Blawgletter has noted the proliferation of efforts to ban arbitration of similar claims on a class basis.  Under the guise of choosing an arbitral forum over a judicial one to settle disputes, more and more contracts embed within the arbitration clause a prohibition on class treatment.

We know that arbitration aims to speed and streamline dispute resolution, but what purpose does barring class arbitration serve? 

The U.S. Chamber of Commerce argues that "class arbitration removes the principal benefits of individual arbitration, yet multiplies the risks exponentially.  For this reason, few businesses would — or could — willingly consent to class-wide arbitration."

That sounds plausible.  What does the other side say?

Two main lines of attack have emerged — that banning class arbitration (1) frustrates enforcement of statutory rights and (2) runs afoul of state law unconscionability principles.  Both approaches urge that claimants cannot obtain effective relief unless they can aggregate their claims with those of others and thus make the proceeding economically viable.

Recent decisions include these:

  • Frustration.  Dale v. Comcast Corp., 498 F.3d 1216 (11th Cir. 2007) (Cable Act); Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006) (antitrust); Booker v. Robert Half Int'l, Inc., 413 F.3d 77 (D.C. Cir. 2005) (civil right statute); Hadnot v. Bay, Ltd., 344 F3d 474 (5th Cir. 2003) (Title VII claim); Morrison v. Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003) (en banc) (Title VII).
  • Unconscionability.  Skirchak v. Dynamics Research Corp., 508 F.3d 49 (1st Cir. 2007) (applying Massachusetts law); Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007) (California law); Tillman v. Commercial Credit Loans, Inc., 665 S.E.2d 362 (N.C. 2008); Simpson v. MSA of Myrtle Beach, Inc., 644 S.E.2d 663 (S.C. 2007); Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007) (en banc); Kinkel v. Cingular Wireless LLC, 223 Ill.2d 1 (Ill. 2006).

Yesterday, the Second Circuit came down on the side of courts that see more mischief in prohibiting class arbitration than in allowing it, at least in cases where enforcement of a class ban would immunize the defendant from liability for its misdeeds.  In In re American Express Merchants' Litig. (Italian Colors Restaurant v. American Express Travel Related Services Co., No. 06-1871-cv (2d Cir. Jan. 30, 2009), the court reversed the district court's refusal to strike a clause that required merchants to arbitrate claims against American Express on an individual basis.  The plaintiffs alleged that American Express violated section 1 of the Sherman Act by tying the merchants' ability to sell to premium "charge card" customers to an obligation to honor all American Express cards.  The tying arrangement, the complaint asserted, forced merchants to pay American Express excessive fees.

The Card Acceptance Agreement between merchants and American Express provided:

There shall be no right or authority for any Claims to be arbitrated on a class action basis or 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 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, slip op. at 11.

The court reviewed Supreme Court and other decisions that suggested or recognized "frustration of statutory rights" as a viable basis for invalidating a class arbitration ban.  It distilled from the cases the principle that a ban fails if the evidence demonstrates that enforcing it would grant "de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery."  Id., slip op. at 33.

Note the court's emphasis that "the record abundantly supports the plaintiffs' argument that they would incur prohibitive costs if compelled to arbitration under the class action waiver."  Id., slip op. at 26.  The evidence include an expert's affidavit that detailed the high costs of litigating a tying claim and the infeasibility of prosecuting such a claim on an individual basis.  Indeed, as the court noted, "Amex has brought no serious challenge to the plaintiffs' demonstration that their claims cannot reasonably be pursued as individual actions".  Id., slip op. at 31.