By Michael Hoenig - New York Law
Journal - February 11, 2013
Our April 2012 column, "
Arbitration Clauses Displace Consumer and Class Lawsuits,"1
reported on a growing trend for contracts of all kinds to
incorporate arbitration clauses that require the contracting
parties to arbitrate any disputes outside of the court system.
Further, such arbitration provisions increasingly contain "class
action waivers" in which the claimant is not to pursue class
actions. The enforceability of such arbitration and class action
waiver stipulations was boosted by the U.S. Supreme Court's
decision in 2011 of
AT&T Mobility v. Concepcion,2 a 5-4 ruling
that the Federal Arbitration Act (FAA) preempts state laws that
make specific categories of claims nonarbitrable. Our article
observed that such arbitration provisions would govern even
personal injury actions.3 Our April article closed,
"Welcome to the brave new world of mandatory arbitration."
In this column we forge ahead
with discussion of some new developments on the
arbitration/class action waiver front and, so, do not repeat
case law discussed in the prior article. The reader is assumed
to be at least somewhat familiar with the topic. One new
development is that the U.S. Supreme Court is scheduled to hear
oral argument on Feb. 27, 2013, in a case called American
Express v. Italian Colors Restaurant (Sup. Ct. No. 12-133).
The court granted review of
a ruling by the U.S. Court of Appeals for the Second Circuit
issued last February 2012 holding that an arbitration and class
action waiver provision was unenforceable where the action was
based upon federal antitrust statutes and the evidence showed
that the prohibitive costs of individually proceeding in
arbitration, as a practical matter, would not give the
plaintiffs an opportunity to "vindicate their statutory rights."4
In particular, an economist
testified that expert assistance in individual antitrust cases
has ranged from $300,000 to more than $2 million per case. The
Amex claim, he opined, would result in experts' costs in the
middle of that range. Thus, to enforce the class action waiver
would effectively deny the claimants an opportunity to recover
for antitrust violations. Were the federal statutory rights
pursued in a class action, however, claims of modest size could
be aggregated and large experts' fees better absorbed. The
Second Circuit held, however, that each class action waiver case
"must be considered on its own merits," based on its own record.
A second development is a
decision by the U.S. Court of Appeals for the Ninth Circuit
issued only two weeks ago,
Kramer v. Toyota Motor,5 dealing with the
question whether unnamed non-signatories to a contract for the
purchase of an automobile from a Toyota retail dealer can
enforce an arbitration/class action waiver provision when the
purchaser sues them in a class action alleging a variety of
state law consumer claims. The Ninth Circuit held "no" based on
the specific language of the arbitration provision and
California law regarding "equitable estoppel."
Third, we report on an
interesting study by Myriam E. Gilles, professor of the Benjamin
N. Cardozo Law School titled, "Killing Them With Kindness:
'Consumer-Friendly' Arbitration Clauses After AT&T Mobility
v. Concepcion,"6 concluding that corporate
transaction attorneys are drafting "friendly" bilateral
arbitration agreements that give courts comfort in finding that
the provisions allow a claimant to be able to "vindicate" his or
her rights in an individual arbitration proceeding. As our April
column noted,7 the arbitration/class action waiver
agreement in the Concepcion case was very "friendly": the
consumer would get at least a $7,500 payment if the arbitration
exceeded the last written offer the company made prior to
selecting an arbitrator; arbitration was cost-free for
non-frivolous claims; double attorney fees would be paid if the
arbitrator awarded the customer more than AT&T's last settlement
offer; and the option was given of conducting the arbitration in
person, over the phone, or solely on the filed papers.
Consumer-friendly provisions also help to stave off charges of
"unconscionability" of the contract.
In the Amex case
awaiting oral argument on Feb. 27, a number of retail businesses
alleged antitrust violations because the defendant had an "Honor
All Cards" policy requiring merchants that wish to accept Amex
credit cards to accept its charge cards as well. (A "charge
card" requires the cardholder to pay the full outstanding
balance at the end of a billing cycle while a "credit card"
allows both full and partial payments, subject to interest
charges). The plaintiffs argued this was an illegal tying
arrangement under the Sherman Act.
The merchants' agreement with
defendant contained an arbitration provision plus a class action
waiver. The latter forbids the parties to the contract from
pursuing anything other than individual claims in the arbitral
forum. First, in 2009, the Second Circuit found the provision
unenforceable because it would prevent vindication of rights
given to plaintiffs by federal statutes, namely, the antitrust
laws (Amex I).
But, in 2010, the U.S.
