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Argument recap: Can arbitration agreements with class action waivers survive in the face of the effective vindication doctrine?

Last week’s argument in American Express Company v. Italian Colors Restaurant featured a lively discussion between virtually all of the Justices and counsel regarding the circumstances under which a federal antitrust claim can be “effectively vindicated” through arbitration, and whether an arbitration agreement with a class action waiver precludes the effective vindication of federal antitrust claims.

In the district court, defendant American Express had successfully moved to compel arbitration of a Sherman Act tying claim brought against it by merchants alleging that American Express unlawfully forced them to accept American Express credit cards and debit cards as a condition of accepting American Express charge cards.  The Second Circuit reversed, holding that American Express’s arbitration agreement was unenforceable because it included a class action waiver that prevented individual claimants from effectively vindicating their federal statutory rights under the Sherman Act through arbitration, citing the prohibitive cost of pursuing an individual antitrust claim. 

At oral argument on Wednesday, many of the Justices seemed to be looking for, and finding, ways to make bilateral arbitration of antitrust claims economically feasible, in part based on the flexible and informal nature of arbitration proceedings.  However, a number of Justices were struggling with whether and how an arbitration agreement with a class action waiver could be reconciled with the “effective vindication doctrine” set forth in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985) and Green Tree Financial Corp.-Alabama v. Randolph (2000).  On the one hand, arbitration provides opportunities for creative ways to deal with individual claims in an efficient and cost-effective manner, but on the other hand, a class action waiver might still be unenforceable under the effective vindication doctrine depending on whether the test depends on practical outcomes, a cost-benefit analysis, a comparison of arbitration to litigation, or something else.  The challenge for the Court will be settling on the appropriate test and striking the right balance between these issues. 

Michael Kellogg argued for American Express.  Justice Ginsburg quickly asked him whether individual claimants could really afford expert economic testimony without class procedures, considering the high cost of economic experts and the low amount of a potential individual recovery. Kellogg explained that the job of the arbitrator is to devise efficient and cost-effective ways to deal with claims.  Claimants might want expensive expert reports or other kinds of expensive discovery in arbitration, but an arbitrator doesn’t have to permit everything that might be permitted in litigation.  In addition, Kellogg argued that nothing prevented individual claimants from sharing costs or pooling resources.  Justice Ginsburg then questioned whether cost-sharing between a group of claimants would make any difference:  “[I]f I have six friends who bring individual arbitrations, that’s not nearly enough.”  Kellogg stated that the option was available, but cautioned that “there is no guarantee in the law that every claim has a procedural path to its effective vindication.”

Justice Kagan discussed Mitusbishi and Randolph with Kellogg.  If an arbitration agreement could not include a clause that simply barred antitrust claims against American Express, which Kellogg conceded, then what about a hypothetical arbitration agreement that included a provision prohibiting claimants from introducing economic evidence in an antitrust action? Wouldn’t this hypothetical clause also preclude the effective vindication of federal statutory rights? Kellogg admitted that expert economic evidence was necessary in an antitrust case.  However, he explained that Mitsubishi and Randolph did not bar such a provision.  Mitsubishi “dealt with the very specific question of . . . a substantive waiver of your rights, not with the procedures to vindicate those rights.”  Under further questioning from Justice Kagan about her hypothetical, which she said would “100 percent effectively absolutely frustrate your ability to bring a Sherman Act suit,”  Kellogg explained that he had no doubt that such a provision would be struck down under state unconscionability laws. However, he warned that Mitsubishi should not be expanded “into a free-floating inquiry for district courts into the costs and benefits of each case.” 

Justice Alito’s only question of the day expressed concern over whether the arbitration agreement was actually part of the alleged underlying antitrust violation.  Justice Kagan joined in this concern; if the merchants alleged that American Express abused its market power to impose an unlawful tying arrangement on them, why wasn’t the arbitration agreement simply part of the same scheme and designed to prevent the antitrust violation from being challenged?  Kellogg said the issue wasn’t before the Court, and in any case, presented an unworkable inquiry for a Court in determining whether to send a case to arbitration.  Whether a party was forced into an arbitration agreement was best left to state unconscionability law.

