The United States Supreme Court decided two cases this month addressing the availability of class-wide relief under agreements that contain mandatory arbitration provisions.
Federal law provides a number of worker protections, including anti-discrimination laws, workplace safety rules, and whistle-blower rights.
Corporations frequently attempt to limit exposure to class action lawsuits by requiring customers to sign arbitration agreements that do not allow for class-wide adjudication of disputes. These types of arbitration agreements have been the subject of several Supreme Court decisions in recent years. The cases decided this month sought to clarify some of the ambiguities contained in those decisions.
By way of background, the Supreme Court in 2010 decided the case of Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. In this case, the court by a 5-3 margin held that an arbitrator may not authorize class arbitration under the Federal Arbitration Act, unless the arbitration agreement between the parties specifically provides class arbitration as a remedy.
Following the Stolt-Nielsen decision, the Supreme Court in 2011 decided the case of AT&T Mobility v. Concepcion. In this decision, the same five-member majority of the Supreme Court ruled that the Federal Arbitration Act preempts state laws that aim to prohibit contracts from barring arbitration of disputes on a class-wide basis.
Oxford Health Plans v. Sutter
On June 10th, the Supreme Court issued its decision in Oxford Health Plans v Sutter. The Supreme Court agreed to hear the Oxford Health case to resolve a circuit split regarding class arbitration in the aftermath of the Stolt-Nielsen decision.
Oxford Health Plans included a mandatory arbitration clause in its contracts governing the reimbursement of medical fees to doctors. The contract contained an arbitration provision that required any dispute arising under the agreement to be submitted to final and binding arbitration, but did not state if class claims were allowed.
The plaintiff in this case filed a putative class action against Oxford Health in New Jersey state court, the company successfully moved to have the dispute referred to arbitration as provided under the agreement. In arbitration, the parties disputed whether the arbitration agreement allowed for class-wide claims. The parties asked the arbitrator to decide the issue, and he found that the agreement did allow for class-wide claims even though such claims were not specifically authorized in the arbitration agreement.
The Supreme Court unanimously affirmed the Third Circuit’s decision to not disturb the arbitrator’s ruling, reaffirming the long-standing legal doctrine that judicial review arbitration decision is extremely limited.
Unlike in Stolt-Nielsen, in this case the parties had disputed the meaning of their contract and had asked the arbitrator to resolve the issue of whether class-wide claims were allowed under the agreement. In holding that it would not review the correctness of the arbitrator’s decision authorizing class claims against Oxford health, the Supreme Court stated that “so long as the arbitrator was arguably construing the contract – which this one was – a court may not correct his mistakes” and that “the potential for these mistakes is the price to agreeing to arbitration.”
In refusing to review the correctness of the arbitrator’s decision, the court succinctly state, “in sum, Oxford chose arbitration, and it must now live with that choice.”
American Express v. Italian Colors Restaurant
Ten days after deciding the Oxford Health Case, a sharply divided Supreme Court issued its ruling in American Express v. Italian Colors Restaurant.
The lawsuit involved a contract between American Express and merchants who accept American Express cards as payment for goods and services. The agreement in question required all disputes arising under the contract to be resolved through arbitration and specifically stated that “there shall be no right or authority for any Claims to be arbitrated on a class action basis.”
As alleged by the merchants, American Express used its monopoly power in the credit card market to force merchants to accept credit card fees that were approximately 30% higher than the fees for competing credit cards.
The merchants argued that the cost of expert testimony needed to establish the antitrust violations were far greater than the maximum possible recovery for any one individual plaintiff. To prove the alleged antitrust violations, the plaintiff would need to hire an economic expert to write a report defining the relevant markets, establishing American Express’s monopoly power, showing the anticompetitive effects, and measuring damages. Such an expert report would cost between several hundred thousand and one million dollars.
If the Italian Colors Restaurant was successful on its antitrust claims, and awarded treble damages as allowed by federal antitrust law, the restaurant would win a damages award of $38,549, a paltry sum compared to the substantial costs of hiring an expert witness to demonstrate the alleged antitrust violations.
Agreeing with the plaintiffs, the Second Circuit held that the class action waiver contained in the arbitration agreement was unenforceable because enforcement of the waiver would have prevented the plaintiffs from asserting statutory rights granted under federal antitrust law.
Justice Scalia, writing for the five-Justice majority, stated that the court’s ruling in AT&T Mobility all but resolves the case. The majority noted that in AT&T Mobility the Supreme Court specifically rejected the argument that class arbitration is necessary to litigate claims that would otherwise slip through the legal system.
In a strongly worded dissent, Justice Kagan, opined that American Express has essentially “insulated itself from antitrust liability – even if it has in fact violated the law” by requiring its merchants to sign an arbitration agreement that precludes class-wide claims. In effect, “the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”
Calling the majority’s opinion “a betrayal to our precedents, and of federal statutes,” Justice Kagan vehemently argued that the court should have applied the effective-vindication doctrine, which invalidates arbitration clauses that impair a plaintiff’s ability to enforce congressionally created rights. Under this doctrine, when an arbitration agreement prevents the effective vindication of federal rights, the party may seek redress in a federal court.
In asserting that AT&T Mobility is not dispositive, Justice Kagan noted that the AT&T Mobility decision had nothing to do with the effective-vindication rule. To the contrary, the Supreme Court in that case emphasized that plaintiffs’ allegations would not go unresolved. The dissent also noted that the AT&T Mobility decision involved state, rather than federal, law.
Referencing the majority’s recent hostility to class action claims, Justice Kagan observed:
To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23 [the Federal Rule of Civil Procedure allowing class actions], everything looks like a class action, ready to be dismantled.
The dissent concludes by noting that “in the hands of today’s majority, arbitration threatens to become … a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability.”
What the Decisions Mean for the Future of Class Action Claims
Although the Supreme Court allowed class-wide relief in the Oxford Health case, the decision highlights one of the major downsides of arbitration – namely, litigants are stuck with an arbitrator’s decision and have limited rights to judicial review of erroneous decisions.
The American Express decision is troublesome because it may have a chilling effect on lawsuits where the amount in controversy makes individual suits an unrealistic option.
In the wake of these two decisions, corporations may rush to amend the mandatory contracts they ask customers to sign. Such mandatory arbitration provisions are often found in cell phone contracts, credit card contracts, and online user agreements.
In addition, employment agreements are also known to contain mandatory arbitration provisions. Federal law provides a number of worker protections, including anti-discrimination laws, workplace safety rules, and whistle-blower rights. It is doubtful that Congress would allow these important federal statutes to be circumvented by mandatory arbitration agreements.
Class actions lawsuits are a very effective method to provide justice to individuals who fall prey to corporate scams and false advertising. These schemes tend to defraud individuals in small amounts, making individual lawsuits economically unfeasible, as was the case in American Express.
Going forward, class actions will undoubtedly remain an essential component of the American judicial system, notwithstanding attempts by corporations to avoid them by using cleverly drafted arbitration agreements.
Author Bio: Shanon Carson is a shareholder at Berger & Montague, a nationally-known law firm headquarted in Philadelphia. Mr. Carson concentrates his practice on representing employees, consumers, and shareholders in class actions, collective actions, and multiple plaintiff lawsuits through the United States. In a major victory for worker's rights, Mr. Carson secured a $21.4 million settlement on behalf of a nationwide class of African-American employees of Kodak who alleged a patern and practice of racial discrimonation at the company.