When the Supreme Court convenes for its private conference today, the Justices will consider whether to grant certiorari in a case presenting one of the most significant questions regarding the meaning of the Court’s ruling in AT&T Mobility v. Concepcion that remains unresolved in the lower courts.
Following the Concepcion decision, opponents of arbitration tried to convince lower courts to limit Concepcion’s holding that arbitration clauses could not be invalidated on the ground that they required individual arbitration and prohibited class proceedings. The overwhelming majority of those arguments were rejected by district courts and courts of appeals, as explained in this article.
But a two-judge panel of the Second Circuit earlier this year endorsed the bizarre assertion that Concepcion applies differently depending on whether the claim to be arbitrated arises under state or federal law. In In re American Express Merchants’ Litigation, the panel held that agreements to arbitrate disputes on an individual basis need not be enforced when a plaintiff provides evidence that the costs of vindicating a federal claim make it “economically irrational” to pursue such a claim without the class-action procedure. Amazingly, the court found that the affidavit of the plaintiffs’ own economic expert provided sufficient “evidence” to invalidate the arbitration clauses. In other words, arbitration clauses that could be enforced with respect to a state claim might be unenforceable if the same plaintiff brought a virtually identical claim under federal law.
As noted in an earlier blog post, American Express filed a petition for a writ of certiorari seeking review of the Second Circuit’s ruling (American Express Co. v. Italian Colors Restaurant, No. 12-133) and Mayer Brown authored an amicus brief supporting the petition on behalf of the Chamber of Commerce, Business Roundtable, American Bankers Association, and National Association of Manufacturers.
The amicus brief explains the dire consequences of allowing the Second Circuit’s decision to stand: “Virtually any class-action complaint can be framed to include at least one federal claim. And plaintiffs’ lawyers can readily retain an expert to assert that the costs of proving a plaintiff’s claim would outweigh the potential recovery—thereby providing the factual predicate needed to avoid arbitration on an individual basis under the Second Circuit’s approach.” Also, “[b]ecause forum-shopping plaintiffs can bring virtually any class action in the Second Circuit—and almost every business of any significant size is susceptible to suit in New York—the decision below will effectively apply nationwide, calling into question literally millions of arbitration agreements.”
We also addressed the flaws in the legal reasoning of the Second Circuit panel. Congress of course has the power to exclude a federal cause of action from the background presumption of arbitrability established by the Federal Arbitration Act (“FAA”), and Congress also could require that parties invoking a federal claim be permitted to utilize class procedures—but Congress has not done that with respect to the antitrust claims at issue in American Express. The question, therefore, is whether judges may, on an ad hoc, case-by-case basis, exercise Congress’s authority to declare federal claims nonarbitrable. The clear answer is “no.”
The Second Circuit panel relied on a passage in the Supreme Court’s opinion in Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), stating that the Court would invalidate an arbitration clause if “the existence of large arbitration costs [were to] preclude a litigant … from effectively vindicating her federal statutory rights.” But Randolph makes clear that this “vindication” principle applies only when an arbitration agreement imposes on the claimant excessive costs unique to arbitration—i.e., costs that would not be incurred if the claim were instead brought in a judicial forum. Indeed, nine years earlier, in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Court specifically rejected the argument that the absence of class procedures in arbitration rendered a federal claim nonarbitrable.
The panel’s test adopts the precise legal standard advocated by the dissent in Concepcion, and specifically rejected by the majority, which held irrelevant—because “States cannot require a procedure that is inconsistent with the FAA”—the dissent’s “claim that class proceedings are necessary to prosecute small dollar claims that might otherwise slip through the legal system.”
But what of the policy arguments that when arbitration on an individual basis is impractical the consequence of applying Concepcion will be to prevent injured parties from vindicating federal rights? Of course courts cannot ignore the commands of federal statutes on policy grounds. But these policy arguments also are flawed on their own terms.
For example, the Second Circuit panel assumed that individual arbitration would proceed in exactly the same way as a class action in court, ignoring the Supreme Court’s repeated recognition that arbitration is simpler, quicker, and less formal than litigation in court. And the court of appeals incorrectly assumed that each individual claimant must reinvent the wheel in each proceeding. In fact, however, nothing prevents claimants (or their attorneys) from sharing the expenses of expert witnesses, fact investigation, and attorney preparation.
More fundamentally, the panel’s case-specific assessment ignores the fact that arbitration clauses apply to a range of disputes—and, because of arbitration’s greater efficiency, provide aggrieved parties with the ability to pursue claims that could not be pursued economically in court. Determining that an arbitration clause is impermissible based on how it applies to one type of claim simply makes no sense.
Given the multiple flaws in the panel’s approach, it is not surprising that five Second Circuit judges dissented from the denial of rehearing en banc. Judge Cabranes explained 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.” We will soon learn how the Supreme Court will respond to the Second Circuit’s “signal.”