The U.S. Supreme Court issued two new decisions, on June 10 and June 20, 2013, that address class action waivers and arbitration agreements. Some commentators may have thought that the Court gave plaintiffs a small victory last week in Oxford Health Plans v. Sutter, No. 12-135, which upheld an arbitrator’s decision to permit class proceedings in arbitration. As explained below, the impact of that decision likely will be limited. In a far more sweeping decision, on June 20, 2013, in American Express Co. v. Italian Colors Restaurant, No. 12-133, the Court reiterated that class action waiver provisions in arbitration agreements are fully enforceable, and they cannot be struck simply because the cost of proceeding on an individual basis outweighs any potential recovery. Both cases are discussed in the summaries below.
SCOTUS Upholds Enforceability of Class Action Waiver in Arbitration Agreements
Once again demonstrating its strong support for enforcement of the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (FAA), and class action waivers, the Supreme Court today struck a blow to what had become a potentially promising argument for plaintiffs’ counsel. In a 5 – 3 decision in American Express Co. v. Italian Colors Restaurant, No. 12-133, the Court held that the FAA does not allow a court to strike a class action waiver provision in an arbitration agreement based on evidence that a plaintiff’s cost of arbitrating on an individual basis (such as for experts, and so forth) is greater than the potential recovery. Justice Sotomayor took no part in the decision.
The Second Circuit, in In re American Express Merchants’ Litigation (American Express), 667 F.3d 204 (2d Cir. 2012), concluded that an arbitration agreement with a class action waiver was 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. Id.
Reversing the Second Circuit, the Supreme Court reiterated that the FAA requires arbitration agreements to be “rigorously enforce[d]” “unless the FAA’s mandate has been overridden by a contrary congressional command.” Slip op. at 3-4 (quotation marks and citations omitted). “The antitrust laws do not ‘evinc[e] an intention to preclude a waiver’ of class-action procedure.” Slip op. at 4 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U. S. 614, 628 (1985)).
The Court went on to state:
Nor does congressional approval of Rule 23 establish an entitlement to class proceedings for the vindication of statutory rights. To begin with, it is likely that such an entitlement, invalidating private arbitration agreements denying class adjudication, would be an “abridg[ment]” or modif[ication]” of a “substantive right” forbidden to the Rules, see 28 U. S. C. §2072(b). But there is no evidence of such an entitlement in any event.
Slip op. at 5.
Finally, the Court rejected the “judge-made exception to the FAA” designed to “harmonize competing federal policies by allowing courts to invalidate agreements that prevent the ‘effective vindication’ of a federal statutory right.” In applying this “effective vindication” exception, the Second Circuit relied on the Supreme Court’s earlier decision in Green Tree Financial Corp.-Ala. v. Randolph, 531 U.S. 79, 92 (2000), which noted that in some circumstances a party could “seek to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive.” The Second Circuit concluded that the expert testimony about the costs of pursuing an antitrust claim satisfied this requirement. Am. Express, 667 F.3d at 217.
The Supreme Court’s decision rejected this application of the “effective vindication” exception and clarified that in Green Tree, the discussion focused on comparing the “arbitration costs” to the costs of pursuing a claim in court. As the Court stated slip op. at 6:
[t]he exception finds its origin in the desire to prevent “prospective waiver of a party’s right to pursue statutory remedies,” Mitsubishi Motors, supra, at 637, n. 19 (emphasis added). That would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.
The expert testimony in American Express 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. As the Court put it, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Slip op. at 7.
New Oxford Health Plans Arbitration Ruling May Have Limited Impact
On June 10, 2013, the Supreme Court issued a unanimous opinion in Oxford Health Plans v. Sutter, No. 12-135, that will be viewed by some as increasing the risk of class proceedings in arbitration. The sweep of the case, however, will likely be much more limited for several reasons.
In Oxford, the Supreme Court rejected a defendant’s request to vacate an arbitrator’s ruling that interpreted an expansive arbitration clause to permit the plaintiff to proceed on a class basis before the arbitrator. The arbitrator reasoned that this agreement referred to arbitration “the same universal class of disputes” that could be brought as a “civil action . . . before any court,” including class proceedings. The Supreme Court’s decision reflects at least a temporary unwillingness to extend its prior decision three years earlier in Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp., 559 U.S. 662 (2010). Stolt-Nielsen stands for the proposition that an arbitrator may apply class proceedings only if the parties have authorized them, and not when the parties stipulated that the agreement was silent as to whether class arbitration proceedings were permissible.
Three facts in particular limit the sweep of the Court’s new decision in Oxford Health. First, the Court emphasized that the defendant failed to argue below that the arbitrator should not be deciding whether class proceedings were permissible. In fact, the defendant twice asked that the arbitrator resolve this issue. Therefore, the Court rested its decision on the significant deference owed to an arbitrator, explaining that it may vacate an arbitrator’s decision “only if ‘the arbitrator acts outside the scope of his contractually delegated authority’” by “issuing an award that ‘simply reflects his own notions of economic justice’ rather than ‘drawing its essence from the contract.’” Thus, the “sole question” before the Court was “whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.”
The Court had little trouble concluding that it had. Distinguishing its prior decision in Stolt-Nielsen by noting that the parties there stipulated that they had not consented to class proceedings in arbitration, the Oxford court found that the arbitrator “did construe the contract (focusing, per usual, on its language) and did find an agreement to permit class arbitration.” The Court explained that even if it found that the arbitrator misapprehended the parties’ intent, there was no basis to overturn the arbitrator’s decision, for the FAA “permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.”
Of particular importance, the Court noted that the standard of review of the arbitrator’s decision may have been different if the defendant had argued below that it presented a “question of arbitrability,” since such questions are typically reviewed de novo. Because the defendant had not challenged the arbitrability of the propriety of class-wide arbitration, the Court declined to address whether the availability of class arbitration is a question of arbitrability or an even whether the arbitrator had the authority to bind absent class members.
Second, the Supreme Court made clear that it was not endorsing the substance of the arbitrator’s ruling, explaining “[n]othing we say in this opinion should be taken to reflect any agreement with the arbitrator’s contract interpretation, or any quarrel with Oxford’s contrary reading.” Defendants seeking to avoid class arbitration will find support in Justice Alito’s concurrence, which stated that if the Court “were reviewing the arbitrator’s interpretation of the contract de novo, we would have little trouble concluding that he improperly inferred ‘an implicit agreement to authorize class-action arbitration . . . from the fact of the parties’ agreement to arbitrate.’” In addition, Justice Alito also explained that because absent class members were not a party to the arbitration, they were likely not bound by the arbitrator’s interpretation of the contract.
Third, the parties’ underlying agreement in Oxford obviously did not expressly state that class proceedings in arbitration were not available. Had it done so, there is little doubt that the class action waiver provision would have been enforced. For the reasons stated above, this does not mean that class proceedings in arbitration are appropriate in the absence of a class waiver provision. It simply makes clear that the whole dispute likely would have been avoided had an explicit class waiver provision been included from the outset.
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Michael D. Leffel