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Third time’s the charm – The United States Supreme Court to consider the availability of class arbitration for the third time in American Express Company v. Italian Colors Restaurant

Posted in Case Comments, Class Actions, Procedure, Torts
Ronald Podolny

Introduction

The United States Supreme Court has granted leave to appeal in a case that will clarify whether federal arbitration law permits the invalidation of arbitration agreements on the basis that they do not permit class arbitration.  This decision will have implications on the development of class arbitration, an emerging area of both American and Canadian class actions law.

Decisions Below

The case arose out of a dispute over the costs of acceptance of credit cards and charge cards issued by American Express (“Amex”).  The merchant plaintiffs alleged Amex compelled them to accept its high cost revolving credit products by virtue of the Honor All Cards rule contained in its Card Acceptance Agreement with the merchants.  The Honor All Cards rule mandated the acceptance of all Amex products, rather than the ability to select particular credit card products which the merchant would accept or reject.

The arbitration clause in the Card Acceptance Agreement contained the following language: “If arbitration is chosen by any party with respect of a claim, neither you nor we will have the right to litigate that claim in court or have a jury trial on that claim … Further, you will not have the right to participate in a representative capacity or as a member of any class of claimants pertaining to any claim subject to arbitration.”

Amex moved to compel arbitration.  The district court granted Amex’s motion, holding that the enforceability of class arbitration waivers was an issue for the arbitrator to resolve.

The United States Court of Appeal for the Second Circuit reversed, holding (on the basis of an affidavit of an economist adduced by the Plaintiffs) that individual arbitrations were not economically feasible to pursue in this case.  In light of the practical impossibility of pursuing individual arbitrations, and the clause banning class arbitrations, the Circuit Court held that the arbitration provision of the Card Acceptance Agreement was invalid, because it granted Amex “de facto immunity from antitrust liability” by removing the plaintiffs’ only feasible means of recovery.

Amex appealed.  The Supreme Court remanded the case back to the Circuit Court, in light of the Supreme Court’s recent decision in Scott-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758.  In Scott-Nielsen, the U.S. Supreme Court held that “a party may not be compelled under the Federal Arbitration Act to submit to class arbitration unless there is a contractual basis for concluding that he party agreed to do so.” (emphasis in original).  In other words, where the arbitration agreement is silent on the question of class arbitration, the arbitrator is not at liberty to permit it.

On remand to the Circuit Court, the original Amex decision was upheld.  The Circuit Court determined that Scott-Nielsen did not mandate the reversal of its original decision.  It found that Scott-Nielsen did not engage the issues of the case.  At issue in Amex was whether the mandatory class action waiver was enforceable even if the plaintiffs were able to demonstrate that eh practical effect of enforcement of the waiver would be to preclude their bringing anti-trust claims against Amex.  Amex appealed, once again.

Shortly after the Amex II decision, the Supreme Court issued its decision in AT&T Mobility LLC v. Conception, 131 S. Ct. 1740.  The question in Concepcion was “whether the FAA prohibits States form conditioning the enforceability of certain arbitration agreements on the availability of classwide arbitration procedures.  Under California common law, class action waivers contained in arbitration clauses were regularly found unconscionable, especially in consumer contracts.  The Supreme Court held that the FAA pre-empted California common law on this point and that the scheme created by California common law was inconsistent with the FAA.

The Supreme Court then remanded the Amex case to the Circuit Court for the second time.  In Amex III, The Circuit Court again upheld its previous decision.  It held:

Concepcion and Scott-Nielsen, taken together, stand squarely for the principle that parties cannot be forced to arbitrate disputes in a class-action arbitration unless the parties agree to class action arbitration.”

In contrast, the Circuit Court in Amex II was not ordering the parties to participate in class arbitration.  It was merely stating that a class action waiver is unenforceable where class arbitration is not an option available to the parties.  Scott-Nielsen and Conception do not stand for the proposition that all class action waivers are per se enforceable, and thus do not contradict Amex II.

The Court then offered a few policy observations.  As the Supreme Court has observed in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), “[t]he policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.”  The Supreme Court has also recognized arbitration as an effective vehicle for vindicating statutory rights, but only “so long as the prospective litigant may effectively vindicate its statutory cause of action in the arbitral forum.”  Furthermore, the Supreme Court has acknowledged in Green Tree Financial Corp. – Alabama v. Randolph, 531 U.S. 79 (2000) that “the existence of large arbitration costs could preclude a litigant … from effectively vindicating her federal statutory rights in the arbitral forum.”  The Circuit Court found this dictum from Randolph controlling.  Thus, it held that causes that in effect make it impossible for the plaintiffs to assert their rights, by prohibiting class arbitration despite individual arbitration being economically unfeasible, must be held invalid.