Justice Kennedy thought that the “substantial justification” for American Express’s position was the fact that “the whole point of arbitration” was to reduce costs, but expressed concern that Kellogg seemed to be arguing that the cost of arbitration didn’t matter.  Kellogg explained that it was up to the arbitrator to figure out how to resolve claims in an efficient and cost-effective way, and added:  “The whole point of arbitration, of course, is that its informality actually expands the universe of claims, of small value claims that can be brought effectively.” 

Justice Breyer questioned whether a prohibitively expensive expert report was really necessary in an antitrust action.  He suggested that an arbitrator could identify the key area or areas of dispute and thereby eliminate the need for an “enormous” report.  Chief Justice Roberts pointed out that claimants could reduce costs in other ways.  For instance, trade associations could commission expert reports on behalf of their members if several were claimants.  Or, as Justice Scalia suggested, claimants could borrow money from their own lawyers.  Kellogg added yet another possibility, noting that hedge funds increasingly finance litigation. 

Justice Kagan questioned whether the confidentiality provisions of the arbitration agreement prevented effective cooperation between claimants on a joint expert report.  Kellogg stated that American Express’s position was that the confidentiality provisions did not bar claimants from cooperating, but noted that the Second Circuit had already ruled otherwise on that issue below. 

Paul Clement argued for the merchants.  Justice Scalia asked Clement why the expense of bringing a claim prevented the effective vindication of that claim, whether in court or in arbitration:  “I don’t see how a Federal statute is frustrated or is unable to be vindicated if it’s too expensive to bring a Federal suit.  That happened for years before there was such a thing as class action in Federal courts.  Nobody thought the Sherman Act was a dead letter, that it couldn’t be vindicated.”  Clement pointed out that even before class actions, joinder was a procedural tool that permitted multiple claims to be litigated together in federal court.  In addition, “back in the good old days, you didn’t necessarily need a $300,000 expert to bring a Sherman Act claim.”  Clement also argued that the confidentiality clause in the arbitration agreement effectively precluded any alternatives such as cost-sharing. 

Justice Breyer continued to question Clement on why the Court should be concerned with litigation or arbitration expenses.  Justice Breyer wondered how the effective vindication doctrine should be applied – should it be a separate analysis of each individual case, an analysis of categories of cases, or something else?  Justice Breyer stated that it would be an “odd doctrine” that allowed plaintiffs to ignore arbitration clauses if they could “get a case that’s expensive enough.”  Clement suggested that the Court deal with categories of cases, and he noted that most cases applying the effective vindication doctrine have been antitrust cases. 

Justice Breyer continued to discuss his concerns with an expense-based standard for the effective vindication doctrine.  He noted that the Second Circuit and the merchants’ expert focused on the “wrong set of costs” — the expense of bringing an antitrust claim in court, rather than in arbitration.  Justice Breyer also explained that there were ways to arbitrate antitrust claims cheaply.  For instance, the arbitrator could be an expert economist, or the arbitrator could be instructed to keep costs down, or the arbitrator could hone in on one dispositive issue for the experts to analyze.  Clement responding by pointing out that American Express never raised these issues.  Justice Breyer also wondered why it wasn’t a better solution to sever the confidentiality provision of the arbitration agreement to permit cost-sharing.  Clement faulted American Express for not seeking review of the Second Circuit’s determination that the confidentiality provision precluded plaintiffs from cooperating in arbitration. 

