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Developments Regarding Arbitration and Class Action Waivers

February 11, 2013 in  News

New York Law Journal

Our April 2012 column, ” Arbitration Clauses Displace Consumer and Class Lawsuits,”reported on a growing trend for contracts of all kinds to incorporate arbitration clauses that require the contracting parties to arbitrate any disputes outside of the court system. Further, such arbitration provisions increasingly contain “class action waivers” in which the claimant is not to pursue class actions. The enforceability of such arbitration and class action waiver stipulations was boosted by the U.S. Supreme Court’s decision in 2011 of AT&T Mobility v. Concepcion,2 a 5-4 ruling that the Federal Arbitration Act (FAA) preempts state laws that make specific categories of claims nonarbitrable. Our article observed that such arbitration provisions would govern even personal injury actions.3 Our April article closed, “Welcome to the brave new world of mandatory arbitration.”

In this column we forge ahead with discussion of some new developments on the arbitration/class action waiver front and, so, do not repeat case law discussed in the prior article. The reader is assumed to be at least somewhat familiar with the topic. One new development is that the U.S. Supreme Court is scheduled to hear oral argument on Feb. 27, 2013, in a case called American Express v. Italian Colors Restaurant (Sup. Ct. No. 12-133).

The court granted review of a ruling by the U.S. Court of Appeals for the Second Circuit issued last February 2012 holding that an arbitration and class action waiver provision was unenforceable where the action was based upon federal antitrust statutes and the evidence showed that the prohibitive costs of individually proceeding in arbitration, as a practical matter, would not give the plaintiffs an opportunity to “vindicate their statutory rights.”4

In particular, an economist testified that expert assistance in individual antitrust cases has ranged from $300,000 to more than $2 million per case. The Amex claim, he opined, would result in experts’ costs in the middle of that range. Thus, to enforce the class action waiver would effectively deny the claimants an opportunity to recover for antitrust violations. Were the federal statutory rights pursued in a class action, however, claims of modest size could be aggregated and large experts’ fees better absorbed. The Second Circuit held, however, that each class action waiver case “must be considered on its own merits,” based on its own record.

A second development is a decision by the U.S. Court of Appeals for the Ninth Circuit issued only two weeks ago, Kramer v. Toyota Motor,5 dealing with the question whether unnamed non-signatories to a contract for the purchase of an automobile from a Toyota retail dealer can enforce an arbitration/class action waiver provision when the purchaser sues them in a class action alleging a variety of state law consumer claims. The Ninth Circuit held “no” based on the specific language of the arbitration provision and California law regarding “equitable estoppel.”

Third, we report on an interesting study by Myriam E. Gilles, professor of the Benjamin N. Cardozo Law School titled, “Killing Them With Kindness: ‘Consumer-Friendly’ Arbitration Clauses After AT&T Mobility v. Concepcion,”6concluding that corporate transaction attorneys are drafting “friendly” bilateral arbitration agreements that give courts comfort in finding that the provisions allow a claimant to be able to “vindicate” his or her rights in an individual arbitration proceeding. As our April column noted,7 the arbitration/class action waiver agreement in the Concepcion case was very “friendly”: the consumer would get at least a $7,500 payment if the arbitration exceeded the last written offer the company made prior to selecting an arbitrator; arbitration was cost-free for non-frivolous claims; double attorney fees would be paid if the arbitrator awarded the customer more than AT&T’s last settlement offer; and the option was given of conducting the arbitration in person, over the phone, or solely on the filed papers. Consumer-friendly provisions also help to stave off charges of “unconscionability” of the contract.

‘Amex’ Litigation

In the Amex case awaiting oral argument on Feb. 27, a number of retail businesses alleged antitrust violations because the defendant had an “Honor All Cards” policy requiring merchants that wish to accept Amex credit cards to accept its charge cards as well. (A “charge card” requires the cardholder to pay the full outstanding balance at the end of a billing cycle while a “credit card” allows both full and partial payments, subject to interest charges). The plaintiffs argued this was an illegal tying arrangement under the Sherman Act.

The merchants’ agreement with defendant contained an arbitration provision plus a class action waiver. The latter forbids the parties to the contract from pursuing anything other than individual claims in the arbitral forum. First, in 2009, the Second Circuit found the provision unenforceable because it would prevent vindication of rights given to plaintiffs by federal statutes, namely, the antitrust laws (Amex I).

