By Joshua Wolson
Special to the Legal
Many people declared the Supreme Court’s decision in ATT Mobility v. Concepcion to be the death of the consumer class action. After all, in Concepcion, the court held that courts cannot invalidate arbitration clauses on grounds of unconscionability merely because those clauses bar a class action. That followed the court’s decision two years earlier in Stolt-Nielsen v. Animal Feeds International, in which the court held that parties to an arbitration agreement cannot be compelled to participate in a class action arbitration unless the arbitration agreement between the parties contemplates such a procedure. So, the reasoning has gone, businesses don’t like class actions, which assert (fairly or unfairly) tremendous economic pressure. Therefore, any rational business will add an arbitration clause to its form agreement or terms of service, including a class action waiver, and consumer class actions will die a silent death. But, like a zombie rising from the dead, a recent decision from the 2nd U.S. Circuit Court of Appeals might revive consumer class actions.
In In re American Express Merchants Litig., the 2nd Circuit was asked to revisit, for the third time, whether an arbitration clause, which included a class action waiver, in American Express’ merchant agreements, was enforceable. On an initial appeal, the 2nd Circuit (per a panel that included then-Judge Sonia Sotamayor) concluded that they were not, but after Stolt-Nielsen, the Supreme Court reversed the case and remanded it for further consideration. The 2nd Circuit held that Stolt-Nielsen did not change anything. Again, the case went to the Supreme Court, and again, in the wake of Concepcion, the court reversed and remanded for further consideration. And, once again, the 2nd Circuit held that nothing had changed.
So, how did the 2nd Circuit reach a decision that seems to fly in the face of recent Supreme Court decisions? The court focused on earlier Supreme Court decisions which held that as a matter of federal substantive arbitration law, if an arbitration clause effectively deprives a plaintiff of its statutory rights, then it is not enforceable. The panel focused on an affidavit submitted by an economist, which estimated the cost to the plaintiff to perform the economic study needed to win a complicated antitrust case. The court concluded that that cost was so significant that no plaintiff would rationally bear it to recover a small amount of money in an individual arbitration. Therefore, in the court’s view, the arbitration clause had the effect of preventing a plaintiff from vindicating its rights under the Sherman Act. The court held that it could not force a class arbitration, but it could invalidate an arbitration clause that had the effect of depriving a plaintiff of a federal statutory right.
If it stands, the 2nd Circuit’s decision seems to provide a roadmap to plaintiffs who want to avoid arbitration clauses and pursue class actions instead. All they have to do is submit a detailed affidavit from a potential expert demonstrating the costs of litigation and show how those costs outweigh any potential recovery. Of course, that need not be the end of the story. A defendant might want to show that the costs are overstated because any study can be used in several proceedings, at no additional cost, meaning that the costs can be spread over many plaintiffs who want to pursue their claims. For example, in the American Express case, Amex might point out that the many plaintiffs can each use the same economist’s report, which will likely focus on the market-wide effects of Amex’s conduct. The cost of the economic study will then be spread over many different members of what would otherwise be a class. The costs then might not seem so out of proportion.
So, to invoke Mark Twain, have reports of the death of consumer class actions been greatly exaggerated? Maybe, if the 2nd Circuit’s decision stands. But, based on the past few years, it seems likely that the Supreme Court will have the last word.
Joshua D. Wolson is a partner in the litigation department at Dilworth Paxson. He can be reached at 215-575-7295 or [email protected].