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June 2012

Second Circuit Holds Class Action Waiver in Arbitration Agreement Unenforceable

In Re: American Express Merchants' Litigation, 667 F.3d 204 (2d Cir. 2012) ("AMEX III")

In AMEX III, the Second Circuit reaffirmed, for the third time, that a class action waiver in an arbitration agreement was unenforceable on the grounds that its practical effect would be to preclude plaintiffs from vindicating their federal statutory rights.  The Second Circuit declared the class action waiver unenforceable despite the intervening opinions by the Supreme Court in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp.1 ("Stolt-Nielsen") and AT&T Mobility LLC v. Concepcion2 ("Concepcion"), both of which addressed the viability of class actions in arbitration agreement settings.

In the underlying case, the AMEX III plaintiffs sued American Express for Sherman and Clayton Act violations, alleging that the company was charging them excessively high merchant discount fees.  The plaintiff merchants' contractual agreement with American Express, i.e., the "Card Acceptance Agreement," contained a mandatory arbitration clause and a class action waiver.  American Express moved to compel arbitration pursuant to the terms of the Card Acceptance Agreement, which was granted by the district court.  Plaintiffs appealed, arguing that their claims could not be reasonably pursued as individual actions.  In support of this argument, plaintiffs' expert opined that an individual merchant's claim was worth $12,850, or $38,549 when trebled, but that the cost of mounting an antitrust case, in expert assistance alone, would cost the individual merchant "at least several hundred thousand dollars, and might exceed $1 million."  (In Re American Express Merchants Litigation3 ("AMEX I")).  The Second Circuit determined that their analysis was controlled by Green Tree Financial Corp.-Alabama v. Randolph4 ("Green Tree"), a case which held that a party seeking to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive bears the burden of showing the likelihood of incurring such costs.  Relying largely on the opinion of plaintiffs' expert, the Second Circuit held that plaintiffs had satisfied this burden, and therefore the class action waiver was unenforceable "because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs." 

The Second Circuit's decision in AMEX I was subsequently vacated by the Supreme Court, and remanded for further consideration in light of its holding in Stolt-Nielsen.  Stolt-Nielsen held that imposing class arbitration on parties whose arbitration clauses are "silent" on that issue was inconsistent with the Federal Arbitration Act ("FAA").  On remand from the Supreme Court, the Second Circuit determined that Stolt-Nielsen did not affect its original analysis and concluded again that the class action waiver in the Card Acceptance Agreement was unenforceable.  (In Re American Express Merchants Litigation5 ("AMEX II")).  Shortly after issuing this opinion, the Supreme Court handed down its opinion in Concepcion, which held in relevant part that California's contract law, which deems class-action waivers in arbitration agreements unenforceable when certain criteria is met, was preempted by the FAA.  The Second Circuit placed a hold on the mandate in AMEX II, and the parties submitted supplemental briefing on Concepcion's potential impact on the case. 

American Express argued that Concepcion required a reversal of the holding in AMEX II.  The Second Circuit rejected that argument, stating that neither Concepcion nor Stolt-Nielsen addressed the key issue of whether a class-action arbitration waiver clause is enforceable when plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights. Citing to older Supreme Court cases, the Second Circuit explained that class action lawsuits are often a necessary vehicle for vindicating a party's statutory rights.  Further, in light of plaintiffs' expert's opinion, the Second Circuit found that the only economically feasible means for plaintiffs to enforce their statutory rights was via a class action.  Accordingly, the class action waiver was unenforceable. 

While the AMEX III opinion cautioned that it did not hold that class action waivers in arbitration agreements are per se unenforceable, and that each waiver must be considered on its own merits, it gives putative class plaintiffs an additional weapon to potentially invalidate class action waivers in arbitration agreements.  Businesses relying on such waivers will no doubt anxiously await to see whether the Supreme Court decides to review AMEX III, and whether plaintiffs can survive a fourth round.

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This decision is not final as the decision may be modified by further proceedings in the district court, on appeal or by review granted by the United States Supreme Court.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at

1 Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (U.S. 2010)
2 AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (U.S. 2011)  
3 In Re American Express Merchants Litigation, 554 F.3d 300, 317 (2d Cir. 2009)
4 Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (U.S. 2000)
5 In Re American Express Merchants Litigation, 634 F.3d 187 (2d Cir. 2011)

Commercial Litigation

Renata Ortiz Bloom

Commercial Litigation