The Second Circuit ruled today that a class action arbitration waiver contained in credit card agreement was unenforceable. See In Re: American Express Merchants’ Litigation, No. 06-871 (2d Cir. 2009). The relevant part of the arbitration agreement stated:
IF ARBITRATION IS CHOSEN BY ANY PARTY WITH
RESPECT TO A CLAIM, NEITHER YOU NOR WE WILL HAVE
THE RIGHT TO LITIGATE THAT CLAIM IN COURT OR HAVE
A JURY TRIAL ON THAT CLAIM . . . . FURTHER, YOU WILL
NOT HAVE THE RIGHT TO PARTICIPATE IN A
REPRESENTATIVE CAPACITY OR AS A MEMBER OF ANY
CLASS OF CLAIMANTS PERTAINING TO ANY CLAIM
SUBJECT TO ARBITRATION. THE ARBITRATOR’S DECISION
WILL BE FINAL AND BINDING. NOTE THAT OTHER RIGHTS
THAT YOU WOULD HAVE IF YOU WENT TO COURT MAY
ALSO NOT BE AVAILABLE IN ARBITRATION.
The Second Circuit held that the class action waiver in Amex’s Card Acceptance Agreement could not be enforced because plaintiffs had no other “reasonably feasible means of recovery.” The court distinguished its case from cases involving unconscionability due to the status of plaintiffs as “small merchants.” Instead, the court stated that its holding was based on “a
vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability. Applying [this analysis], we have found that plaintiffs have demonstrated the necessity of some class mechanism in order to bring their claims against Amex.”
This case provides consumers and small businesses renewed hope in their ongoing effort to fight credit card companies using the class action process. Consumers can look to this case to support arguments that class action waivers prevent them from vindicating important (here, antitrust) statutory rights.
I tend to agree with Carl on this point. I spent my first summer in law school working at a law firm in Vermont. The majority of my summer involved work on a claim brought against a bank my firm was defending. Banks, like credit cards, like these arbitration clauses because of the high costs of class action litigation. The claim brought against the bank was dropped when the claimant could not escape the arbitration clause.
For a plaintiff with a valid claim, arbitration would, I think, be a good forum for that claim. Arbitration clauses, while perhaps stepping on the toes of some plaintiffs, at least serve the purpose of separating the wheat from the chaff.
Removing the arbitration clause takes a case (frivolous or not) and sends it to litigation. Even if an institutional defendant gets the claim dismissed (rather than settling) because the claim was frivolous, there are the costs associated with litigating the case that far.
From a practical standpoint, arbitration seems to be a much better forum for defendants, plaintiffs with valid claims, and courts, which are already overburdened.
The Second Circuit’s attack on freedom of contract in the name of enabling plaintiffs to commence class actions reveals a bias toward plaintiffs and in favor of more litigation. Yes, a job creation decision for attorneys. However, is this the kind of jobs we need?
No litigation presents equal financial risk on plaintiffs and defendants. In fact, class actions have been criticized because the expenses of litigation and risk of a “wild card” result falls almost exclusively on the defendant, rather than individual plaintiffs who are members of a class. Why does the Second Circuit not care about the fact that class action litigation makes it too expensive and too risky to defend claims? Why is not the assertion of valid defenses just as important a policy objective as the assertion of valid claims?