The U.S. Supreme Court's landmark decision last June in American Express v. Italian Colors, ___ U.S. __, 133 S. Ct. 2304, 186 L. Ed. 2d 417 (2013), like its earlier decision in AT&T Mobility LLC v. Concepcion, 563 U.S. ___, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011), solidified the broad deference given to arbitration agreements by the Supreme Court and reinforced the principle that state laws and policies invalidating arbitration agreements and class-action waivers are preempted by the Federal Arbitration Act (FAA) to the extent they are deemed to disfavor arbitration. More recent cases have helped to illustrate the far-reaching implications of those decisions and to draw more clearly defined boundaries. A review of those decisions and their progeny, most notably in the Second and Ninth Circuits, is useful for any commercial litigator braving the complex area of arbitrability jurisprudence.
In AT&T Mobility LLC v. Concepcion, discussed at length in our Summer 2011 newsletter, a 5–4 majority held that an unconscionability defense based on the presence of language waiving the right to participate in a class arbitration is preempted by the FAA. In the majority opinion written by Justice Antonin Scalia and joined in by Chief Justice Roberts and Justices Kennedy, Alito, and Thomas (who also wrote a concurring opinion), the Court invalidated what had come to be known as the "Discover Bank rule," which held that a class waiver in a consumer arbitration agreement could be deemed unconscionable if the agreement was in an adhesion contract, disputes between the parties were likely to involve small amounts of damages, and the party with inferior bargaining power alleged a deliberate scheme to defraud. The Court found that such a principle was at odds with the FAA because it effectively disfavored arbitration and created a disincentive for businesses to include arbitration agreements. The Court disagreed with the premise that there was no incentive for a consumer to bring this dispute as a bilateral arbitration, and held that in any event, "States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons." 131 S. Ct. at 1753.
If there were any doubt that state-law unconscionability defenses were circumscribed by Concepcion, those doubts were put to rest by the Supreme Court in American Express. Indeed, the roller-coaster procedural history of American Express itself amplifies this lesson.
In American Express, a putative class of merchants sought federal antitrust damages for allegedly being forced to accept credit cards at higher rates. American Express moved to compel arbitration under the parties' arbitration agreement, which contained a class-action waiver. The merchants alleged that the waiver was unenforceable, relying on an economist's projection that the cost of expert analysis to support the antitrust claim would dwarf the likely recovery, and the district court denied the motion to compel class arbitration. The Second Circuit reversed the district court, concluding that such high costs rendered the class-action waiver unenforceable. In re Am. Express Merchants' Litig., 554 F.3d 300 (2d Cir. 2009).
In response to the first of multiple encounters with this case, the Supreme Court vacated the judgment and remanded for further consideration in light of its decision in Stolt-Nielsen v. AnimalFeeds International, 559 U.S. 662 (2010), which, like Concepcion, is discussed at length in our Summer 2011 newsletter. Am. Express Co. v. Italian Colors Rest., __U.S. __, 130 S. Ct. 2401, 176 L. Ed. 2d 920 (2010) (mem.). On remand, the Second Circuit found nevertheless that the waiver was unenforceable. In re Am. Express Merchants' Litig., 634 F.3d 187 (2d Cir. 2011).
Following the Supreme Court's decision in Concepcion, the Second Circuit reconsidered its ruling sua sponte and found once again that the class waiver was unenforceable. In re Am. Express Merchants' Litig., 667 F.3d 204 (2d Cir. 2012). Again American Express petitioned for certiorari, after the Second Circuit declined en banc review. In re Am. Express Merchants' Litig., 681 F. 3d 139 (2d Cir. 2012). The Supreme Court reversed, in a 5–3 decision in which Justice Sotomayor did not participate. Writing for the majority, Justice Scalia explained that requiring that the claims be litigated individually did not contravene any congressional command reflected in the antitrust laws, which "do not guarantee an affordable procedural path to the vindication of every claim." 133 S. Ct. at 2309.
The Court declined to interpret Federal Rule of Civil Procedure 23 as establishing an "entitlement" to class actions for the vindication of statutory rights or a nonwaivable opportunity to vindicate federal policies through a class mechanism. It clarified the meaning of past cases that expressed a willingness to invalidate arbitration agreements that failed to provide effective vindication of a statutory right, explaining that "the FAA's command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low value claims." 133 S. Ct. at 2312 n.5. The Court held that "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." Id. at 2311 (emphasis in original). The Court added in dicta that such a principle might still invalidate an arbitration agreement that forbids the assertion of statutory rights or that names a forum with filing and administrative fees so high as to make access to the forum impracticable. Id.
