Second Circuit Rules that Class Action Waiver Provision Violates the Federal Arbitrations Act

In In re: American Express Merchants' Litigation, 06-1871-cv, decided on January 30, 2009, the Second Circuit ruled for the first time that the class action waiver provision within a contract between American Express Co. and merchants is unenforceable under the Federal Arbitration Act. The Court held that to enforce this agreement would "grant Amex de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery."

The Court did not go so far as to rule that class action waiver provisions are either void or enforceable per se, focusing solely on the provision contained in the specific contract being argued before them.

The Court also held that the authority to determine the enforceability of a class action waiver is a matter for the courts, not the arbitrator.

Plaintiffs - two groups of business operators who have contracts with the company and a trade association that represents independently owned supermarkets - filed suit against American Express, claiming that they were forced to agree to accept all American Express credit and debit cards as a cost of doing business with the company. The agreement prevents the filing of a class action lawsuit. The complaint alleged an illegal 'tying arrangement' in violation of §1 of the Sherman Act.

The District Court had granted American Express’s motion to compel arbitration. The Second Circuit held that "the enforcement of the Card Acceptance Agreement to cover their claims against Amex under federal antitrust statutes would be incompatible with the federal substantive law of arbitration."

The Court recognized the general principle that "the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action." Further, the "record abundantly supports the plaintiffs' argument that they would incur prohibitive costs if compelled to arbitrate under the class action waiver."

"The Card Acceptance Agreement therefore entails more than speculative risk that enforcement of the ban will deprive them of substantive rights under the federal antitrust statutes."

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