American Express v. Italian Colors Restaurant has Major FLSA Implications Moving Forward
In American Express v. Italian Colors Restaurant, the Supreme Court of The United States reversed the decision of the Second Circuit by a 5-3 decision, holding that the Federal Arbitration Act, 9 U.S.C. 2, does not permit courts to invalidate arbitration agreements simply because the cost of individual arbitration may be high. In so holding, the Supreme Court effectively made it possible for companies to avoid class action lawsuits altogether by simply adding an arbitration provision in employment contracts.
American Express v. Italian Colors Restaurant arose from contractual agreements entered into between credit card company, American Express and the many merchants who accept American Express credit cards. This contractual agreement includes a clause which states that all disputes must be resolved by arbitration and provides that there “shall be no right or authority for any claims to be arbitrated on a class action basis.” Respondents nonetheless filed a class action, claiming that petitioners violated §1 of the Sherman Act and seeking treble damages for the class under §4 of the Clayton Act. Petitioners moved to compel individual arbitration under the Federal Arbitration Act (FAA), but respondents countered that the cost of expert analysis necessary to prove the antitrust claims would greatly exceed the maximum recovery for an individual plaintiff.
The District Court granted the motion and dismissed the lawsuits. The Second Circuit reversed and remanded, holding that because of the prohibitive costs respondents would face if they had to arbitrate, the class-action waiver was unenforceable and arbitration could not proceed. The Circuit stood by its reversal when the Supreme Court remanded in light of Stolt-Nielsen S. A. v. Animal Feeds International Corp., 559 U. S. 662, which held that a party may not be compelled to submit to class arbitration absent an agreement to do so.
The Supreme Court reversed the Second Circuit decision. In so holding, the Court emphasized three separate points. First, the FAA reflects the overarching principal that arbitration is a matter of contract that must be respected by the courts, even if the claims allege a violation of federal statute. The Court specifically noted that the only exception to this rule is if the FAA’s mandate has been overridden by a contrary congressional command.
Second, the Court pointed out that there are currently no congressional commands requiring the rejection of class-arbitration in situations such as this one. Antitrust laws don’t guarantee an affordable procedural path to any and all claims or evince an intention to preclude a waiver of class action procedure. The Court also noted that congressional approval of Federal Rule 23 does not establish an entitlement to class proceedings for the vindication of statutory rights, and the Supreme Court has previously rejected the assertion that the class-notice requirement must be dispensed with because the prohibitively high cost of compliance would frustrate Plaintiff’s attempt to vindicate policies underlying the antitrust.
Lastly, the Court noted how the “effective vindication exception” does not invalidate the instant arbitration agreement. Normally, an “effective vindication exception” is a mechanism used to prevent a prospective contractual waiver from choking off a party’s ability to enforce congressional created rights. However the Court reasoned that the exception does not apply to this case since requiring a court to “determine the legal requirements for success on the merits claim-by-claim and theory-by-theory, the evidence necessary to meet those requirements, the cost of developing the evidence, and the damages that would be recovered in the event of success” would be inconsistent with the text of FAA and past Supreme Court precedent. Furthermore, the Court distinguished situations such as this where it may not be worth the expense to prove a statutory remedy from situations where a right to pursue a claim is eliminated. For example, one may have a right to pursue a claim when a provision exists forbidding the assertion of certain statutory rights, but it may simply not be worth the expense.
In her dissenting opinion, Justice Kagan (joined by Justices Ginsburg and Breyer) demonstrated that not all agree with the majority. Justice Kagan made the argument to extend the Court’s earlier rulings that arbitration clauses cannot thwart “effective vindication” of statutory rights by requiring overly high fees for entry into arbitration. Justice Kagan goes so far as to say that the majority opinion is simply saying to the small businesses and employees working with companies, “Too darn bad.” Justice Kagan goes further by stating:
The Court today mistakes what this case is about. To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled. So the Court does not consider that Amex’s agreement bars not just class actions, but “other forms of cost-sharing . . . that could provide effective vindication.” Ante, at 7, n. 4. In short, the Court does not consider—and does not decide— Italian Colors’s (and similarly situated litigants’) actual argument about why the effective-vindication rule precludes this agreement’s enforcement.
Justice Thomas also wrote a concurring opinion to underscore that the result was required by the plain meaning of the FAA.
Although the Court’s decision arose in the antitrust context, it will have major effects on wage and hour claims moving forward. For one, the decision jeopardizes the right to file class action lawsuits because now there is nothing preventing someone wanting to avoid class action lawsuits from including an arbitration provision in an agreement. The decision should foreclose the use of the “effective vindication” or “economic feasibility” argument that plaintiffs have used extensively to challenge the enforceability of class arbitration waivers in wage and hour claims.
Plaintiffs may try to disassociate FLSA claims from this case because unlike the federal antitrust statutes, which make no mention of class actions, the FLSA expressly permits collective actions. However this argument will likely fail given that Justice Scalia’s opinion heavily relied on Gilmer v. Interstate/Johnson Lane Corp. There, the American Express majority stated, “We had no qualms in enforcing a class waiver in an arbitration agreement even though the federal statute at issue, the Age Discrimination in Employment Act, expressly permitted collective actions.” The American Express decision state that this “brings home the point” those collective actions are not necessary to the effective vindications of statutory rights.
The message to employers is that clear class and collective action waivers in arbitration agreements should be enforced, paving the way for employers to compel arbitration on an individual basis and removing the threat of collective litigation. The most logical way for this to be changed is through the legislature, and of course there has been legislation introduced for the past several Congresses that would ban requiring an arbitration agreement as a condition of employment. But at least for the foreseeable legislative future, that seems unlikely.
If you have a question regarding an arbitration clause or agreement, please contact the NYC Employment Lawyers of Fitapelli & Schaffer for a free consultation.