As a coda to American Express, the U.S. Supreme Court vacated the decision of the California Court of Appeal in CarMax Auto Superstores California v. Fowler, __ U.S. __, 134 S. Ct. 1277 (Feb. 24, 2014), and in doing so, implicitly rejected the so-called "Gentry Rule" in California, under which class-action waivers in employment arbitration agreements are invalid if "a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration." See, Gentry v. Superior Court, 165 P.3d 556, 568 (Cal. 2007). The California Court of Appeal in CarMax had distinguished Concepcion on the grounds that it was not decided in the employment context and concluded that the Gentry Rule survived Concepcion. Fowler v. CarMax, Inc., 2013 WL 1208111 (Cal. Ct. App. Mar. 26, 2013). The California Supreme Court denied review, and the U.S. Supreme Court granted certiorari. In a two-sentence decision, the U.S. Supreme Court vacated the judgment and remanded the case for further consideration in light of American Express.
Recent State and Federal Appellate Cases Interpreting American Express
In the wake of American Express, the Second Circuit acknowledged that the "effective vindication" standard as applied to economically infeasible claims was all but dead in Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. 2013) (per curiam). The court reversed a district court decision that had invalidated a class waiver on the grounds that the employee-plaintiff's claim under the Fair Labor Standards Act (FLSA) of 1938 was not worth pursuing individually. The court held that such a basis for invalidating a class waiver was expressly abrogated by American Express and that the FLSA contained no "contrary Congressional command," given that the statute required an employee to affirmatively opt-in to any collective action. Id. at 296–97; accord Walthour v. Chipio Windshield Repair, LLC, 2014 WL 1099286 (11th Cir. Mar. 21, 2014); Raniere v. Citigroup, 533 F. App'x 11 (2d Cir. 2013).
Just as the Second Circuit needed reassurance from the Supreme Court that only the most egregious examples of unconscionability would avoid FAA preemption, several courts subsequent to American Express have had a similar change of heart.
For example, in Feeney v. Dell, 466 Mass. 1001, 993 N.E.2d 329 (2013), the Supreme Judicial Court of Massachusetts did a 180-degree turn after the American Express decision. Just eight days before American Express, the Massachusetts high court held in Feeney v. Dell, 465 Mass. 470, 989 N.E.2d 439 (2013) that an arbitration agreement containing a class-action waiver could be invalidated on the grounds that the plaintiff's claim is "nonremediable" in arbitration. After the U.S. Supreme Court ruled, Dell sought rehearing, and the Massachusetts high court literally reversed itself. Explaining that the Amex holding had "thwarted" its reliance on dictum in Concepcion, the Feeney court acknowledged its error, while at the same time calling the U.S. Supreme Court's view that the FAA trumps any interest in ensuring the prosecution of low-value claims "untenable." 993 N.E. 2d at 331.
Likewise, in Sonic-Calabasas v. Moreno, 57 Cal. 4th 1109, 311 P.3d 184, 163 Cal. Rptr. 3d 269 (2013), the Supreme Court of California held that a state legislative process for reviewing employment claims prior to arbitration was preempted by the FAA and could not be enforced, after having concluded just the opposite two years earlier. The court in a prior decision had found that that process, known as a "Berman hearing," and a corresponding rule that the process was unwaivable, did not discriminate against arbitration agreements. See Sonic-Calabasas v. Moreno, 51 Cal. 4th 659, 247 P.3d 130, 121 Cal. Rptr. 3d 58 (2011). The U.S. Supreme Court vacated that decision and remanded the case for further consideration in light of Concepcion. 565 U.S. ___, 132 S. Ct. 496, 181 L. Ed. 2d 343 (2011). On remand, the California Supreme Court concluded that "the FAA preempts a state-law rule that categorically prohibits an adhesive arbitration agreement from requiring an employee to waive access to a Berman hearing." 57 Cal. 4th at 1171. The court nevertheless remanded the case to the trial court to determine whether, under a modified approach to unconscionability, the arbitration agreement was enforceable. It remains to be seen whether California's modified approach to unconscionability, which requires an assessment of whether the dispute-resolution procedures in the arbitration agreement provide an "effective and low-cost approach to resolving wage disputes," is itself preempted by the FAA, in that it appears to be targeted solely at arbitration agreements.
Several other recent decisions have demonstrated how far courts are now willing to go to limit unconscionability challenges in light of American Express. In Reed Elsevier v. Crockett, 734 F.3d 594 (6th Cir. 2013), the court rejected an unconscionability challenge to an individual arbitration agreement brought on behalf of a putative class of LexisNexis subscribers, despite what it characterized as a "one-sided" adhesion contract with LexisNexis. As described by the court:
[T]he clause favors LexisNexis at every turn, and as a practical matter makes it economically unfeasible for Crockett or any other customer to assert the individual claims that Crockett seeks to assert here. The clause provides that any arbitration of any dispute concerning LexisNexis's charges must occur in Dayton, Ohio, where LexisNexis is headquartered. The customer must pay his own legal fees, even if the arbitrator concludes that LexisNexis's charges were improper. And unlike many corporations that require arbitration of disputes with their customers, LexisNexis makes its customer split the tab for the arbitrator's fee. The idea that the arbitration agreement in this case reflects the intent of anyone but LexisNexis is the purest legal fiction.
