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.

Concepcion

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.

American Express

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).

CarMax 
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 inCarMax 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).

Oxford
Finally, the Supreme Court clarified the boundaries of its own decision in Stolt-Nielsen byrefusing 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:

133 S. Ct. at 2071.

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