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Courts Question Viability of Class Action Waivers

By Anthony R. McClure, Litigation News Associate Editor – March 27, 2009

Attempts to include in arbitration clauses a prohibition against class actions was dealt a blow in decisions recently rendered by both the U.S. Courts of Appeals for the Second Circuit and Third Circuit. The federal appellate courts’ decisions, In re: American Express Merchants’ Litigation [PDF] and Homa v. American Express, Co., [PDF] are being touted as major victories by consumers who seek to pursue their claims in a class action setting. Defense counsel counter that the validity of class action waivers still needs to be analyzed on a case-by-case basis.

In re: American Express involved a proposed class of merchants with American Express cards, claiming that American Express engaged in an illegal “tying arrangement,” in violation of the Sherman Act. The American Express agreement at issue included an arbitration clause that banned any type of class litigation. However, the Second Circuit concluded that “enforcement of the [class action waiver] would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs,” and would violate the Federal Arbitration Act (FAA).

In its decision, the Second Circuit applied Section 2 of the FAA, and considered evidence that the costs of an expert study necessary to prove the class members’ antitrust claim might exceed $1 million, while the potential recovery for an individual could be as low as $5,000 even after trebling. The court made it a point, however, to stress that it was not holding class action waivers to be unenforceable per se; rather, the enforceability of such waivers must be analyzed on a case-by-case basis.

The Homa decision, by contrast, was not based on the FAA, but rather on state unconscionability law. In Homa, a class of New Jersey consumers brought suit, claiming that American Express falsely promised rebates of up to five percent of purchases made with the Blue Cash Card.

Initially, the district court held in favor of American Express. The court applied Utah state law, under a choice-of-law provision, and held that the plaintiffs failed to prove the American Express arbitration clause was procedurally or substantively unconscionable. On appeal, the Third Circuit reversed, concluding that “the class-arbitration waiver violates fundamental New Jersey public policy as applied to small-sum cases.”

The Third Circuit observed that the New Jersey Supreme Court would apply New Jersey law rather than Utah law, because “New Jersey has a materially greater interest than Utah in the enforceability of a class-arbitration waiver that could operate to preclude a New Jersey consumer from relief under the [New Jersey Consumer Fraud Act].”

While consumer groups and the plaintiff’s bar find the outcomes favorable, these recent decisions have caused some concern among the defense bar about the extent to which class action waivers can survive judicial review. “The class action device has been misused by some,” says Sabrina H. Strong, Los Angeles, cochair of the Section of Litigation Class Actions and Derivative Suits Committee Emerging Issues subcommittee.

“Some plaintiffs’ lawyers are using the device to aggregate meritless claims—creating crushing pressure to settle. Under this pressure, it’s not surprising that often companies are forced to settle for reasons wholly unrelated to the merits of the claims,” Strong observes.

“Given this type of abuse, companies should be entitled to take steps to protect themselves in their own contracts,” Strong says.

These recent decisions make clear that companies should take care in drafting contracts in the future, defense attorneys note. For instance, companies might want to ensure that a class action waiver is not severable from the arbitration clause itself. “If the waiver is unenforceable, companies should craft the agreement so that the arbitration agreement [itself] is unenforceable,” advises Angelo A. Stio, Princeton, NJ, the Section’s Commercial and Business Committee newsletter editor and author of a recent article on the In re: American Express decision.

Companies might actually prefer to be in court as opposed to arbitration, because “there’s no meaningful review while you are proceeding in class arbitration,” Stio opines.

Companies might also consider crafting their agreement to include cost- and fee-shifting provisions, Strong suggests.

“Even if a plaintiff is unable to bring a class action in arbitration, that plaintiff may still have the economic means to pursue his or her individual claim in an arbitration setting. This would help stifle a plaintiff’s argument that the waiver destroys his or her ability to bring a claim at all,” Strong says.

Keywords: Court of Appeals, class actions, waiver, arbitration, In re: American Express Merchants’ Litigation, Homa v. American Express, Co.

Related Resources

  • April 6, 2009 – Dear Mr. McClure and Editors of Litigation News:

    The above article is written in such a way as to appear neutral while representing only one side of the story, making it seem as if that one side is the only side with a reaction worthy of coverage. The result is that the article fails to further the ABA's mission of serving its members, the profession and the public by defending liberty and delivering justice as the national representative of the legal profession.

    Though the tone of the article appears neutral, its content reveals that it is a piece of advocacy. After introducing the opinions in Homa and In re AmEx, Mr. McClure begins his analysis by stating that "[w]hile consumer groups and the plaintiff's bar find the outcomes favorable, these recent decisions have caused some concern among the defense bar." One might expect that an analysis of the decisions from both standpoints would follow. Instead, the remainder of the article is given over to the defense bar's response to the rulings. Two attorneys representing the defense bar are quoted at length, and the impact of the article on corporate defendants is discussed.

    No one representing a consumer group or the plaintiff's bar (not to mention other groups whose interests are negatively impacted by class action "waivers," such as franchisees and employees) is quoted in the article, and Mr. McClure does not attempt to explain why consumers groups and the plaintiff's bar may be pleased with the rulings.

    If this article was titled, "Defense Bar Reacts to Decisions Striking Down Class Action Waivers," it would not be so galling. If the article did not so clearly set up opposing reactions to the rulings only to follow through with only one of those reactions, it would be less problematic. However, by giving the article a title that leads the reader to expect an objective take, and by framing it in a way that leads the reader to expect balanced analysis, the resulting one-sided article is deceptive and does a disservice to a true understanding of the issue. The reader is left with the impression that the national representative of the legal profession sides only with the defense bar and corporate interests.

    Matt Melamed
    Public Justice, PC


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