Id. at 600.
Ultimately, however, the court in Reed Elsevier concluded that American Express mandates individual arbitration even in cases involving one-sided, adhesive contracts. Id. It further held that the issue of whether an arbitration agreement permits class-wide arbitration is a gateway matter reserved for the courts and that in accordance with Stolt-Nielsen, the absence of language permitting class-wide arbitration prevents a court from inferring it. The court suggested that Crockett's best way to vindicate his rights is simply to switch to Westlaw, which has no arbitration agreement with its customers. Id. See also Lombardi v. DirectTV, 2013 WL 6224642 (9th Cir. Dec. 2, 2013) (reversing denial of motion to compel arbitration, finding that district court's reliance on California's policy against enforceability of class waivers as basis for choice of law was abrogated by Concepcion); Ferguson v. Corinthian Colls., 733 F.3d 928 (9th Cir. 2013) (holding that California rule that claims for public injunctive relief could not be arbitrated was preempted by the FAA, relying on Concepcion and American Express in reversal of district court decision to the contrary).
Despite this movement toward broader preemption, some decisions have found that unconscionability findings survived the decisions in Concepcion and American Express. In Chavarria v. Ralphs Grocery Co., 733 F.3d 916 (9th Cir. 2013), for example, the Ninth Circuit held that an arbitration policy incorporated into an employment application was unconscionable where, among other unreasonable terms, the policy imposed high fees to be split equally between the employer and employee. The only exception to that cost burden would arise if "settled and controlling legal authority" required that one party bear a greater share. The policy implied that only U.S. Supreme Court authority would be controlling in that determination. The U.S. District Court for the Central District of California found that the arbitration policy was unconscionable, and, on appeal, the Ninth Circuit affirmed the denial of the employer's motion to compel arbitration. The policy was nonnegotiable, was enforced regardless of whether it was signed, and its four pages of single-spaced terms were not shown to the employee until three weeks after she commenced employment. The Ninth Circuit agreed with the district court that these characteristics satisfied the requirement of procedural unconscionability under California law. Finding that the policy also was substantively unconscionable, the court relied on the fact that the selection process was calculated to favor an arbitrator proposed by the employer; the policy precluded the use of well-known forums such as AAA and JAMS; and as noted above, the arbitrator's fees, estimated at between $7,000 and $14,000 per day, were to be equally apportioned regardless of fault between the employer and employee. The court found that these principles did not disproportionately affect arbitration agreements and thus were not preempted by the FAA. The court concluded that Concepcion and American Express did not require a contrary result and that in fact the high fees were precisely what had been identified in the dicta discussed above in American Express as the type of unconscionable characteristics that would not be preempted. See also Newton v. Am. Debt Servs. Inc., 2013 WL 6501391 (9th Cir. Dec. 12, 2013) (affirming refusal to compel arbitration where agreement unconscionably required California plaintiff to arbitrate in Oklahoma, allowed the defendants to select the arbitrator, limited recoverable damages, and infringed on counsel fee recovery otherwise available under California law).
Finally, the Supreme Court clarified the boundaries of its own decision in Stolt-Nielsen by refusing to vacate the decision of an arbitrator that permitted a class-wide arbitration to go forward. See Oxford Health Plans LLC v. Sutter, __ U.S. ___ ,133 S. Ct. 2064, 186 L. Ed. 2d 113 (2013). Whereas the parties in Stolt-Nielsen had stipulated that their arbitration agreement was silent on the issue of class arbitration, the plain vanilla language in Oxford ("No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration") was left for the arbitrator to construe. The arbitrator found that the reference to "civil actions" authorized all types of suits that otherwise were available in court to be filed in arbitration and unambiguously evinced an intent to permit class actions. The district court denied Oxford's motion to vacate that ruling, and the Third Circuit affirmed. On certiorari, the Supreme Court refused to second-guess the arbitrator's construction, holding essentially that he did his job by construing the agreement and that his construction would stand, "however good, bad or ugly." 133 S. Ct. at 2071. Suggesting that it would have ruled similarly in Stolt-Nielsen, had there been no contrary stipulation as to the parties' intent, the Court demonstrated great deference to the arbitrator's decision, even while acknowledging that the arbitrator may have been wrong:
In sum, Oxford chose arbitration, and it must now live with that choice. Oxford agreed with Sutter that an arbitrator should determine what their contract meant, including whether its terms approved class arbitration. The arbitrator did what the parties requested: He provided an interpretation of the contract resolving that disputed issue. His interpretation went against Oxford, maybe mistakenly so. But still, Oxford does not get to rerun the matter in a court.
133 S. Ct. at 2071.
Keywords: litigation, commercial, business, arbitration agreements, class-action waivers, Federal Arbitration Act, FAA, Concepcion, American Express, CarMax, Oxford, federal cases
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