September 13, 2013 Top Story

Two U.S. Supreme Court Opinions Enforce Arbitration Agreements

Court finds terms of parties' arbitration agreements and class action waivers binding

M. Derek Harris

Litigants cannot be forced to arbitrate disputes through class arbitration unless they agree to do so. This is the U.S. Supreme Court’s message delivered in two opinions addressing the enforceability of arbitration provisions and class action waivers. With these opinions, the Court signaled that the language of the arbitration agreement controls whether a case may be maintained as a class action or whether a class action is precluded.

Choose Language Carefully 

The Supreme Court issued its unanimous opinion in Oxford Health Plans v. Sutter,affirming an arbitrator’s conclusion that contractual language requiring arbitration of all claims that could be brought as a civil action was intended for class action claims to be resolved through arbitration because a class action is a type of civil action. The Court noted that the parties agreed that their agreement was silent as to whether class arbitration was permissible and requested that the arbitrator interpret the agreement and determine whether class arbitration was permissible. The Court refused to second guess the arbitrator’s decision, concluding there was no error as he interpreted and applied the language of parties’ agreement.

“What Oxford demonstrates is that if you don’t have explicit language in your arbitration agreements [addressing class action treatment] and you defer to the arbitrator to decide that, you may not like what the arbitrator has to say, but you’ll be stuck with that,” explains Edward A. Salanga, Phoenix, cochair of the ABA Section of Litigation’s Expert Witness Committee.  “The Oxford Health Plans case was a basic contract interpretation case,” observes Raymond A. Garcia, New Haven, chair of the subcommittee on construction for the Section of Litigation’s Alternative Dispute Resolution Committee. “The lesson for business people drafting these provisions is that they have to be very specific,” cautions Garcia. Otherwise, as the Supreme Court stated, “[t]he potential for those mistakes is the price of agreeing to arbitration.”

Arbitration Agreements Will Be Enforced as Written 

Less than two weeks after issuing its decision in Oxford Health Plans, the Supreme Court issued an opinion addressing whether a class action waiver in an arbitration agreement is enforceable where enforcement would deprive the plaintiffs of an effective means to vindicate their statutory rights. In American Express Co. v. Italian Colors Restaurant, the Court disagreed with three successive Second Circuit decisions holding a class action waiver was unenforceable because the high costs of litigating antitrust claims meant individual claims would not be pursued absent a class action mechanism. The Supreme Court held that a class action waiver is not unenforceable on the ground that the cost of arbitrating the claim exceeds the potential recovery.

The Supreme Court is “taking every opportunity to publish decisions on arbitration agreements holding that they will be enforced in accordance with their terms as that is the stated policy behind the FAA,” observes Salanga. Now, with its decision in American Express, the Court has reaffirmed that “arbitration is a matter of contract,” and “courts must ‘rigorously enforce’ arbitration agreements according to their terms”—even if that means low-value claims will not be prosecuted.

“I view the American Express case as being an extension of the AT&T Mobility case,” notes Salanga. In AT&T Mobility v. Concepcion, the Court overturned a Ninth Circuit decision finding a class action waiver was unenforceable because the waiver was unconscionable under California law. The Court held that the overarching purpose of the Federal Arbitration Act is to ensure the enforcement of arbitration agreements according to their terms, and when a state law stands as an obstacle to the accomplishment of this objective, it is preempted.

Freedom of Contract Principles Trump Consumer Protection Concerns

The Supreme Court’s decision in American Express settles the question of whether a class action waiver provision in an arbitration agreement is enforceable under the FAA even if enforcement means individual plaintiffs will not have an effective means to vindicate their statutory rights. The Supreme Court has made clear that it will not “allow consumer protection concerns to override basic contract interpretation,” explains Garcia.

Parties seeking to avoid enforcement of class action waivers and bring their claims as a class action instead of an individual action cannot rely on an argument that the costs of proceeding on an individual basis are prohibitive to invalidate class action waivers. Plaintiffs still have the right to pursue their claims individually; it just may not be worthwhile to do so. As Justice Scalia, the author of the majority opinion, observed during oral argument, some claims may have to be foregone on the basis that they are “de minimis non curate lex,” meaning the law does not concern itself with trifles.

Following this decision, some small claims plaintiffs will have to face the harsh reality that pursing their claims does not make economic sense where they waived their right to bring their claims as part of a class action. The impact is quite different for potential corporate class action defendants. Businesses can utilize these provisions to ensure that individual disputes do not morph into class action disputes and avoid the exponential increase in risk and exposure that is inherent with the switch from a bilateral dispute to a class action.

“If you are in a business that has exposure to class actions, you should seriously think about updating your arbitration agreements to include a class action waiver,” says Salanga. Businesses that implement class action waivers can expect to decrease the number of small claims they must defend against. The low potential recovery for small claims simply cannot justify the costs to pursue them. As the Seventh Circuit aptly observed years ago, “the realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”

Keywords: class action, arbitration, waiver

Related Resources

  • American Express v. Italian Colors Restaurant, et al., No. 12-133 (U.S. June 20, 2013).
  • Oxford Health Plans v. Sutter, No. 12-135 (U.S. June 10, 2013).
  • AT&T Mobility v. Concepcion, 563 U.S. ___, 131 S.Ct. 1740 (2011).

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