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Archive for March 9th, 2011

Class arbitration waivers are contract provisions that require disputes be submitted to arbitration but also expressly preclude the arbitration from being conducted on a representative or class basis.  Class arbitration waivers have been a hot topic in class action litigation over the past few years, as some courts have found that in certain contexts that the are unenforceable in violation of public policy.

Yesterday, the Second Circuit Court of Appeals issued its decision on remand from the U.S. Supreme Court in In re American Express Merchants’ Litigation, No. 06-1871-cv.  This is the second decision by the Second Circuit in the case finding that the class arbitration waiver provision at issue was unenforceable.  The first decision, In re American Express Merchants’ Litigation, 554 F.3d 300 (2009), was issued by a panel that included future Supreme Court Justice Sonia Sotomayor.  (See this February 2009 CAB entry discussing the decision).  Last May, the Supreme Court granted certiorari, vacated the decision, and remanded for reconsideration in light of its recent decision in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010).

A 2-judge panel, sans now-Justice Sotomayor, issued the decision on reconsideration yesterday.  The court found that Stolt-Nielsen did not change its conclusion.  The rationale is best summarized in the following excerpt:

Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so. It does not follow, as Amex urges, that a contractual clause barring class arbitration is per se enforceable. Indeed, our prior holding focused not on whether the plaintiffs’ contract provides for class arbitration, but on whether the class action waiver is enforceable when it would effectively strip plaintiffs of their ability to prosecute alleged antitrust violations.

Slip op. at 11.

The Court went on to hold that the arbitration provision at issue was not enforceable because, it found, the facts in the record established that having to pursue the antitrust claims at issue in the case would be prohibitively expensive without using the class action device.  Therefore, the court reasoned, the contract provision was void for public policy reasons, as a matter of law.  In rejecting the argument that Stolt-Nielsen prohibits the invalidation of arbitration provisions for public policy reasons, the court stated:

While Stolt-Nielsen plainly rejects using public policy as a means for divining the parties’ intent, nothing in Stolt-Nielsen bars a court from using public policy to find contractual language void. We agree with plaintiffs that “[t]o infer from Stolt-Nielsen’s narrow ruling on contractual construction that the Supreme Court meant to imply that an arbitration is valid and enforceable where, as a demonstrated factual matter, it prevents the effective vindication of federal rights would be to presume that the Stolt-Nielsen court meant to overrule or drastically limit its prior precedent.” (Plaintiffs’ Supp. Brief, p. 7) Following the Stolt-Nielsen decision, our court reached a similar conclusion in considering a different iteration of the issue: whether class action waivers are unconscionable as a matter of state law.

Id. at 21.

The long-term impact of the Second Circuit’s decision is unclear, especially since the Supreme Court’s decision in AT&T Mobility v. Concepcion is expected soon.  (See this November 17, 2010 CAB Entry recapping the oral arguments in AT&T Mobility).  However, AT&T Mobility involves issues of federal preemption and the power of the state courts to find class arbitration waivers unenforceable.  Therefore, even a decision favorable to the defendant in AT&T Mobility may not prevent future federal courts from applying the Second Circuit’s reasoning in invalidating class arbitration waivers.

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