Last week the Second Circuit Court of Appeals refused to enforce a class action waiver in an arbitration provision despite the U.S. Supreme Court approving such waivers. This alert discusses the Second Circuit’s decision and potential implications for franchise companies.
Reports that franchisors could avoid class actions through arbitration appear to have been greatly exaggerated. Despite the United States Supreme Court’s AT&T Mobility v. Concepcion decision upholding class action waivers, the Second Circuit last week again distinguished Concepcion to hold that such waivers are unenforceable where class actions are “the only economically feasible means for plaintiffs [to enforce] their statutory rights.” While the case, In re American Express Merchants’ Litigation, No. 06-1871, 2012 U.S. App. LEXIS 1871 (2d Cir. Feb. 1, 2012), did not involve claims by franchisees, it is the latest example of the Second Circuit’s narrow interpretation of the Supreme Court’s recent arbitration decisions and may well provide fuel for class actions by franchisees.
Recent Supreme Court Arbitration Decisions: Stolt-Nielsen v. AnimalFeeds Int’l Corp. and AT&T v. Concepcion
In 2010, the Supreme Court, in Stolt-Nielsen, reversed the Second Circuit to hold that the Federal Arbitration Act requires parties to affirmatively agree to permit class arbitration proceedings for a court to compel them. 130 S. Ct. 1758 (2010). Absent an affirmative agreement, neither the courts nor an arbitrator could imply an agreement to permit the proceeding where the agreement to arbitrate is silent on the issue.
The Supreme Court again addressed class action arbitration proceedings the following year in Concepcion. 131 S. Ct. 1740 (2011). There, two consumers sought to bring a class action alleging that AT&T engaged in false advertising and fraud, and violated California consumer protection laws, when it offered “free” cell phones but collected $30 in sales tax. AT&T responded by moving to dismiss the lawsuit based on the service contract’s arbitration and class action waiver provisions. Although the lower courts refused to dismiss the class action suit based on California law holding class action waivers to be unconscionable, the Supreme Court reversed and held that courts must enforce arbitration agreements as written, even when the terms require individual, and not class, arbitration. Building on Stolt-Nielsen, the Court explained that requiring class-wide arbitration when the parties’ contract says otherwise “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” The Court emphasized that “[a]rbitration is a matter of contract, and the FAA requires courts to honor parties’ expectations.” As a result, Concepcion seemed to change the calculus toward inclusion of arbitration clauses in franchise agreements by making it an effective strategy for requiring individual arbitrations and waiving class action arbitrations.
American Express Merchants’ Litigation
The limitations of Stolt-Nielsen and Concepcion became evident in last week’s American Express decision. See also Jock v. Sterling Jewelers, Inc., 646 F.3d 113 (2d Cir. 2011) (limiting applicability of Stolt-Nielsen). In American Express, a class of merchants that accept American Express (Amex) credit cards claimed that Amex’s “honor all cards” provision in its card acceptance agreement is a tying arrangement that violates Section 1 of the Sherman Act. At issue is whether the merchant agreement’s mandatory arbitration clause and class action waiver are enforceable. In a 2009 decision in this case, the Second Circuit held that the class action waiver was unenforceable because it “would grant Amex de facto immunity from antitrust liability by removing plaintiffs’ only reasonably feasible means of recovery.” 554 F.3d 300, 320 (2d Cir. 2009). The Second Circuit reached the same conclusion again in 2011 after its first decision was vacated and remanded for reconsideration in light of Stolt-Nielsen. This latest decision is the Second Circuit’s third opinion, after giving the parties another opportunity to argue their case following the Concepcion decision.
In last week’s decision, the Second Circuit reaffirmed its previous decisions and rejected the argument that Stolt-Nielsen and Concepcion held that class action arbitration waivers are per se enforceable. Instead, it found that “a careful reading” of both Stolt-Nielsen and Concepcion “demonstrates that neither one addresses the issue presented here: whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.” In reaching this conclusion, the Second Circuit focused on the need to vindicate statutory rights, as opposed to common law rights, and plaintiffs’ proffer of an expert opinion that the cost of pursuing the case for an individual would be in excess of $850,000 with an expected recovery of $38,549. While recognizing that the burden of establishing an unreasonable cost fell to plaintiffs, the court held that this burden had been satisfied by the expert report. Accordingly, the plaintiffs could proceed with their class action claim in court or, at Amex’s election, in arbitration.
Recommendations for Franchise Companies
The Concepcion case gives franchisors a good reason to adopt arbitration as their dispute resolution forum, especially if class action claims are a concern. However, as suggested in American Express, arbitration provisions that are drafted to make arbitration more expensive for franchisees or that are one-sided, such as those allowing the franchisor to recoup attorneys’ fees if successful but denying franchisees any ability to do so, may be deemed unconscionable and therefore unenforceable. The American Express decision underscores the importance of drafting arbitration provisions in a way that makes arbitration a viable alternative dispute resolution mechanism for both franchisors and franchisees. The recent plethora of Supreme Court and appellate court decisions on the topic makes it important for such provisions to be regularly reviewed and updated to comport with changing judicial attitudes toward class treatment.