Second Circuit Holds That Concepcion Preemption Analysis Does Not Apply to Federal Statutory Claims, Rejecting Class Action Waiver in Arbitration Agreement Where Individual Plaintiffs Would Be Left Unable to Vindicate Their Rights

In In re: American Express Merchants’ Litigation (Feb. 1, 2012) (“AmEx III”), the Second Circuit refused to enforce American Express’s class action waiver where the “practical effect” would be to deprive plaintiffs of the ability to vindicate their federal statutory rights. By framing the issue in terms of the ability to vindicate federal statutory rights, the Second Circuit sidestepped the preemption analysis mandated by the United States Supreme Court in AT&T Mobility LLC v. Concepcion. But whether AmEx III is ultimately reversed, or deemed to carve out an exception to Concepcion where federal statutory rights are at issue, it brings into sharp focus the real question on everyone’s mind: Can companies bar class actions in both courts and arbitral forums in favor of bilateral arbitration, and if so, how?

Concepcion and AmEx III considered the same fundamental question — whether class action waivers in arbitration agreements are enforceable — but, as noted, the Supreme Court and the Second Circuit resolved the issue using different analytical frameworks:

• In Concepcion, the Supreme Court held that Section 2 of the FAA preempts state rules that condition the enforceability of arbitration agreements on the availability of classwide arbitration. More specifically, the Supreme Court reasoned that, because such “manufactured,” non-consensual classwide arbitration (i) sacrifices informality and efficiency, (ii) requires procedural formality to bind absent parties, and (iii) may be intolerably risky for defendants given the higher stakes and lack of meaningful appellate review; it conflicts with the FAA’s principal purpose: ensuring that arbitration agreements are enforced according to their terms so as to facilitate efficient, streamlined dispute resolution proceedings. The Supreme Court acknowledged that Section 2’s “saving” clause preserves generally applicable defenses based on the revocation of contracts but held that it does not “preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objectives.”
• In AmEx III, the Second Circuit rejected Concepcion’s preemption analysis in favor of the “federal substantive law of arbitrability,” holding that class action waivers are unenforceable where plaintiffs established that arbitrating their individual claims would be “prohibitively expensive” such that they would be left unable to vindicate their federal statutory rights (here, under the Sherman and Clayton Acts). The Second Circuit principally relied on dicta in two other Supreme Court cases: (i) Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985), approving of arbitration only “so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum,” and (ii) Green Tree Financial Corp. v. Randolph (2000), acknowledging that “large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum.” In particular, the Second Circuit credited the affidavit of plaintiffs’ expert, who opined that it would not be “economically rational” to pursue an individual antitrust case given that expert witness fees would likely be somewhere between $300,000 and $2 million. The Second Circuit further reasoned that the fee-shifting provisions of the Clayton Act were “inadequate” to make individual claims viable given the risk of losing, in which case the plaintiff would recover nothing, and since, even where a plaintiff prevails, the damages and costs awarded likely would not cover expert fees in any event.

Significantly, Concepcion considered and expressly rejected the argument that classwide arbitration is necessary since it may be economically infeasible for some plaintiffs to pursue small-dollar value claims on an individual basis: “[S]tates cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” And the Second Circuit in AmEx III notably emphasized that it was not holding that class action waivers are per se unenforceable, either generally or in the context of antitrust actions: “[E]ach 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.’”

To be sure, the competing analytical frameworks in Concepcion and AmEx III create confusion. But until the confusion is resolved, companies wishing to enforce bilateral arbitration agreements would be well-served by including certain baseline, claimant-friendly provisions, which give claimants a viable way to vindicate their rights. Examples of such provisions include:

• Venue Provisions, Including “Virtual” Arbitration: By agreeing to venues close to the claimant, companies provide easy access to affordable dispute resolution. AT&T, for example, (i) published dispute resolution forms on its website, (ii) agreed to arbitrate in the county where it billed its customers, and (iii) offered telephonic or written arbitration in some cases.
• Capped Fee / Cost-Shifting Provisions: Taking responsibility for the relatively low costs of arbitration (as compared to collective actions, whether in court or arbitral forums) for claimants with meritorious claims ensures that they can afford to prosecute them. However, any agreement to pay costs and fees should be capped at a reasonable amount. Companies can also pledge to forbear from seeking to recover their own attorneys’ fees.
• Conspicuous, Plain Language Provisions: Provisions mandating and defining the contours of bilateral arbitration should be in plain English and no less prominent than other critical terms in the agreement so that claimants cannot later claim surprise.

Although these provisions are unnecessary under Concepcion and may not always satisfy AmEx III, offering arbitration on terms that make it economically viable to pursue individual claims may help sustain a class-action waiver in an arbitration agreement. Ultimately, unless and until this issue is resolved by the Supreme Court of the United States, the waters will remain murky.