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Legal Update

Enforceability of Arbitration Agreement in Antitrust Context Sharply Divides Second Circuit

30 May 2012
Mayer Brown Legal Update

Last Term, the US Supreme Court held in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), that the Federal Arbitration Act (FAA) prohibits states from conditioning enforceability of arbitration agreements on the availability of class-wide arbitration. In the wake of Concepcion, a two-judge panel of the Second Circuit reaffirmed its view that agreements to arbitrate disputes on an individual basis need not be enforced when a plaintiff establishes that the costs of vindicating a federal claim make it unrealistic to pursue such a claim without the class-action procedure. See In re: American Express Merchants’ Litig., 667 F.2d 204 (2d Cir. 2012) (“AmEx III”). Concluding that the cost of obtaining the “antitrust study” necessary to pursue the plaintiffs’ claims would far exceed the possible damages award, the panel declared that the plaintiffs’ agreement to arbitrate their claims on an individual basis was unenforceable. (Our Legal Update describing AmEx III may be found here.)

On May 29, 2012, the Second Circuit denied American Express’s petition for rehearing en banc over the dissenting views of five judges. (The order denying rehearing, along with the concurring and dissenting opinions, may be found here.) 

Judge Pooler, the author of AmEx III, wrote a concurring opinion taking the position that the “limited holding” in AmEx III “creates no broad new rights.” According to Judge Pooler, Concepcion “focused wholly on the issue of preemption of state law by federal law,” whereas the issue in AmEx III was “whether the FAA always trumps rights created by a competing federal statute.” In her view, prior decisions of the Supreme Court establish that “[v]indication of statutory rights analysis is the method of analysis” when a federal claim is involved. Accordingly, Judge Pooler concluded that AmEx III does not conflict with either Concepcion or the Ninth Circuit’s recent decision in Coneff v. AT&T Corp., 673 F.3d 1155 (9th Cir. 2012), which she contended “examines when the FAA preempts state contract law.”

Chief Judge Jacobs, joined by Judges Cabranes and Livingston, wrote a lengthy dissent. He argued that AmEx III “impairs the Federal Arbitration Act’s strong federal policy favoring the enforcement of arbitration agreements, and frustrates the goals of arbitration by multiplying claims, lawsuits, and attorneys’ fees.” Summarizing his reasons for supporting en banc review, Chief Judge Jacobs asserted that such review “is needed because [A] the panel opinion is unbounded and can be employed to defeat class-action waivers altogether; [B] it makes the district court the initial theater of arbitral conflict on the merits (how else does a district court estimate the cost of a litigation?); and [C] it is already working mischief in the district courts.”

With respect to the first reason, Chief Judge Jacobs explained that “Amex III is a broad ruling that, in the hands of class action lawyers, can be used to challenge virtually every consumer arbitration agreement that contains a class-action waiver—and other arbitration agreements with such a clause.” As he sees it, under AmEx III, “every class counsel and every class representative who suffers small damages can avoid arbitration by hiring a consultant (of which there is no shortage) to opine that expert costs would outweigh a plaintiff’s individual loss.”

Further elucidating his second reason for supporting en banc review, Chief Judge Jacobs pointed out:

The courtroom inquiry that the panel requires to be undertaken before any class arbitration can in fact take place is searching. Whether a dispute may require expert testimony is a question inseparable from the merits (and raises Daubert and other vexed questions). Without a close inquiry into the merits, no court can decide what expert testimony would be required, or how much discovery is needed. And it cannot be decided whether any discovery or testimony is needed at all without deciding if the claim is dismissible—or such prior questions as the statute of limitations and laches, controlling law, res judicata, etc., etc., not to mention little things like whether the putative class is duly constituted and properly represented, without which there is no class claim.

The problem, he reasoned, is that “[e]ven if arbitration is given a green light at the end of the judicial proceeding, the party seeking to arbitrate may have already spent many times the cost of an arbitral proceeding just enforcing the arbitration clause. * * * The predictable upshot is that Amex III will render arbitration too expensive and too slow to serve any of its purposes.”

