Breaking News: U.S. Supreme Court Issues Amex III Decision

The Supreme Court has issued its highly-anticipated decision in “Amex III”, the latest installment in an attack on class actions thinly disguised as an affection for the “liberal federal policy favoring arbitration.” The 5-3 majority (Justice Sotomayor abstained) reversed the Second Circuit and held that the Court of Appeals ruled contrary to the Federal Arbitration Act (FAA) when it invalidated an arbitration clause’s class action waiver, even though a class action would have been the plaintiff’s only way of effectively vindicating its antitrust claims against the defendant, American Express. See American Express Co. v. Italian Colors Restaurant, 570 U. S. ___ (2013) (slip opinion available here).

Italian Colors Restaurant, joined by other restaurants and retailers, sued American Express alleging that the credit card mainstay violated antitrust law by forcing merchants to accept its debit cards as a condition of accepting its charge cards. American Express sought to enforce an arbitration agreement, which included a class action waiver, but was rebuffed by the Second Circuit, which held that a prohibition against collective actions would impair the plaintiffs’ ability to enforce their statutory rights under the Sherman Act because the cost of plaintiffs’ individually arbitrating their dispute would be prohibitive and would thus effectively deprive them of protection under the antitrust laws. See In re Amer. Express Merchants’ Litig., 667 F. 3d 204 (2d Cir. 2012).

However, the majority opinion written by Justice Antonin Scalia stated that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” Slip op. at 4. After some odd bedfellow-ing in recent Fourth Amendment decisions, the Court returned to its familiar split, with Justices Alito, Thomas and Kennedy joining Scalia, along with Chief Justice Roberts. Justice Kagan wrote a dissent supported by three votes that will no doubt be widely described as “stinging,” which explains that: “here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.” Slip op., dissent, at 1. Justice Sotamayer recused herself because she had been on the Second Circuit when the case was before it.

Ostensibly at least, the decision turned on careful consideration of the “effective vindication doctrine,” which is widely regarded to have originated in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), and which stands for the reasonable proposition that an arbitration clause that functions as an exculpatory clause (e.g., a clause prohibiting all antitrust claims) need not be enforced. The majority suggests that the doctrine “originated as dictum” (slip op. at 6), before going into several paragraphs of analysis that treat the doctrine as if it were in fact dictum (slip op. at 6-7). On this point, the dissent gets the better of the argument, and in doing so likely saves what it portrays as a narrow doctrine. See slip op., dissent at 8, n.3. Justice Kagan persuasively argues that the majority is “dead wrong” when it contends that, in Mitsubishi, the Supreme Court didn’t reach the issue of whether an arbitration agreement’s potential deprivation of the right to pursue federal remedies is a permissible ground for deeming the arbitration agreement unenforceable, by noting that Mitsubishi merely did not reach whether the at-issue arbitration clause did in fact nullify the ability to vindicate a federal right. Id. (“But [in Mitsubishi] we stated expressly that if the agreement did so (as Amex’s does), we would invalidate it.”)

A similar issue of particular importance in California — whether an arbitration agreement that purports to waive a person’s ability to seek civil penalties under PAGA may be deemed unenforceable — is unaffected by the Amex III decision, as the controlling law remains that PAGA waivers in arbitration agreements may be properly found unenforceable, since a PAGA action is “fundamentally a law enforcement action designed to protect the public and not to benefit private parties,” and thus does not frustrate the purposes of the FAA. See Brown v. Ralphs Grocery, 197 Cal. App. 4th 489, 502 (2011). Likewise, while Amex III exclusively discusses the economic factors that could impede the vindication of a right, it does not address or alter the non-economic factors that the California Supreme Court identified in Gentry v. Super. Ct. that are to be considered in determining whether an arbitration agreement in the employment context impermissibly blocks vindication of an unwaivable right. See Gentry, 42 Cal. 4th 443 (2007).

In Amex III, however, the majority brought to bear arguments more compelling than those in earlier arbitration/class action rulings, noting that the at-issue class action waiver “no more eliminates those parties’ right to pursue their statutory remedy than did federal law before its adoption of the class action for legal relief in 1938.” Slip op. at 7. While the Kagan dissent didn’t directly address that argument, it had a provocative retort, styled around arbitration provisions that would be permissible under the majority’s scheme and are indistinguishable from candidly exculpatory provisions that the majority would have to concede the invalidity of, including the Amex CEO as the designated arbitrator, no relief even on a finding of liability, and prohibiting economic testimony in an antitrust case. See slip op., dissent at 3.

Perhaps naively, the three-member dissent argues that “[w]hat the FAA prefers to litigation is arbitration, not de facto immunity.” Slip op., dissent at 5. While that might be an accurate statement of what the drafters of the FAA intended, it appears that the majority is tacitly on the side of providing businesses not just with access to the arbitration forum, but also the de facto immunity that is any rational company’s most desired endgame when it aims to catch consumers or employees in arbitration’s adhesive flypaper.