Reinsurance Focus

On a matter of first impression, the Second Circuit Court of Appeals considered the enforcement of a mandatory arbitration clause in a contract that also contained a “class action waiver” forbidding parties to the contract from pursuing class claims in the arbitral forum. Though the court declined to decide whether class action waiver provisions were void or enforceable per se, it concluded that the plaintiffs had demonstrated that the class action waiver provision at issue should not be enforced because it would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs.

The court noted that although the Supreme Court has not squarely addressed this issue, it had implicitly recognized that a provision in an arbitration agreement is not per se unenforceable because the question of the validity of an arbitration clause which contained a class action ban was a matter for the arbitrator, not the court, to decide. The court found Green Tree Fin. Corp.v. Randolph, 531 U.S. 79 (2000) controlling to the extent that, based on the costs of individual litigation or arbitration, the agreement entailed more than a speculative risk that enforcement of the class action ban would deprive the plaintiffs of substantial rights under federal antitrust statutes. Further, the court found that, for all intents and purposes, the plaintiffs could only pursue their antitrust claims against American Express through the aggregation of individual claims either in class action litigation or in class arbitration. The court concluded that the class action waiver could not be enforced because the provision would effectively grant American Express de facto immunity from antitrust liability. The court noted by way of caveat that the ruling was in no way dependent on the “size” of any or all of the merchant plaintiffs; rather, it depended on a showing that the size of the recovery of any individual plaintiff would be too small to justify the expenditure of bringing an individual action. Finally, the court emphasized that this decision did not find all class action bans in arbitration agreements per se unenforceable. The case was remanded to the District Court for further proceedings. In re: American Express Merchants' Lit., No. 06-1871 (2d Cir. Jan. 30, 2009).

This post written by John Black.