As for his third reason for supporting en banc review, Chief Judge Jacobs pointed out that three district courts within the Second Circuit already had extended AmEx III to federal employment-law claims. He also pointed out that, contrary to Judge Pooler’s understanding, Coneff involved a federal claim, not just state-law claims, and therefore concluded that it does squarely conflict with AmEx III. (A copy of the opinion in Coneff, in which Mayer Brown was counsel of record, is available here.)

Turning to the merits, Chief Judge Jacobs castigated the panel’s “labored analysis,” which he said “does not rise to a distinction, and treats the reasoning of Concepcion as an obstacle to be surmounted or evaded.” He then explained why the Supreme Court cases on which AmEx III relies do not, in fact, support the broad vindication-of-rights approach adopted by the panel. Instead, the Supreme Court’s references to the costs of arbitration are “about the price of admission: ‘payment of filing fees, arbitrators’ costs, and other arbitration expenses’” (quoting Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 84 (2000)), while its statement that it would not hesitate to invalidate an arbitration agreement that acted as a prospective waiver of rights under the antitrust laws was about specific provisions within the arbitration agreement, not costs of pursuing a claim that are exogenous to the agreement. 

Chief Judge Jacobs also criticized the panel for failing to recognize that antitrust studies prepared by expensive economic experts may not even be necessary in arbitration. As the Chief Judge explained, “[i]t evidently did not occur to [the plaintiffs’ expert] or the panel that the rules of evidence do not govern arbitration, and that an arbitrator can consult treatises and articles for relevant antitrust and economic principles, and should do so in some cases.” 

Judge Cabranes filed a short dissent of his own “to underscore that the issue at hand is indisputably important, creates a circuit split, and surely deserves further appellate review.” In an overt message to the Supreme Court, he stated that “[t]his is one of those unusual cases where one can infer that the denial of in banc review can only be explained as a signal that the matter can and should be resolved by the Supreme Court.”

Judge Raggi, joined by Judge Wesley, also dissented. She too expressed the view that “[t]he panel decision to hold a class action waiver unenforceable is at odds with Coneff v. AT&T Corp., 673 F.3d 1155 (9th Cir. 2012)” and that “[t]his circuit split appears unwarranted in light of controlling Supreme Court precedent for the reasons forcefully advanced by Chief Judge Jacobs in his opinion dissenting from the denial of rehearing en banc.” 

Given the number and forcefulness of the dissents, and the express references to a conflict with the Ninth Circuit, it seems likely that American Express will seek US Supreme Court review. The issue is an important one to the entire business community. 

For one thing, the panel’s approach would apply in all federal antitrust cases. Indeed, another case raising the same issue currently is pending in the Eighth Circuit. (An amicus brief that Mayer Brown prepared for the Chamber of Commerce of the United States in that case may be found here.) 

Moreover, as Chief Judge Jacobs pointed out, courts are unlikely to treat this approach as limited to antitrust cases: three district judges in the Second Circuit already have applied it in cases involving employment claims, and plaintiffs have raised it in cases raising other federal claims as well. (Mayer Brown’s amicus brief for the Chamber of Commerce in an employment case now before the Second Circuit may be found here.) If review is not granted, it is predictable that plaintiffs’ lawyers will file their putative class actions within the Second Circuit, and raise at least one federal claim whenever possible. If the AmEx III rationale is applied in those cases, that could greatly limit Concepcion’s salutary effects. 

For more information about the topics raised in this Legal Update, please contact at +1 202 263 3240, at +1 202 263 3220 or at +1 202 263 3328.

Authors

  • Evan M. Tager
    T +1 202 263 3240
  • Archis A. Parasharami
    T +1 202 263 3328
  • Andrew J. Pincus
    T +1 202 263 3220

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