Co-authored by James Hlawek, Richard Alfred and Robert Whitman
Is a waiver of class arbitration enforceable in cases where the plaintiff’s cost of individually arbitrating her federal statutory claim exceeds her potential recovery and is, therefore, not economically feasible?
That is the question addressed today in American Express Co. v. Italian Colors Restaurant [here], which the Supreme Court decisively answered, “Yes.” Even when the cost of individual arbitration is higher than the potential recovery, class action waivers in arbitration agreements are enforceable and prevent class arbitrations. Although the decision arose in the antitrust context, it has a direct impact on wage and hour claims, allowing employers to compel individual arbitrations–and avoid class or collective arbitrations–where their arbitration agreements clearly prohibit class and collective arbitrations.
In American Express, Italian Colors, a small restaurant as the dissent noted, brought a class action against American Express for alleged violations of federal antitrust laws. American Express sought to enforce an agreement to arbitrate all disputes individually, with no “class arbitration.”
The restaurant responded that the waiver was unenforceable because the costs to prove its claim would be several hundred thousand dollars in expert witness fees alone, whereas its maximum recovery would only be around $40,000. This meant that it would be economically infeasible for individual plaintiffs to pursue their claims on a bilateral basis. In other words, Italian Colors argued, enforcing the class arbitration waiver would bar the “effective vindication” of its federal statutory rights.
The Supreme Court, dividing along ideological lines (with Justice Sotomayor not taking part in the decision), rejected that argument in a 5-3 opinion authored by Justice Scalia and upheld the waiver. The Court said that effective vindication concerns do not arise simply because the costs of proving a claim are high. Put differently, the Court ruled that a class waiver in an arbitration agreement cannot be found unenforceable under the Federal Arbitration Act merely because it would be too costly for a party to pursue her claims on an individual basis. This part of the decision should foreclose the use of the “effective vindication” or “economic feasibility” argument, which plaintiffs have used extensively to challenge the enforceability of class arbitration waivers in wage and hour claims.
Plaintiffs’ lawyers may try to argue that American Express should not be applied to FLSA claims because, unlike the federal antitrust statutes that do not mention class actions, the FLSA expressly permits collective actions. Possibly anticipating such an argument, Justice Scalia’s opinion essentially forecloses it by relying, among other Supreme Court precedent, on Gilmer v. Interstate/Johnson Lane Corp. There, the AmEx majority stated, “we had no qualms in enforcing a class waiver in an arbitration agreement even though the federal statute at issue, the Age Discrimination in Employment Act, expressly permitted collective actions.” This the Court said, “brings home the point” that collective actions are not necessary to the effective vindication of statutory rights. ADEA imports the collective action language from the FLSA, which leads to the conclusion that this reasoning applies equally to FLSA collective actions.
In the end, the AmEx majority found that its decision in its seminal class-waiver decision, AT&T Mobility LLC v. Concepcion, “all but resolves this case” because the Court there “specifically rejected the argument that class arbitration was necessary to prosecute claims that might otherwise slip through the legal system.”
In a spirited dissent, Justice Kagan castigated the majority for what she believes is its unwarranted attack on class actions and its undue deference toward individual arbitration as an alternative. As she put it, “To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled.”
American Express is yet another example where the Supreme Court has enforced an arbitration agreement according to its terms. In this case, the Supreme Court stuck to that principle, even though a class waiver in an arbitration agreement may require a plaintiff to pursue her claims on an individual basis even if it is not economically feasible to do so. The message to employers is that clear class and collective action waivers in arbitration agreements should be enforced, paving the way for employers to compel arbitration on an individual basis and removing the threat of collective litigation.