The Third Time is Not a Charm as the Second Circuit Again Holds Class Action Waivers Unenforceable
The Second Circuit considered the validity of class action waivers for the third time in an antitrust action brought against American Express (“AMEX”) based upon the company’s Card Acceptance Agreement. And, despite intervening Supreme Court opinions, for the third time the appellate court held class action waivers involving federal statutory rights were unenforceable. The Second Circuit’s February 1, 2012 opinion held “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 [Federal Arbitration Act] is a congressional declaration of a liberal federal policy favoring arbitration agreements.” This third opinion likely will have an impact beyond costly antitrust litigation, but the question is how far? Indeed, the opinion cited two District Court decisions denying enforcement of class action waivers in the employment law context.
I. The History
A brief review of the case’s long appellate history is helpful. The appeal was originally argued on December 10, 2007. In Re American Express Merchants’ Litigation.pdf, 554 F.3d 300 (2d Cir. 2009) (“AMEX I”) the court held the class action waiver unenforceable “because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.” AMEX I at 304. The U.S. Supreme Court vacated that decision and remanded it for reconsideration in light of its Opinion in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010). Stolt-Nielsen, which was previously discussed in this blog, held that imposing class arbitration on parties that had not agreed to it conflicts with the FAA. The Second Circuit, however, found that Stolt-Nielsen did not affect its original analysis and again reversed the District Court’s decision and remanded the case. AMEX II, 634 F.3d at 199-200.
On April 11, 2011, the appellate court placed a hold on the mandate in AMEX II so that AMEX could seek a writ of certiorari. During that time, the Supreme Court issued its opinion in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). The Concepcion decision, also extensively covered in this blog, held that the FAA preempted California law barring the enforcement of class action waivers in the consumer context. 131 S.Ct. 1740 (2011). The Second Circuit then received supplemental briefing on Concepcion’s potential impact on the case.
II. The Background
A. The Claims
The Merchants in the AMEX litigation brought antitrust claims under both the Sherman and Clayton Acts maintaining that the “Honor All Cards” provision in AMEX’s Card Acceptance Agreement created an illegal “tying arrangement.” The Merchants were “faced with the choice of paying supracompetitive merchant discount fees . . . on AMEX’s new mass-market products [credit cards] or losing ‘a significant portion of the sales they received from businesses, travelers, affluent consumers, and others’ who are the traditional users of AMEX charge cards.”
B. The Costs
The Court found that the Merchants’ evidence “establishes, as a matter of law, that the cost of plaintiff’s individually arbitrating their dispute with AMEX would be prohibitive, effectively depriving plaintiffs of the statutory protection of the antitrust laws.” In reaching that conclusion, the appellate court relied upon the affidavit of economist Gary L. French, Ph.D. which detailed the costs of expert assistance for individual plaintiffs in antitrust cases. Dr. French summarized those expert costs:
. . . the cost of [Nathan Associates'] expert assistance in individual plaintiff antitrust cases has ranged from about $300 thousand to more than $2 million. However, after reviewing the complaint and doing some preliminary research in this case, it is my opinion that . . . the cost for this case will fall in the middle of the range of [Nathan Associates'] experience.
Dr. French then considered those expert witness costs in relation to a plaintiffs’ potential recovery. He concluded:
The largest volume named plaintiff merchant, with reported American Express Card volume of $1,690,749 in 2003, might expect four-year damages of $12,850, or $38,549 when trebled.
In my opinion as a professional economist . . . it would not be worthwhile for an individual plaintiff . . . to pursue individual arbitration or litigation where the out-of-pocket costs, just for the expert economic study and services, would be at least several hundred thousand dollars, and might exceed $1 million. (Emphasis added).
Largely based on Dr. French’s affidavit, the Second Circuit concluded that “the only economically feasible means for plaintiffs enforcing their statutory rights is via a class action.” In AMEX I the court had found the expert’s affidavit was “essentially uncontested”. 554 F.3d at 317. In reaching its conclusion, the court discounted the fact that the Clayton Act provides for treble damages and the recovery of attorneys’ fees and expenses.
III. Legal Analysis in AMEX III
AMEX argued that Concepcion required a reversal of the holding in AMEX III. The Second Circuit rejected that argument stating:
It is tempting to give both Concepcion and Stolt-Nielsen such a facile reading, and find that the cases render class action arbitration waivers per se enforceable. But a careful reading of the cases demonstrates that neither one addresses the issue presented here: whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights. (Emphasis added).
