Revisiting its opinion in Italian Colors Restaurant v. American Express Travel Related Services Co. for the third time, the Second Circuit held on February 1, 2012 that a class action waiver in an arbitration agreement cannot be enforced if it would effectively preclude the assertion of federal antitrust claims.

In the suit, merchants who accept American Express cards sought to pursue class action antitrust claims under the Sherman Act. The Second Circuit concluded, as it had twice before, that since it would be necessary for the merchant to hire an expert who would charge exponentially more than the merchant’s potential recovery, and because those expert fees could not be recovered under the Sherman Act even if the merchant prevailed in an individual arbitration, the class action waiver precluded the merchants from vindicating their federal statutory rights.

The U.S. Supreme Court had vacated the Second Circuit’s original opinion and remanded for reconsideration in light of its 2010 decision in Stolt-Nielsen, S.A. v. Animal Feeds, Int’l, Corp. which held that under the Federal Arbitration Act (FAA), class arbitration procedures cannot be imposed upon parties who did not expressly agree to them. (See our prior legal alert on the Stolt-Nielsen ruling and an alert about our amicus brief before the Supreme Court in the Italian Colors case.)

After the Second Circuit adhered to its decision that the class action waiver was unenforceable, but before the appellate mandate issued, the Supreme Court issued its landmark decision in AT&T Mobility LLC v. Concepcion (see our legal alert on the ruling) which held that the FAA preempts state laws that refuse to enforce class action waivers in consumer arbitration agreements as unconscionable or against public policy. After permitting additional briefing, the Second Circuit found that Concepcion, like Stolt-Nielsen before it, did not alter its conclusion that the class action waiver was unenforceable.

The Second Circuit’s decision is inconsistent with not only Stolt-Nielsen and Concepcion, both of which mandate the enforcement of arbitration agreements in accordance with their terms, but also with CompuCredit Corp. v. Greenwood, where the U.S. Supreme Court held just weeks ago that claims under the federal Credit Repair Organizations Act (CROA) are subject to arbitration. There, the Court stressed that the FAA establishes “a liberal federal policy favoring arbitration agreements” which applies “even when the claims at issue are federal statutory claims.” It further emphasized that if Congress had intended to prohibit the enforcement of arbitration agreements in CROA, it could have said so explicitly, as it has done in certain other statutes. (See our prior alert on the ruling.)

The Second Circuit attempted to brush off Greenwood in a footnote, while acknowledging that “the Sherman Act does not provide plaintiffs with the express right to bring their claims as a class in court.” Its ruling, which conflicts with Greenwood, Concepcion and Stolt-Nielsen, could set the stage for the U.S. Supreme Court to take the case up.

In any event, unless and until it is reversed by the Supreme Court, the Second Circuit’s ruling could make it more difficult to enforce class action waivers in class actions filed in the Second Circuit asserting claims under federal statutes, like the antitrust laws, where there is an alleged need to hire an expert at a cost that is grossly disproportionate to the plaintiff’s ultimate recovery. However, the issue decided by the Second Circuit might be avoided by including appropriate language in the arbitration agreement itself—language that we have counseled numerous clients to use.

Ballard Spahr’s Consumer Financial Services Group produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right. The group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com, or Mark J. Levin, 215.864.8235 or levinm@ballardspahr.com


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