbitration agreement between AmEx and the merchants simply reflected a monopoly using “its monopoly power to protect its monopoly power” by ensuring that cost-effective routes for challenging alleged Sherman Act violations were foreclosed to potential claimants, while the only ones remaining were “prohibitively expensive.”

American Express obviously has important ramifications in the employment law sector, particularly in states like California, where employers often have class action waivers in their arbitration agreements with employees. Also, state court decisions like the California Supreme Court’s Gentry v. Superior Court, 42 Cal. 4th 443 (2007) and Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000) restrict arbitration provisions generally in employment cases (and Gentry restricts class action waivers specifically) on the basis of the effective vindication doctrine. One type of case that will certainly be impacted by American Express are wage-hour class, collective, or representative claims, where individual damages may be modest, similar to the merchants’ claims in American Express. In the future, American Express could be interpreted to remove a major previous impediment to enforcing class action waiver provisions applying to both wage-hour claims, and employment claims in general.

However, companies and employers should monitor federal and state court decisions applying American Express closely. In states that may judicially disfavor arbitration agreements, courts may not choose to directly follow American Express as they encounter disputes about the validity of class action waivers in employment arbitration agreements.