But, in 2010, the U.S. Supreme Court decided Stolt-Nielsen v. Animal Feeds Int’l,8 holding that an arbitral panel’s decision to allow class arbitration—where there was no contractual basis for concluding that the party agreed to do so—exceeded the arbitrators’ powers. Simple “silence” is not an authorization for class arbitration. The Supreme Court thus vacated Amex I and remanded the case for further consideration in light of Stolt-Nielsen.

On remand the Second Circuit again refused to enforce the arbitration/class action waiver provision, construing Stolt-Nielsen as a “narrow ruling” not affecting the circuit court’s original analysis. The Second Circuit held its mandate, however, allowing American Express to petition for review to the Supreme Court again. At about that time the Supreme Court’s Concepcion decision issued. The Second Circuit accepted supplemental briefing on the effect of Concepcion upon the Amex dispute but again held that the arbitration provision would not be enforced since Concepcion dealt with preemption of state contract law and not the vindication of federal statutory rights.

In the Supreme Court the battle lines have hardened. Defendant argues that arbitration agreements must be enforced as written “unless Congress itself has evinced an intention to preclude the agreement.” Since the antitrust laws do not show any intent to preclude bilateral arbitration agreements, the arbitration provisions must be enforced. Defendant argues that the Second Circuit was not authorized to override the parties’ contractual choice of bilateral, “no-class-action” arbitration. Further, says Amex, Concepcion’s upholding of the Federal Arbitration Act is being frustrated by the circuit ruling because it forces the defendant to accept class arbitration, or else to abandon arbitration altogether.

Plaintiffs, on the other hand, argue in the Supreme Court that there is a “uniquely federal need” to harmonize the FAA’s general pro-arbitration policy with competing federal statutes that enjoy “equal constitutional footing.” Thus, Supreme Court precedent has recognized that federal statutory claims may be resolved by arbitration only “so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum.”9 Plaintiffs contend that the “effective-vindication” rule applies where, as here, enforcing an arbitration clause would impose “prohibitive costs” that prevent a claimant from pursuing a class action to vindicate her federal statutory rights.

A number of amicus curiae briefs have been filed in the Amex case. One of them is the brief of the U.S. Chamber of Commerce and the Business Roundtable. These amici argue that the circuit decision seeks to carve out a new “effective vindication of rights” exception to the FAA’s mandate that arbitration agreements be enforced according to their terms. But neither the FAA nor any other federal statute authorizes such an exception. While Congress could do so legislatively, the circuit court’s exercise in “judicial policymaking cannot stand.” Indeed, the court in Concepcion rejected a state’s effort to impose class procedures on arbitration in order to facilitate “small-dollar claims that might otherwise slip through the legal system.”10

Further, argue these amici, the pre-Concepcion case law dicta on which the circuit court relied actually referred to costs unique to arbitration, such as filing fees and arbitral forum costs that would preclude access to the arbitral forum altogether. In addition, the “effective vindication” test would create a “procedural morass” that would undermine the objectives of the FAA. Such a test is “not administrable even on its own terms.” Thus there is no way for courts to reliably forecast, at the very outset of litigation, the total costs of proving a claim or the expected recovery that would result.

Lurking in the details of the Amex proceedings is a perhaps broader issue, namely, whether class actions are so hallowed that they must be protected whenever the filing of only individual lawsuits will be deterred by the costs of filing them when weighed against the potential recovery. Many anti-Concepcion advocates suggest that plaintiffs suing for small or modest individual recoveries need the class action device in order to aggregate small claims into one large lawsuit and, thereby, distribute the large costs of suit among many plaintiffs. Pro-Concepcion advocates, however, argue that many class plaintiffs’ lawyers file frivolous or non-meritorious class actions in pursuit of the pot of gold at the end of the class action rainbow. The ubiquity of class suits creates enormous leverage forcing corporate defendants to pay a “ransom” via settlement.11 Ultimately, the Amex decision will either fortify Concepcion even in suits based on federal statutes or carve out a narrow exception to enforcement of arbitration and class waiver provisions.