The Court, in a footnote, also brushed aside the Supreme Court’s opinion in CompuCredit Corp. v. Greenwood, 2012 WL 43517 (Jan. 10, 2012) (addressed in this recent blog post). CompuCredit Corp. held that because the Credit Repair Organization Act was silent on whether claims could be arbitrated, the FAA mandated that the arbitration agreement be enforced. Even after CompuCredit Corp., the Second Circuit found that Congressional intent could be discovered in the history or purpose of a statute. So,
[a]lthough the Sherman Act does not provide plaintiffs with an express right to bring their claims as a class in court, forcing plaintiffs to bring their claims individually here would make it impossible to enforce their rights under the Sherman Act and thus conflict with congressional purposes manifested in the provision of a private right of action in the statute. (Emphasis added).
The Court instead looked to older Supreme Court precedent to find support for whether arbitration can be rejected if it does not fully vindicate federal statutory rights. It cited Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., for the proposition that arbitration can be “an effective vehicle for vindicating statutory rights but only ‘so long as the prospective litigant may effectively vindicate its statutory cause of action.’” Citing Mitsubishi, 473, U.S. 614, 632 (1985). The Court then looked to dicta in Green Tree Financial Corp-Alabama v. Randolph stating “that the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum.” 531 U.S. 79, 90 (2000). Because Mitsubishi and Green Tree were not impacted by Stolt-Nielson or Concepcion, the Second Circuit felt it was free to rely on those opinions.
The Court emphasized that it relied not on the size of the Merchants involved but “on the need for plaintiffs to have the opportunity to vindicate their statutory rights.” As support of this analysis, the Court cited two employment cases – Raniere v. Citigroup, Inc.pdf., No. 11 Cir. 2248, 2011 WL 5881926 (S.D.N.Y., November 22, 2011) and Chen-Oster v. Goldman, Sachs & Co.pdf., No. 10 Cir. 6950, 2011 WL 2671813 (S.D.N.Y. July 7, 2011). Raniere involved a putative nationwide collective action under the Fair Labor Standards Act as well as a New York class action under the New York Labor Law. The District Court found that since Concepcion involved state not federal rights, “even if . . . read broadly to acquiesce to the enforcement of an arbitral agreement that as a practical matter would prevent the vindication of state rights in the name of furthering the strong federal policy favoring arbitration, that would not alter the validity of the federal statutory rights analysis . . . . ” (Emphasis added).
The underlying action in Chen-Oster was a pattern and practice claim for gender discrimination under Title VII of the Civil Rights Act of 1964. After considering Concepcion, the judge in Chen-Oster found it was not a “controlling decision.” And, both Raniere and Chen-Oster cited AMEX II as controlling precedent. So, what these two lower court decisions really illustrate is that the reasoning in AMEX III may well extend into other areas of federal law.
IV. What’s Next
While the AMEX III decision cautioned that it did not hold that class action waivers were “per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions,” it left many unanswered questions. Instead of considering whether Congress intended to preclude arbitration of the statutory claims involved, it focused on whether arbitration would preclude vindication of the federal statutory rights. It also took a broad view of the way in which the statutory rights would be determined. It apparently based its decision on a case-by-case analysis of litigation costs (expert witness fees) and discounted the potential benefits of multiple damage awards, attorneys’ fees and expenses provided to successful plaintiffs by the federal statutes involved.
But, AMEX III established no objective guidelines for the task – other than to point out that many plaintiffs failed in their quest. “The fact that plaintiffs so often fail in their attempts to overturn such waivers demonstrate that the evidentiary record . . . is not easily assembled, and that the courts are capable of the scrutiny such arguments require.” But are they? Is it only where vindication of the federal rights would be impossible? And, does the ability to bring aggregate actions become a substantive right when the statute does not mention the procedure and when the federal statute provides multiple damages, attorneys fees for prevailing parties and other fee shifting provisions. Under what circumstances will the statutorily created remedies be considered inadequate? Hopefully, the Supreme Court will resolve some of these issues and properly interpret Concepcion when AMEX III is considered on certiorari.
The Bottom Line: AMEX III will be another potential obstacle to enforcing class action waivers, at least in the Second Circuit. However, it’s difficult to say what practical effect it will have on employment actions. It’s a rare employment case, indeed, in which a plaintiff must spend between $300 thousand to more than $2 million for expert witness costs and only expect to recover $38,549 (after being trebled).