Class actions under arbitral attack

The Supreme Court has continued to exhibit a preference for arbitration over court litigation in a number of recent rulings, including those that have limited the ability to pursue class actions and collective actions. The Supreme Court’s agenda seems to be the minimization of legal exposure from systemic challenges to existing business practices and even from individual claims that seek to address structural problems. In other words, the doors to the proverbial courthouse are being closed rather than opened. Such developments obviously portend more difficult times ahead for those who pursue employment, civil rights, or consumer protection claims.

This is the troubling context of the Supreme Court’s decision to review American Express Co. v. Italian Colors Restaurant. In this case, the Second Circuit clearly and repeatedly ruled that the company’s arbitration agreement – which included a class action waiver – was unenforceable because it would preclude aggrieved parties from effectively enforcing their statutory rights. Importantly, the Second Circuit so ruled both after the Supreme Court’s decision in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010) and after the Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011). In adhering to the time-honored principle that class action waivers in arbitration agreements are invalid if they restrict statutory rights, the Second Circuit turned aside the Supreme Court’s decision to vacate the Second Circuit’s initial ruling, In re American Express Merchants’ Lit., 634 F.3d 187 (2nd Cir 2011), and the Second Circuit then sua sponte reaffimed its prior rulings, in In re American Express Merchants’ Lit., 667 F.3d 204 (2012), in response to Concepcion.

The company, backed by the Chamber of Commerce and the Business Roundtable, argues that the class-action ban is always enforceable because of the policy supposedly codified by the Federal Arbitration Act: arbitration agreements are enforced according to their explicit terms. The plaintiffs, backed by Public Justice, the American Association for Justice, and arbitration scholars, argue that decades of settled precedent reject efforts to curb statutory rights through arbitration agreements. As a practical matter, they add, precluding class actions and collective actions would largely eliminate the capacity of aggrieved parties to proceed because the legal costs would far outweigh the potential damages and other recoveries if claims were disaggregated.

To protect and promote the rule of law, the Second Circuit should be affirmed. Given the Supreme Court’s decisions in Stolt-Nielsen and then in Concepcion, however, the rule of law may take a further hit in this case – compromising the integrity of employment law, civil rights, and consumer protection everywhere.