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Second Circuit Weighs in Again on Class Action Waivers in Arbitration Agreements


On February 1, 2012, the United States Court of Appeals for the Second Circuit reconfirmed two prior decisions that class action waivers in certain arbitration provisions applied to antitrust disputes are unenforceable.  These waivers require arbitration to be conducted on an individual rather than class-wide basis.  The decision is significant because it follows two recent United States' Supreme Court rulings in which class action waivers were upheld, each of which required the Second Circuit to review its initial ruling that rejected the enforceability of the class action waivers.  The Second Circuit explained that the Supreme Court decisions did not declare all class action waivers either per se enforceable or per se unenforceable.  Rather, the Second Circuit emphasized that the enforceability of class action waivers would depend upon the particular facts in each case and that plaintiffs had to demonstrate effectively "that their claims cannot reasonably be pursued as individual actions."

Click here for the opinion in In re American Express Merchants' Litigation [PDF].

Class action waivers generally require any arbitration to be conducted on an individual basis, thereby precluding class action relief.  Over the last few years, there has been extensive litigation concerning the enforceability of class action waivers.  The Second Circuit's decision is the third time that the Second Circuit has addressed the question of the enforceability of class action waivers in arbitration provisions contained in merchant agreements with American Express. 

In 2009, the Second Circuit declared that the class action waiver at issue could not be enforced as to antitrust claims because doing so would result in "de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery."  One year later, however, the Supreme Court vacated the Second Circuit's decision on account of the Supreme Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010), which held that "a party may not be compelled under the [Federal Arbitration Act] to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."  Id. at 1775 (emphasis in original).

Upon remand in 2011, the Second Circuit determined that Stolt-Nielsen did not require it to change its ruling.  The issue remained "whether the mandatory class action waiver . . . is enforceable even if the plaintiffs are able to demonstrate the practical effect of enforcement of the waiver would be to preclude [plaintiffs] bringing [antitrust] claims."  The Second Circuit "concluded [that] enforcement of the class action waiver would indeed bar plaintiffs from pursuing their statutory claims" in that the evidence supported a finding that "the cost of plaintiffs' individually arbitrating their dispute with [the defendant] would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws."

Soon after the Second Circuit issued its second ruling, however, the Supreme Court decided AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) in which the Court determined that the Federal Arbitration Act preempted a California law that deemed most class action waivers in consumer contracts unconscionable.  To consider the impact of Concepcion on its ruling, the Second Circuit invited additional briefing from the parties and reconfirmed its holding, explaining that "Concepcion and Stolt-Nielsen, taken together, stand squarely for the principle that parties cannot be forced to arbitrate disputes in a class action arbitration unless the parties agree to class action arbitration."  Nevertheless, the Second Circuit made clear, "[w]hat Stolt-Nielsen and Concepcion do not do is require that all class-action waivers be deemed per se enforceable."  According to the Second Circuit, these Supreme Court cases do not prevent a class action waiver from being deemed unenforceable where a plaintiff can "demonstrate that the practical effect of the enforcement would be to preclude the[] ability to bring federal antitrust claims."  In this case, the Second Circuit ruled that the defendant had not effectively challenged "plaintiffs' demonstration that their claims cannot reasonably be pursued as individual actions."

The Second Circuit, nonetheless, cautioned that its decision should not be applied too broadly, stating "[w]e again emphasize [that] our holding comes with caveats."  First, the Court underscored that the ruling had nothing to do with the size of the parties, asserting: "[o]ur decision in no way relies upon the status of  plaintiffs as 'small' merchants.  We rely instead on the need for plaintiffs to have the opportunity to vindicate their statutory rights."  Second, the Court was explicit that "[w]e do not hold today that class action waivers in arbitration agreements are per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions."

Instead, the Second Circuit reiterated that a case by case analysis of class action waivers remains the operative focus.  The Court wrote: "we hold that each waiver must be considered on its own merits, based on its own record, and governed with a healthy regard for the fact that the [Federal Arbitration Act] 'is a congressional declaration of a liberal federal policy favoring arbitration agreements.'"

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Daniel D. Edelman
Partner – New York
Phone: +1 212.895.4309