Yesterday, the Supreme Court issued its long awaited decision in American Express v. Italian Colors Restaurant. The decision is a must read for every business.
In American Express, the Court enforced a standard provision in American Express’ merchant agreement requiring merchants to: (a) arbitrate all claims, and (b) waive the right to bring the claims on a class action basis. The Court also rejected the argument that a merchant could avoid arbitration by arguing that it could only effectively vindicate its claims as class claims, specifically ruling 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 the remedy.”
The 5-3 majority decision continues two themes of recent Supreme Court jurisprudence. First, the Court reaffirmed that courts should “rigorously enforce” arbitration agreements “according to their terms." For example, the Court recently ruled that the Federal Arbitration Act preempted state law attempting to invalidate class waivers in consumer arbitration agreements (AT&T Mobility) and that a party cannot be compelled to participate in class arbitration absent a contractual agreement to do so (Stolt-Nielson). At the same time, the Court is carefully examining the language in the arbitration agreement; earlier this month, the Court unanimously deferred to an arbitrator’s decision to require class arbitration when the parties agreed that the arbitrator should decide the issue and the language in the agreement was unclear (Oxford Health).
Second, the Court continued to limit the availability of class action procedures. The Court has continued to heighten the standards for class certification under Rule 23 (Wal-Mart and Comcast) and has now confirmed that there is no right to proceed with claims on a class basis in arbitration and that a standard waiver of the right to proceed on a class action basis is enforceable.
The takeaways from the American Express decision and these recent decisions are twofold:
(1) All businesses should re-evaluate whether arbitration provisions in their agreements would be appropriate and should re-examine the language of the provisions. These rulings confirm that courts should enforce provisions which establish specific rules and procedures, limit with whom they will arbitrate, and clarify the issues for arbitration — provided that the terms are clear and unambiguous. At the same time, these rulings also confirm that courts must strictly interpret the language and defer to arbitrator rulings even if the rulings are erroneous.
(2) All businesses should consider adding a class action waiver provision as part of their arbitration agreement. The provision can include a waiver of class action claims, mass action claims, and/or the right to consolidate or join claims. Such a provision can significantly decrease the time and costs associated with future arbitrations and litigation.
The authors and our corporate and litigation attorneys can help you evaluate your options and answer any questions you may have regarding this new decision.
* Special thanks to Summer Associate Meaghan K. FitzGerald for her contributions to this alert.
Joe Callow helps clients manage and reduce litigation risk and litigation costs. When litigation arises, he handles and coordinates cases on a national, regional, and local basis.
Joe primarily works on class action and complex ...
Mike Moeddel is a trusted advisor to senior executives and investors on key strategic transactions including mergers and acquisitions, private equity investments, equity and debt financing transactions and other commercial ...
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