Potential Significance

The case will be the latest clarification in the emerging area of class arbitrations in the United States.  The idea of class arbitrations holds the promise of combining the benefits of class actions (arbitration of individually non-viable claims, economy of adjudicative resources etc.) with the benefits of arbitration (confidentiality, procedural flexibility, speed of adjudication).  The field of class actions involves the inherent conflict between the freedom of parties to contract to arbitrate their claims and the need to ensure consumers are not disenfranchised from their right to commence a class action, granted by legislation.  There is now substantial divergence between the U.S. Supreme Court’s and Canadian Supreme Court’s views on this issue.  In Seidel v. TELUS Communications Inc., 2011 SCC 15, the Supreme Court of Canada permitted a consumer class action to proceed in court, in the face of an arbitration clause in a cellular phone service contract, on the basis of its interpretation of the Business Practices and Consumer Protection Act of British Columbia. The majority of the Supreme Court of Canada emphasized that “[i]t is clearly open to a legislature to utilize private consumers as effective enforcement partners operating independently of the formal enforcement bureaucracy and to conclude that the most effective form is not a ‘private and confidential’ alternative dispute resolution behind closed doors, but very public and well-publicized proceedings in a court of law.”  Conversely, in CompuCredit Corp. v. Greenwood, 565 US ____ 2012, the U.S. Supreme Court refused to invalidate an arbitration clause in the face of a consumer protection statute that mandated the disclosure of a “right to sue.”  The U.S. Supreme Court took a cautious, technical interpretation to the consumer protection statute, consistent with the strongly expressed federal legislative policy favouring arbitration.

For more on this divergence, see our posts here and here. See also: Ron Podolny, “U.S. Supreme Court Rules on Enforceability of Arbitration Clauses” 1 Commercial Litigation and Arbitration Review 3 (August 2012).

Perhaps because of the U.S. Supreme Court’s deference to the language of the arbitration agreement, class arbitration is far more important for U.S. class plaintiffs than for Canadian ones.  This may explain the relative paucity of judicial dicta on class arbitrations in Canada. In contrast with several U.S. Supreme Court decisions that have dealt with the subject, the Supreme Court of Canada has never approached it.  The Ontario Superior Court, in Kanitz v. Rogers Cable Inc. (2002), 58 O.R. (3d) 299 (Sup. Ct. J.) explicitly recognized the possibility of a class action arbitration in Ontario.  In the words of Nordheimer J.:

“Without deciding the point, it would appear that section 20(1) [of the Arbitration Act, 1991] would permit an arbitrator, at the very least, to consolidate a number of arbitrations which raise the same issue.  Therefore, it appears at least arguable that if each of the five named representative plaintiffs here chose to seek arbitrations of their claims, an arbitrator might well decide that those arbitrations could be dealt with together thereby saving time and expense for all parties.  Such possibilities serve to mitigate against the central assertion of the plaintiffs that the arbitration clause operates so as to erect an economic wall barring customers of the defendant from effectively seeking relief.”

The possibility of class action arbitration has similarly been recognized in Ruddell v. B.C. Rail Ltd., 2007 BCCA 269, where stated:

“Further, in my view, the chambers judge did not give effect to the language of [the applicable pension legislation] which provides that an arbitration decision is ‘final and binding on the parties and any person affected by the decision.’  Given that provision, a successful arbitration by even one member would bind these similarly placed.  Harkening to the history of class actions recounted in Western Canadian Shopping Centres Inc.., it is within an arbitrator’s mandate, in my view, to recognize an arbitration advanced by an individual on a point of principle, as is here the case, and fashion a response applicable to others who are in the same position.  Alternatively, the solution proposed in Kanitz v. Rogers Cable is available.” [citations omitted, emphasis added.]

Conversely, the Ontario Court of Appeal, in Smith v. National Money Mart Company (2005), 258 D.L.R. (4th) 453, may have closed the door on class arbitration in Ontario by stating that “under the [Ontario] Class Proceedings Act, only a justice of the Superior Court has jurisdiction over class proceedings and arbitrators cannot assume jurisdiction.”  However, the Circuit Court in Smith did not rule on the availability of class action arbitration, but rather on jurisdiction to interpret arbitration clauses, and thus the development of class action arbitrations remains a possibility in Ontario and Canada generally.  Should class arbitration be utilized in Canada in the future, Canadian courts will have to grapple with the questions raised by cases such as Italian Colours Restaurant.

Case Information

American Express Company v. Italian Colors Restaurant

Decision below: 667 F.3d 204.

Cert. Granted: 11/9/2012.