Harold Reynolds: Death of the class action in AMERICAN EXPRESS v. ITALIAN COLORS

        Histories are often made by events which, slow in the making, pass by us when we are not looking and later stun us by the magnitude of their meaning. The sunny day of June 20th,  2013, was such a day, the place the Supreme Court, and the occasion Justice Scalia’s report of the opinion in American Express v Italian Colors,  a case involving credit cards, arbitration claims,  the waiver of class actions, and the Sherman Act, enough to draw into a deep sleep any workman passing the courthouse.  He would not suspect that Justice Scalia was changing the ground rules of our society by in effect protecting corporations from the detection of their violation of federal statutes.  

          It was the work of a corporate attorney never to draft an arbitration clause without positioning the arbitration clause, like a chess piece, next to a class action waiver. In the attorney’s tool kit, the deceptive adhesion contract was the rope, the arbitration itself lay in waiting, and the class action waiver was the knot in the rope, all this in a democracy boastful of a free market for its unemployed who are rarely informed of the arbitration clause nestled in the printed employment form that they, out of work, gratefully sign. House counsel took care to include the class action waiver, for without it his CEO’s fate in a class action could be that of  dancing across a floor 24/7 with a one-legged flamenco dancer.                                                                                                                                                                                                                    

          On the other side of the dance floor was the class action lawyer whose ideal was the pot of gold awarded not to the members of the class, who commonly hold low-value claims, but to him whose take, so to speak, depends  on the aggregate number of the members of the class. He sometimes thinks himself, on the way to the bank, as a  private prosecutor, a quasi-attorney general, shadow of the old time Pinkerton agent acting in the public interest. However, if he presses weak claims in class actions, the renouned Judge Richard Posner entertains a different fantasy about him.  Judge Posner, a soft spoken realist, sees a class action alleging weak claims as an attempt to blackmail defendants into the Hobson’s choice of either settling or rolling the dice.

          And rare is the class action lawyer who wants for members of a class. Consider how arbitration clauses have sprung up:

          By 1991, more employees were covered by arbitration clauses than by collective bargaining agreements. Arbitration clauses were thoughtfully included by employers in personnel manuals, lenders put them in credit card agreements,  nurses tendered them in hospital medical consent forms, like wild weeds they sprouted in purchase agreements and service contracts.

          By 2003, nearly one quarter of private nonunion workers were subject to arbitration systems  imposed as a condition of employment.

          By 2009, 75 percent of major consumer transactions were subject to mandatory binding arbitration.                                                                                                     

          In 2010, arbitration was mandatory in agreements of the 4 largest cell phone companies, 5 out of the 8 largest cable companies, 6 out of 9 major credit card companies, and 2 out of 4 national retail banks. All required the waiver of the right to bring a class action.

          By 2011, 93% of the most prominent firms in the credit and financial services industries had arbitration clauses in their employment contracts.

          By 2012, more than 50% of the largest retail banks and credit unions had arbitration agreements for individual checking account customers.

          If the class action lawyer feels a debt to anyone it is to the genius who thought to take arbitration from the courts who  disliked  it, and to enshrine it in the Federal Arbitration Act (FAA) where it  must have been greeted as if it were a bride. What greater gift for the tired businessman than the knowledge that, if a dispute involves a contract with an arbitration clause, the Federal Arbitration Act provides that the court must stay litigation so that the dispute can go to arbitration and, after the arbitration is completed, the Act gives extremely limited power to the courts to review the award no matter how erroneous it might be.

          Prior to American Express, the Supreme Court found in 2011 that  the Arbitration Act favored the enforcement of class waivers in arbitration agreements. AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1750-51 (2011). On the other hand, class action lawers took comfort from the conviction that the court had in 1985 in the Mitsubishi Motors case  provided a way around that wall in  the so called “ vindication principle” which barred an arbitration clause if it prevented the vindication of federal statutory rights. Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985)

          In American Express, retail merchants signed contracts that provided that they must accept both AmEx  charge and credit cards. The contracts contained arbitration clauses coupled with class action waivers. In their class action, the merchants claimed that AmEx violated the Sherman Act by the use of its monopoly power in the credit card market to force the merchants into an unlawful tying arrangement involving the credit and charge cards. As for their waiver, they argued that the waiver prevented them from asserting federal antitrust claims the individual litigation of which was prohibitively expensive. The district court sustained the waiver but the Second Circuit reversed, holding a class action the economical route for the merchants to proceed in the light of recent rulings of the Supreme Court.

          In reversing with what was probably unconcealed enthusiasm, Scalia, J., when finished with his autopsy, left little of the class action for use in arbitrations, a result foreshadowed by his opinion in AT&T Mobility LL.C. v. Concepcion, 131 S.Ct.1740 (1211). He upheld the class action waiver because (1) there was no congressional command requiring the rejection of the waiver, (2) proof was lacking that Congress approved Rule 23 as an entitlement of class proceedings for the vindication of statutory rights, (3) the respondents individually, but not as a class, had their rights to secure the vindication of their federal rights, and (4) as for the respondents lack of money to pay for the  prosecuting of their individual antitrust claims, Justice Scalia ice-skated away with the  statement that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim”, words right out of Dickens. Indeed, right out of the courthouse window went the “vindication principle”.

          Justice Scalia did not address the fact that, on the papers before him, there was arguable proof that American Express may have been in criminal violation of the Sherman Act and that the consequence of the court’s opinion, in effect, was the protection of American Express from the inquiry and  overhauling that the class action lawyers would have given it. Reading the opinion, one is left with a sense of shame, a sense of having witnessed something wrongful.

          In dissent, Justice Kagan to no avail unsuccessfully argued primarily that the arbitration clause, by barring a class action by the respondent merchants, prevented the effective vindication of federal statutory rights.

          However much one may imagine attempts to evade American Express,  it ultimately   falls to Congress to say whether and in what contexts it favors contractual freedom in arbitration agreements over the private enforcement of federal statutes or, to put it more pointedly, whether it has the moral will to resist the pressure of moneyed interests over the public welfare, for business interests are active even now in our wonderful Capitol to resist changes in the law of arbitration. They must have read with relief Justice Scalia’s scuttling of the vindication principle. 

          What do scholars foresee in American Express? They see “the destruction of protection for collective action that has been at the heart of the labor laws for over sixty years. It will require employees and consumers to arbitrate their federal statutory rights even when, to paraphrase Justice Kagan, they have been given an adhesive contract that effectively deprived them of all legal recourse.” Stone, Procedure, Substance, and Power: Collective Litigation and Arbitration Under the Labor Law, 61 UCLA L. Rev. Disc. 164, 179 (2013) [Upon which I drew for the data concerning the widespread use of arbitration agreements, supra.]

          Having delivered the bad news, here is the good news:

          Section 1028 of the Dodd-Frank Act requires the Consumer Financial Protection Bureau to report to Congress concerning the use of arbitration in consumer transactions and to “prohibit or impose conditions or   limitations on the use of…arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers”. Should the agency issue regulations prohibiting the use of class action waivers in consumer financial products, the law that now favors  the enforcement of class waivers in arbitration agreements  would be flipped for those contracts over which the Consumer Financial Protection Bureau has direct authority. However, if the Consumer Financial Protection Bureau bans class action waivers in consumer financial contracts, its rule will apply, pursuant to a grandfather clause, only to contracts entered  into more than 180 days after the rule is issued. During that period, the sun will be blotted out by crisply printed class action waivers.

Harold Reynolds, Attorney at Law, Scarsdale, NY 
November 18, 2013