Justice Scalia then went back and forth with Clement on his own views about an appropriate test under the effective vindication doctrine.  Justice Scalia thought that it was appropriate to compare what could be done in arbitration with what could be done in court.  “If you couldn’t do it in court, you don’t have to be able to do it in arbitration, it seems to me.”  Since class actions are not essential to federal claims brought in court, class proceedings cannot be essential to the effective vindication of federal rights in arbitration.  Clement disagreed, explaining that when an arbitration agreement operates as a “de facto as-applied exculpatory clause,” there is no comparison between litigation and arbitration, because the plaintiff has been deprived of both when it otherwise would have had the opportunity to vindicate its rights in court.    

Justice Breyer noted that “a lot” of the “beneficial aspects of class action can be used in an arbitration that does not formally have a class action.”  With respect to Clement’s concern regarding the confidentiality provision, Justice Breyer didn’t think it was an obstacle, because an expert economic analysis of overcharges or barriers to entry doesn’t require the use of private information.  Chief Justice Roberts also questioned whether the confidentiality clause would really bar individual claimants from sharing information.  Clement noted that to prepare an expert report on damages, the expert would need confidential sales information from each merchant, but the “confidentiality agreement protects that and doesn’t allow that to be shared.” 

Deputy Solicitor General Malcolm Stewart then argued on behalf of the United States in support of the merchants.  Stewart reinforced Clement’s opposition to Justice Scalia’s view that the Court should compare what could be done in court with what could be done in arbitration.  Stewart went back to Justice Kagan’s example of a clause that expressly precluded antitrust claims – the Court surely would not need to conduct any comparisons to determine that such a clause was unenforceable.  Similarly, no comparison should be necessary for an arbitration agreement with “the same practical effect as an exculpatory clause.”  Justice Kagan agreed, and added that the Court in Randolph did not need to compare prohibitively high arbitration fees to analogous fees or costs in litigation:  “[I]t didn’t look to say, well, let’s compare how these fees relate to whatever costs you would wind up with in litigation.  It just said, if the arbitration fees are prohibitive . . . in such a manner that it prevents you from vindicating your Federal claim in arbitration, that’s enough.” 

Justice Breyer took issue with Justice Kagan’s analogy to Randolph.  He saw a significant difference between the prohibitive filing fees that blocked access to arbitration in Randolph on the one hand and high expert fees on the other – the latter are a product of plaintiffs’ “own theory of wrong.”  According to Justice Breyer, if “all you have to do to get out of the arbitration is to allege a theory of your case which is hard and complicated to prove,” then “it seems to me in practice we have reversed many, many cases” holding that federal claims can be arbitrated. 

During Kellogg’s rebuttal argument, several Justices noted that the Second Circuit’s decision and the record below all dealt with litigation costs as opposed to the costs associated with arbitration under the various scenarios discussed by the Court.  Justices Kennedy and Breyer wondered whether the Court needed to remand the case for consideration of additional facts.  Justice Kagan ended by noting that the parties seemed to have moved away from the original question presented, which may have been the wrong question to begin with. 

Justice Sotomayor was recused from the case because she sat on the panel in the Second Circuit’s decision.  In light of the questioning, most of the remaining Justices seem to be leaning in favor of finding that American Express’s arbitration agreement and class action waiver are enforceable under the effective vindication doctrine.  None of the Justices questioned the existence of the effective vindication doctrine. Indeed, Justice Breyer agreed that the doctrine was “well established.”  Trying to read the tea leaves in an oral argument as far-ranging as this one is a difficult and speculative task.  But it appears that the Court wants to continue down the road it paved in recent cases such as AT&T Mobility LLC v. Concepcion of enforcing arbitration agreements according to their terms, even when they include class action waivers.  The challenge for the Court is doing so in a fashion that is consistent with the effective vindication doctrine, which requires the Court to either come up with a fact-specific reason why this case passes the effective vindication test, or to tackle the complicated and difficult task of setting forth the contours of a generally applicable effective vindication test. 


Recommended Citation: David Garcia, Argument recap: Can arbitration agreements with class action waivers survive in the face of the effective vindication doctrine?, SCOTUSblog (Mar. 4, 2013, 8:35 AM),