Supreme Court decided
Stolt-Nielsen v. Animal Feeds Int'l,8 holding
that an arbitral panel's decision to allow class
arbitration—where there was no contractual basis for concluding
that the party agreed to do so—exceeded the arbitrators' powers.
Simple "silence" is not an authorization for class arbitration.
The Supreme Court thus vacated Amex I and remanded the
case for further consideration in light of Stolt-Nielsen.
On remand the Second Circuit
again refused to enforce the arbitration/class action waiver
provision, construing Stolt-Nielsen as a "narrow ruling"
not affecting the circuit court's original analysis. The Second
Circuit held its mandate, however, allowing American Express to
petition for review to the Supreme Court again. At about that
time the Supreme Court's Concepcion decision issued. The
Second Circuit accepted supplemental briefing on the effect of
Concepcion upon the Amex dispute but again held
that the arbitration provision would not be enforced since
Concepcion dealt with preemption of state contract law and
not the vindication of federal statutory rights.
In the Supreme Court the
battle lines have hardened. Defendant argues that arbitration
agreements must be enforced as written "unless Congress itself
has evinced an intention to preclude the agreement." Since the
antitrust laws do not show any intent to preclude bilateral
arbitration agreements, the arbitration provisions must be
enforced. Defendant argues that the Second Circuit was not
authorized to override the parties' contractual choice of
bilateral, "no-class-action" arbitration. Further, says Amex,
Concepcion's upholding of the Federal Arbitration Act is
being frustrated by the circuit ruling because it forces the
defendant to accept class arbitration, or else to abandon
Plaintiffs, on the other
hand, argue in the Supreme Court that there is a "uniquely
federal need" to harmonize the FAA's general pro-arbitration
policy with competing federal statutes that enjoy "equal
constitutional footing." Thus, Supreme Court precedent has
recognized that federal statutory claims may be resolved by
arbitration only "so long as the prospective litigant
effectively may vindicate its statutory cause of action in the
arbitral forum."9 Plaintiffs contend that the
"effective-vindication" rule applies where, as here, enforcing
an arbitration clause would impose "prohibitive costs" that
prevent a claimant from pursuing a class action to vindicate her
federal statutory rights.
A number of amicus curiae
briefs have been filed in the Amex case. One of them is
the brief of the U.S. Chamber of Commerce and the Business
Roundtable. These amici argue that the circuit decision seeks to
carve out a new "effective vindication of rights" exception to
the FAA's mandate that arbitration agreements be enforced
according to their terms. But neither the FAA nor any other
federal statute authorizes such an exception. While Congress
could do so legislatively, the circuit court's exercise in
"judicial policymaking cannot stand." Indeed, the court in
Concepcion rejected a state's effort to impose class
procedures on arbitration in order to facilitate "small-dollar
claims that might otherwise slip through the legal system."10
Further, argue these amici,
the pre-Concepcion case law dicta on which the circuit
court relied actually referred to costs unique to arbitration,
such as filing fees and arbitral forum costs that would preclude
access to the arbitral forum altogether. In addition, the
"effective vindication" test would create a "procedural morass"
that would undermine the objectives of the FAA. Such a test is
"not administrable even on its own terms." Thus there is no way
for courts to reliably forecast, at the very outset of
litigation, the total costs of proving a claim or the expected
recovery that would result.
Lurking in the details of the
Amex proceedings is a perhaps broader issue, namely,
whether class actions are so hallowed that they must be
protected whenever the filing of only individual lawsuits will
be deterred by the costs of filing them when weighed against the
potential recovery. Many anti-Concepcion advocates
suggest that plaintiffs suing for small or modest individual
recoveries need the class action device in order to aggregate
small claims into one large lawsuit and, thereby, distribute the
large costs of suit among many plaintiffs. Pro-Concepcion
advocates, however, argue that many class plaintiffs' lawyers
file frivolous or non-meritorious class actions in pursuit of
the pot of gold at the end of the class action rainbow. The
ubiquity of class suits creates enormous leverage forcing
corporate defendants to pay a "ransom" via settlement.11
Ultimately, the Amex decision will either fortify
Concepcion even in suits based on federal statutes or carve
out a narrow exception to enforcement of arbitration and class
In the Ninth Circuit's
Kramer v. Toyota decision issued on Jan. 30, 2013,12
the court held that non-signatories to automobile purchase
contracts between retail dealers and their customers could not
enforce an arbitration/class action waiver provision. The reason
was that the language of the arbitration provision mentioned
"you" and "we" or "buyer" and "dealer" to identify who may elect
arbitration. The Toyota corporate entities, who sought to
enforce arbitration when sued in a class action alleging bad
braking performance, were not contemplated in the "you," "we"
kind of language. Further, the court rejected Toyota's argument
that plaintiffs were "equitably estopped" to avoid binding
arbitration. While the U.S. Supreme Court has held that a
litigant who is not party to an arbitration agreement may invoke
arbitration under the FAA, that is true only "if the relevant
state contract law allows the litigant to enforce the
In its review of California
contract law, the circuit court concluded that a non-signatory
under these circumstances could not enforce arbitration by way
of equitable estoppel. Sometimes, non-signatories can enforce
arbitration when the plaintiffs' claims are "intertwined" with
the purchase agreements because plaintiffs' claims actually rely
on the existence of the vehicle purchase transactions. Here,
however, the various causes of action—alleged
misrepresentations, deceptive practices, omissions regarding
vehicle safety, violations of false advertising law, and the
like—were regarded by the court as not "intimately founded" in
the purchase agreements. Rather, they related to acts and
omissions by the non-signatories.