Other Developments

In the Ninth Circuit’s Kramer v. Toyota decision issued on Jan. 30, 2013,12 the court held that non-signatories to automobile purchase contracts between retail dealers and their customers could not enforce an arbitration/class action waiver provision. The reason was that the language of the arbitration provision mentioned “you” and “we” or “buyer” and “dealer” to identify who may elect arbitration. The Toyota corporate entities, who sought to enforce arbitration when sued in a class action alleging bad braking performance, were not contemplated in the “you,” “we” kind of language. Further, the court rejected Toyota’s argument that plaintiffs were “equitably estopped” to avoid binding arbitration. While the U.S. Supreme Court has held that a litigant who is not party to an arbitration agreement may invoke arbitration under the FAA, that is true only “if the relevant state contract law allows the litigant to enforce the agreement.”13

In its review of California contract law, the circuit court concluded that a non-signatory under these circumstances could not enforce arbitration by way of equitable estoppel. Sometimes, non-signatories can enforce arbitration when the plaintiffs’ claims are “intertwined” with the purchase agreements because plaintiffs’ claims actually rely on the existence of the vehicle purchase transactions. Here, however, the various causes of action—alleged misrepresentations, deceptive practices, omissions regarding vehicle safety, violations of false advertising law, and the like—were regarded by the court as not “intimately founded” in the purchase agreements. Rather, they related to acts and omissions by the non-signatories.

Kramer, however, involved California estoppel law. Other states may well differ on the issue. Our April column, for example, mentioned an Alabama appellate decision, Volkswagen Group of America v. Williams,14 where a non-signatory was permitted to enforce an arbitration clause in a car purchase agreement because the broad language “all disputes” was deemed inclusive.

In Gilles’ study (forthcoming in the Notre Dame Law Review)15 the author discusses the vindication-of-rights exception to Concepcion reflected in the Amex case but perceives that the dominant view in the post-Concepcionworld is what she calls “practical formalism.” Most claimants trying to make a vindication of rights argument are likely to fail because “consumer-friendly” arbitration clauses will proliferate across the corporate landscape.

In her “qualitative examination” of 37 current arbitration clauses used by consumer-oriented companies, Gilles found that many have indeed added “friendly” provisions such as offering to pay filing fees, providing for attorney and expert fee-shifting and promising “bounty” or premium payments to claimants who achieve a better arbitral outcome than the company’s last-best offer.


As indicated in our April column, Concepcion enhanced the enforceability of arbitration and class action waiver provisions. Increasingly, contracts are including these terms together with consumer-friendly provisions making bilateral arbitration an attractive alternative to lawsuits in court. The Supreme Court’s decision in the Amex case either will fortify the Concepcion trend even as to federal statutory rights or, perhaps, carve out a narrow exception to class action waivers in claims based on federal statutes. The Ninth Circuit’s Kramer decision shows that, depending on a particular state’s law, unnamed non-signatories to customer purchase agreements may have difficulties enforcing arbitration clauses. There are contractual solutions, perhaps such as explicitly naming the non-signatories in the contract, but company counsel need to address the adjustments necessary for enforcement.

Michael Hoenig is a member of Herzfeld & Rubin.


  1.  Hoenig, New York Law Journal, April 9, 2012, p. 3.
  2.  131 S. Ct. 1740 (2011).
  3.  See Marmet Health Care Center v. Brown, 132 S. Ct. 1201 (2012) (injury and death lawsuits against nursing homes could be barred by arbitration agreement); Ayzenberg v. Bronx House Emanuel Campus, 2012 NY Slip Op 02396 (1st Dept. March 29, 2012).
  4.  667 F.3d 204, 217, 218—219 (2d Cir. 2012).
  5.  2013 U.S. App LEXIS 2090 (9th Cir. Jan. 30, 2013).
  6.  Cardozo Legal Studies Faculty Research Paper No. 372 (posted August 2012) (last revised Oct. 1, 2012), Available at SSRN:, forthcoming in 88 Notre Dame L. Rev. 825 (2013).
  7.  Hoenig, supra n. 1.
  8.  130 S. Ct. 1758 (2010).
  9.  Respondent’s Brief, at 1, citing Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614, 637 (1985).
  10.  Concepcion, 131 S. Ct. at 1753.
  11.  See Amex, Brief for Petitioners, at 53, citing S. Rep. No. 109—14, at 20 (2005) (CAFA Report); In re Rhone-Poulenc Rorer, 51 F.3d 1293, 1299 (7th Cir. 1995) (noting that aggregation can create irresistible settlement pressures despite “the demonstrated likelihood that the plaintiffs’ claims…lack legal merit”).
  12.  2013 U.S. App. LEXIS 2090 (9th Cir. 2013).
  13.  Arthur Andersen v. Carlisle, 556 U.S. 624, 632 (2009).
  14.  64 So. 3d 1062 (Ala. App. 2010).
  15.  Gilles, supra n. 6.