U.S. Supreme Court Reaffirms Commitment to Enforce Arbitration Agreements

On June 20, 2013, the United States Supreme Court ruled that class-action waivers contained in arbitration clauses are enforceable even if the cost of individually prosecuting a claim under federal law would exceed the potential recovery.  In American Express Co. v. Italian Colors Restaurant, a group of merchants brought a class action lawsuit against American Express asserting antitrust violations.  The merchants alleged that American Express abused its market power and forced the merchants to pay excessive fees on credit card transactions. 

The merchants brought the suit as a class action even though the contracts that they signed with American Express provided that there “shall be no right or authority for any Claims to be arbitrated on a class action basis.”  American Express moved to arbitrate each claim on an individual basis.  The merchants argued that they should not be bound by the class-action waiver clause because each merchant would spend far more than each could possibly recover in litigating their cases.  Litigating as a class, the merchants would be able to share costs and increase their leverage to force a settlement with American Express. 

The United States Supreme Court rejected the merchants’ argument and held that the Federal Arbitration Act’s (“FAA”) enforcement provisions require individual arbitration of the merchants’ claims.  The Court also held that the “effective vindication” exception to the FAA did not apply to invalidate an otherwise enforceable arbitration provision merely because it would make pursuing the case uneconomical.  Under the “effective vindication” exception to the FAA, courts may refuse to enforce all or part of an arbitration agreement if the provisions of the agreement attempt to deprive a party of the “right to pursue” statutory remedies.  Justice Scalia wrote that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute elimination of the right to pursue that remedy.”

The Italian Colors holdings are not limited to antitrust litigation and are likely to be used in the labor and employment arena where class action suits are typical. The decision undermines any argument that arbitration agreements between employers and employees containing class action waivers are unenforceable, even if the effect of the waiver is to prohibit employees from pursuing claims under federal employment statutes.  Although it remains to be seen how lower courts will interpret and apply the Italian Colors decision, well drafted class waiver provisions in employment agreements may be used to minimize liability and manage the risk of exposure to federal class action suits against employers under familiar federal statutes like the Fair Labor Standards Act and the Age Discrimination in Employment Act.   

For a review of employment contracts, FLSA compliance training, or representation in employment-related litigation, contact Mary Elizabeth Davis at (804) 697-2035. 

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.