Class Action Waiver in Arbitration Agreement Unconscionable

There appears to be some life left in the “vindication of statutory rights” argument following Concepcion and Stolt-Nielsen after all! The Second Circuit, in In re: American Express Merchants’ Litigation, 06-1871 (2d Cir. 2012), held that a class action waiver in an arbitration agreement can be ruled unconscionable if the plaintiff (here, a merchant) can show that it would be unable to vindicate its statutory rights in bilateral arbitration. In the case at hand, the plaintiff brought an antitrust claim. The plaintiff demonstrated through testimony of an expert that bringing the cause of action as an individual plaintiff would be cost-prohibitive. As a result, the court held that the plaintiff, if unable to join others in a class, would effectively be precluded from vindicating its rights (thus rendering the arbitration agreement unconscionable). Unable to order the parties to class arbitration under Concepcion and Stolt-Nielsen, the court remanded the case so that the district court could deny the motion to compel arbitration (which will likely lead to a judicial class action).

From the decision: “. . . we are persuaded by the record before us that if plaintiffs cannot pursue their allegations of antitrust law violations as a class, it is financially impossible for the plaintiffs to seek to vindicate their federal statutory rights. Since the plaintiffs cannot pursue these claims as class arbitration, either they can pursue them as judicial class action or not at all. If they are not permitted to proceed in a judicial class action, then, they will have been effectively deprived of the protection of the federal antitrust-law. The defendant will thus have immunized itself against all such antitrust liability by the expedient of including in its contracts of adhesion an arbitration clause that does not permit class arbitration, irrespective of whether or not the provision explicitly prohibits class arbitration.

Therefore, in light of the fact that the arbitration provision at issue here does not allow for class arbitration, under Stolt-Nielsen and by its terms, if the provision were enforced it would strip the plaintiffs of rights accorded them by statute. We conclude that this arbitration clause is unenforceable. We remand to the district court with the instruction to deny the defendant’s motion to compel arbitration.”

It would seem, then, that a plaintiff subject to a class action waiver in an arbitration agreement could attack that provision on the ground of unconscionability if it can show that bilateral arbitration would effectively preclude it from vindicating its statutory rights. Although this analysis must be done on a case-by-case basis, according to the Second Circuit, it certainly gives plaintiffs a basis for challenging a class action waiver. American Express says that it is going to appeal the decision.

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