Co-Authored By: Ruth E. Hartman


The U.S. Supreme Court heard the much anticipated oral argument in American Express Co. v. Italian Colors Restaurant on February 27, 2013.  The issue before the Court was whether an arbitration clause which prohibits class actions should be enforced if the claimant could establish that enforcement of the clause would effectively preclude vindication of federal statutory rights.  Many of the Justices appeared skeptical of the “effective vindication of statutory rights” doctrine. 

The plaintiffs in the American Express Co. (“AMEX”) litigation were merchants who brought antitrust claims maintaining that a provision in AMEX’s Card Acceptance Agreement created an illegal tying arrangement.  But, the potential impact of the case goes far beyond antitrust law.

The Long History of AMEX

The Second Circuit thrice refused to compel the parties to arbitrate, despite their express agreement.   Largely based upon the affidavit of an economist, Gary L. French, Ph.D, the Second Circuit concluded the costs of plaintiffs’ individually arbitrating their dispute with AMEX would be prohibitive, and the “only economically feasible means for Plaintiffs enforcing their statutory rights is via class action.”  See In Re American Express Merchants’ Litigation, 667 F.3d 204, 212 (2d Cir. 2012) (“AMEX III”). (We covered AMEX III extensively on February 6, 2012 and again on June 5, 2012, after the Second Circuit’s denial of defendants’ petition for rehearing en banc). 

This case has a long and tortured history.  The Second Circuit first heard the matter on December 10, 2007. In In re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009) (“AMEX I”) the court held the class action waiver unenforceable.  The U.S. Supreme Court then 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 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.  In Re American Express Merchants’ Litigation, 634 F.3d 187, 199-200 (2d Cir. 2011) (“AMEX II”).  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.   Id.  The Second Circuit then received supplemental briefing on Concepcion’s potential impact on the case. On February 1, 2012, the Second Circuit issued an opinion in favor of the plaintiffs.  It 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.” In Re American Express Merchants’ Litigation, 667 F.3d 204 at 219 (2d Cir. 2012).  On May 20, 2012 the Second Circuit denied rehearing en banc with three dissenters – some presaging concerns raised in the Supreme Court.  These included Chief Judge Jacobs’ concern that AMEX III required district judges rather than arbitrators, to consider the merits of the case for a variety of reasons.

Skepticism From On High

While the effective vindication of rights doctrine had its apparent supporters – namely Justices Elena Kagan and Ruth Bader Ginsburg – others expressed profound skepticism both from substantive and procedural perspectives. 

Counsel for AMEX, Michael Kellogg, made the point early on that the law did not guarantee “every claim has a procedural path to its effective vindication.”   And, Justice Antonin Scalia commented: “I don’t see how a federal statute is frustrated or is unable to be vindicated if it’s too expensive to bring a Federal suit.  That happened years before there was such a thing as class action in federal courts.”  The Sherman Act, enacted in 1980, predated Rule 23 by four decades, a fact that was significant for Justice Scalia.  “Nobody thought the Sherman Act was a dead letter, that it couldn’t be vindicated,” he said.

Unworkable Threshold Inquiry

Another key point raised by Kellogg was that the merchants proposed an essentially unworkable threshold requirement for determining whether parties should arbitrate or litigate: “[i]t would create a completely unworkable inquiry at the outset of litigation in order to determine whether to refer a case to arbitration in the first place.”  Justice Steven Breyer appeared to agree with AMEX’s assessment:  “It’s an odd doctrine that just says, plaintiff by plaintiff, you can ignore an arbitration clause if you can get a case that is expensive enough.”  Following up, Justice Breyer asked:  “And do we go case by case . . . [if] you have a weird theory . . . [with] 17 experts and endless studies . . . you don’t have to [arbitrate].”  Or, is it done by categories.  Paul Clement, counsel for the merchants suggested it could be done by categories, treating antitrust claims differently or put “the burden on the plaintiff to make a non-speculative showing.”

Justice Ginsburg appeared to be a proponent of the doctrine, commenting “the expense to win one of these cases is enormous”, more than a single person would bear.  But, the initial merits inquiry required by the vindication of rights doctrine would seem to be at odds philosophically with Justice Ginsburg’s recent opinion in Amgen v. Connecticut Retirement Plan & Trust Funds.  In Amgen Justice Ginsburg declared that that Rule 23 grants the court “no license to engage in free-ranging merit inquiries at the certification stage,” 568 U.S.___(2013), which is exactly what a trial court would need to do in order to determine the economic feasibility of proceeding with an arbitration claim.

Cost Sharing Proposal

In addressing the merchants’ arguments about the prohibitive costs, AMEX suggested that multiple plaintiffs or a trade association could share the costs of an expert report for arbitration purposes.  Justices Roberts and Scalia both seemed to endorse that idea.  Justice John Roberts commented that a trade association might finance the cost of producing an antitrust expert report which could be shared by all the plaintiffs.  

AMEX’s counsel Kellogg argued that a goal of arbitration is expansion of the universe of claims, so that small value claims could be brought effectively.

Class Waiver As An Exculpatory Clause

There was, however, some initial support for the merchants’ position from Justices Kagan and Ginsburg, who both appeared to view the class waiver as tantamount to an exculpatory clause, preventing an effective vindication of rights to bring an antitrust suit.  Justice Kagan further questioned AMEX about whether it would be permissible to have a clause in an arbitration agreement that said:  “I hereby agree not to bring any Sherman Act claims,” implying that this class action waiver had the same effect. 

Justice Kagan asked Kellogg to distinguish AMEX from Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., a 1985 Supreme Court decision, cited by the Second Circuit in AMEX III, which held 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 . . . .”  Mitsubishi, 473 U.S. 614, 637 (1985).  

To prove an antitrust claim, Justice Kagan stated, one needs economic evidence of monopoly power, antitrust injury and damages.  Justice Ginsburg agreed.  Yet AMEX counsel Kellogg argued that it was unclear whether the cost of the expert reports and testimony would be the same in arbitration as litigation.  And, he confirmed that multiple plaintiffs could share experts’ costs.

Justice Sonya Sotomayor recused herself because the case was decided during her tenure at the Second Circuit.

The Bottom Line:

The AMEX case provides the Supreme Court with yet another opportunity to support the liberal federal policy favoring arbitration agreements.  The Second Circuit decision in AMEX below is one of the few remaining federal obstacles to enforcing class action waivers.  If the Second Circuit decision in AMEX is overturned, it will have a significant impact on the continuing development of federal arbitration law.