however, involved California estoppel law. Other states may well
differ on the issue. Our April column, for example, mentioned an
Alabama appellate decision,
Volkswagen Group of America v. Williams,14
where a non-signatory was permitted to enforce an arbitration
clause in a car purchase agreement because the broad language
"all disputes" was deemed inclusive.
In Gilles' study (forthcoming
in the Notre Dame Law Review)15 the author
discusses the vindication-of-rights exception to Concepcion
reflected in the Amex case but perceives that the
dominant view in the post-Concepcion world is what she
calls "practical formalism." Most claimants trying to make a
vindication of rights argument are likely to fail because
"consumer-friendly" arbitration clauses will proliferate across
the corporate landscape.
In her "qualitative
examination" of 37 current arbitration clauses used by
consumer-oriented companies, Gilles found that many have indeed
added "friendly" provisions such as offering to pay filing fees,
providing for attorney and expert fee-shifting and promising
"bounty" or premium payments to claimants who achieve a better
arbitral outcome than the company's last-best offer.
As indicated in our April
column, Concepcion enhanced the enforceability of
arbitration and class action waiver provisions. Increasingly,
contracts are including these terms together with
consumer-friendly provisions making bilateral arbitration an
attractive alternative to lawsuits in court. The Supreme Court's
decision in the Amex case either will fortify the
Concepcion trend even as to federal statutory rights or,
perhaps, carve out a narrow exception to class action waivers in
claims based on federal statutes. The Ninth Circuit's Kramer
decision shows that, depending on a particular state's law,
unnamed non-signatories to customer purchase agreements may have
difficulties enforcing arbitration clauses. There are
contractual solutions, perhaps such as explicitly naming the
non-signatories in the contract, but company counsel need to
address the adjustments necessary for enforcement.
is a member of Herzfeld & Rubin.
1. Hoenig, New York Law
Journal, April 9, 2012, p. 3.
2. 131 S. Ct. 1740 (2011).
Marmet Health Care Center v. Brown, 132 S. Ct. 1201
(2012) (injury and death lawsuits against nursing homes could be
barred by arbitration agreement);
Ayzenberg v. Bronx House Emanuel Campus, 2012 NY Slip Op
02396 (1st Dept. March 29, 2012).
4. 667 F.3d 204, 217, 218-219
(2d Cir. 2012).
5. 2013 U.S. App LEXIS 2090
(9th Cir. Jan. 30, 2013).
6. Cardozo Legal Studies
Faculty Research Paper No. 372 (posted August 2012) (last
revised Oct. 1, 2012), Available at SSRN:
http://ssm.com/abstract=2132604, forthcoming in 88 Notre
Dame L. Rev. 825 (2013).
7. Hoenig, supra n. 1.
8. 130 S. Ct. 1758 (2010).
9. Respondent's Brief, at 1,
Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S.
614, 637 (1985).
10. Concepcion, 131 S.
Ct. at 1753.
11. See Amex, Brief
for Petitioners, at 53, citing S. Rep. No. 109-14, at 20 (2005)
In re Rhone-Poulenc Rorer, 51 F.3d 1293, 1299 (7th Cir.
1995) (noting that aggregation can create irresistible
settlement pressures despite "the demonstrated likelihood that
the plaintiffs' claims…lack legal merit").
12. 2013 U.S. App. LEXIS 2090
(9th Cir. 2013).
Arthur Andersen v. Carlisle, 556 U.S. 624, 632 (2009).
14. 64 So. 3d 1062 (Ala. App.
15. Gilles, supra n. 6.
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