The U.S. Supreme Court may be asked to revisit the issue of class action waivers in arbitration agreements now that the U.S. Court of Appeals for the Second Circuit has refused to reconsider its February 1, 2012, decision in Italian Colors Restaurant v. American Express Travel Related Services Co.

The Second Circuit’s refusal to grant an en banc rehearing prompted dissents by the court’s chief judge and four other judges and creates a split in the circuits by not following the Ninth Circuit.

In Italian Colors, a Second Circuit panel had refused to enforce the class action waiver in the American Express arbitration agreement on the ground that it would effectively preclude the plaintiff from prosecuting its federal antitrust claims. By contrast, the Ninth Circuit recently held in Coneff v. AT&T Corp.—a case involving alleged violations of the Federal Communications Act and state laws—that there is no vindication of statutory rights exception to the Federal Arbitration Act (FAA).

The Second and Ninth circuits thus disagree on whether the so-called vindication of statutory rights theory is viable in light of the U.S. Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion, 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.

In Italian Colors, the three-judge panel concluded that Concepcion did not preclude them from refusing to enforce the class action waiver because the plaintiff had shown that in order to prosecute its claims, it would be required to hire an expert who would charge exponentially more than the plaintiff’s potential recovery, and that those expert fees could not be recovered under the Sherman Act even if the plaintiff prevailed in an individual arbitration.

By contrast, in Coneff, the Ninth Circuit found Concepcion to be “broadly written” and held that the FAA required enforcement of the arbitration agreement’s class action waiver notwithstanding plaintiff’s argument that she would be unable to vindicate her statutory rights without a class action because her claims were worth much less than the cost of litigating them.

The split between the Second and Ninth circuits, as well as the sharp disagreement among the Second Circuit judges, could prompt the Supreme Court to take the issue up again. The Second Circuit’s decision to deny en banc rehearing elicited four opinions—one concurring in the denial and three dissenting opinions that supported rehearing.

Judge Rosemary S. Pooler concurred in the denial of en banc review, stating that the vindication of statutory rights analysis was an issue “untouched by Concepcion” since that decision dealt solely with FAA preemption of state unconscionability law and not whether parties can vindicate their rights under federal statutes. She also found Coneff to be distinguishable because it, like Concepcion, involved a situation in which the plaintiff would be able to vindicate her rights in an individual arbitration because she could recover her attorneys’ fees and costs if she prevailed.

But Second Circuit Chief Judge Dennis Jacobs, vigorously dissenting from the denial of rehearing en banc, found the panel ruling in Italian Colors to be “incompatible with the FAA” and the facts in Concepcion to be “materially indistinguishable.” In Concepcion, he argued, the Supreme Court rejected the vindication of rights theory in holding that arbitration agreements requiring individual arbitration must be enforced under the FAA even if “class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.”

According to Chief Judge Jacobs, the panel decision would permit class action lawyers to sidestep Concepcion and avoid arbitration simply “by hiring a consultant (of which there is no shortage) to opine that expert costs would outweigh a plaintiff’s individual loss.”

Judge Jose A. Cabranes wrote a separate dissenting opinion “to underscore that the issue at hand is indisputably important, creates a circuit split, and … should be resolved by the Supreme Court.”

Any petition for certiorari filed by American Express would likely not be acted upon until the fall of 2012 at the earliest. We will be following this issue closely and will alert our readers to breaking developments.

Ballard Spahr’s Consumer Financial Services 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). It also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right. The CFPB recently launched a study of pre-dispute consumer arbitration agreements. Ballard Spahr is currently counseling several clients in connection with that study.

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