Amex Class Action Defense Cases–In re American Express: Second Circuit Reverses District Court Order Enforcing Class Action Waiver And Compelling Individual Arbitration In Antitrust Class Action

Feb 4, 2009 | By: Michael J. Hassen

As Matter of First Impression, District Court Erred in Antitrust Class Action in Compelling Arbitration Pursuant to Mandatory Arbitration Clause in Commercial Contract and Enforcing Class Action Waiver because Absent Class Action Relief it was Unlikely Merchants would seek Redress for Alleged Wrong Second Circuit Holds

Several class action lawsuits were filed by various merchants against American Express alleging violations of federal antitrust laws in the form of a “tying arrangement” between its charge cards and credit cards; the first of these class actions was filed in August 2003 in the Northern District of California, but in December 2004 the district court granted a motion filed by defense attorneys to transfer the class actions, pursuant to 28 U.S.C. § 1404(a), to the Southern District of New York, where it was consolidated with several class actions against Amex pending in that district. In re American Express Merchants’ Litig., ___ F.3d ___, 2009 WL 214525, *2, *5-*6 (2d Cir. January 30, 2009). According to the allegations underlying the class action, Amex “is the leading issuer of general purpose and corporate charge cards to consumers and businesses in the United States and throughout the world. It is also the leading provider of charge card services to merchants.” _Id._, at *3. The class action plaintiffs are “(1) California and New York corporations which operate businesses which have contracted with Amex and (2) the National Supermarkets Association, Inc. (‘NSA’), ‘a voluntary membership-based trade association that represents the interests of independently owned supermarkets.’” _Id._ The Card Acceptance Agreement entered into by the merchants-plaintiffs provided, in pertinent part, that any dispute was subject to a broad and mandatory arbitration clause, which was governed by the Federal Arbitration Act (FAA) and which contained a class action waiver provision. _See id._, at *3-*5. Defense attorneys moved to compel arbitration and to enforce the class action waiver provision, _id._, at *6. The district court granted the motion, finding that the arbitration clause was broad enough to govern the dispute. _Id._ With respect to whether the matter could proceed as a class action, the district court suggested that enforcement of the class action waiver would not preclude individual merchants from enforcing their rights because the Section 4 of the Clayton Act allows for recovery of treble damages, costs of suit and attorney fees, but deferred the issue of enforceability of the class action waiver to the arbitrator. _Id._ The Second Circuit reversed.

The Circuit Court explained that it was “consider[ing] here only the narrow question of whether the class action waiver provision contained in the contract between the parties should be enforced,” In re American Express, at *3. The Court began by noting that it “frequently enforces mandatory arbitration clauses contained in commercial contracts,” but that this case presented a case of first impression in the Ninth Circuit as it dealt with the enforceability of a class action waiver in the context of a commercial contract with a mandatory arbitration clause. Id., at *1. And the court summarized the countervailing arguments surrounding the enforceability of class action waivers, see id., at *1-*2. Ultimately, the Ninth Circuit concluded that the class action waiver was unenforceable under the facts of this case “because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.” Id., at *2.

The Ninth Circuit first addressed the issue of whether the enforceability of the class action waiver should be decided by the federal court or by the arbitrator, and readily concluded that “the district court erred in holding that the question of the class action waiver’s enforceability is a matter for the arbitrator, not the court,” and observed that Amex did not argue otherwise. In re American Express, at *8 (citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006)). Accordingly, the Circuit Court turned to whether the class action waiver was enforceable. After a detailed analysis of the “general considerations” underlying the enforceability of class action waivers, which we do not summarize here, see id., at *8-*12, the Court found that plaintiffs adequately had established that would “incur prohibitive costs if compelled to arbitrate under the class action waiver,” id., at *13 (footnote omitted). In this regard, it found “compelling” the affidavit submitted by plaintiffs’ expert economist, see id., at *13-*14, who concluded that “it would not be worthwhile for an individual plaintiff … to pursue individual arbitration or litigation where the out-of-pocket costs, just for the expert economic study and services, would be at least several hundred thousand dollars, and might exceed $1 million,” id., at *14. And while the district court correctly summarized the relief available to plaintiffs under Section 4 of the Clayton Act, see id., at *14, the Ninth Circuit concluded that even treble damages would not pay for the expert fees likely to be incurred and that “plaintiffs must include the risk of losing, and thereby not recovering any fees, in their evaluation of their suit’s potential costs,” id., at *15. In the Circuit Court’s view, under the facts of this case, the class action waiver “flatly ensures that no small merchant may challenge American Express’s tying arrangements under the federal antitrust laws.” Id., at *15. Accordingly, the Court held that the class action waiver was unenforceable, id., at *17.

The Ninth Circuit stressed, however, that there were “two important limitations” on its: (1) that plaintiffs’ characterization of themselves as “small merchants” or “small businesses” was immaterial to the issue before the circuit court, and (2) that it is not holding that class action waivers in arbitration agreements are per se unenforceable. In re American Express, at *17. Rather, the enforceability of class action waivers must be resolved on a case-by-case basis, id., at *17-*18. In sum, it reversed the district court order compelling arbitration on an individual basis and remanded the class action for further proceedings. Id., at *18.

NOTE: The specific class action waiver provision stated:

IF ARBITRATION IS CHOSEN BY ANY PARTY WITH RESPECT TO 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. THE ARBITRATOR’S DECISION WILL BE FINAL AND BINDING. NOTE THAT OTHER RIGHTS THAT YOU WOULD HAVE IF YOU WENT TO COURT MAY ALSO NOT BE AVAILABLE IN ARBITRATION.

There shall be no right or authority for any Claims to be arbitrated on a class action basis or on any basis involving Claims brought in a purported representative capacity on behalf of the general public, other establishments which accept the Card (Service Establishments ), or other persons or entities similarly situated. Furthermore, Claims brought by or against a Service Establishment may not be joined or consolidated in the arbitration with Claims brought by or against any other Service Establishment(s), unless otherwise agreed to in writing by all parties.

In re American Express, at *4.

Download PDF file of In re American Express Merchants’ Litigation

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