Second Circuit Panel Strikes Arbitration Agreement With Class Action Waiver

In In Re: American Express Merchants’ Litigation (No. 06-1871-cv), a two judge panel of the Second Circuit breathes new life into arguments to strike arbitration clauses. The court held that, because of the allegedly prohibitive costs for pursuing antitrust claims on an individual basis, forcing the plaintiffs to pursue their claims in arbitration would prohibit them from effectively vindicating their federal claims. The court therefore held that the arbitration agreement at issue was unenforceable. 

For those of you who thought that the U.S. Supreme Court (in Stolt-Nielsen, Concepcion, and CompuCredit) finally put to rest any arguments about the enforceability of arbitration clauses and class action waivers, a two judge panel of the Second Circuit begs to differ. In In Re: American Express Merchants’ Litigation (No. 06-1871-cv), a two judge panel (the original third judge, now Justice Sotomayor, having obtained new employment since the case was originally argued) concluded that an arbitration agreement with a class action waiver is unenforceable based on expert testimony that it would be cost prohibitive for the plaintiffs to pursue their antitrust claims on an individual basis. This would mean, the court reasoned, that arbitration would not permit the plaintiffs to effectively vindicate their federal statutory rights. The court therefore held that the arbitration agreement is not enforceable.

Notably, the court relied on the U.S. Supreme Court’s earlier decision in Green Tree Financial Corp.-Ala. v. Randolph, 531 U.S. 79, 92 (2000), which held that when “a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs.” The Second Circuit concluded that the expert testimony about the costs of pursuing an antitrust claim satisfied this requirement. (Slip op. at 21-24.) However, in Green Tree, the discussion focused on comparing the “arbitration costs” to the costs of pursuing a claim in court. See, e.g., Green Tree, 531U.S. at 522. Here, the expert testimony focused solely on the costs of pursuing an antitrust claim as an individual—regardless of whether that claim was pursued in arbitration or in court.       

It remains to be seen whether other courts will adopt this line of reasoning. Obviously, it is hard to imagine that plaintiffs with many other federal claims could not raise the same type of argument about the costs of proceeding on an individual basis. For now, however, expect to see this case heavily cited by class action attorneys looking to avoid arbitration.