Litigation: Predicting Colors with emerging trends in arbitration clauses and class actions

Businesses in many sectors should consider including in their contracts an arbitration clause with specific protections

In the past, mandatory arbitration clauses often failed to protect businesses against class actions, particularly where the parties arguably had unequal bargaining power (e.g., in consumer contracts). But recent Supreme Court decisions have made the arbitration clause a potent weapon against class actions in many areas of the law. In AT&T Mobility LLC v. Concepcion in 2011, the Supreme Court held that an arbitration clause in a consumer mobile telephone contract was enforceable – and a purported federal court class action lawsuit based on the contract was impermissible – under the strong pro-arbitration policy of the Federal Arbitration Act (FAA). The Court rejected the argument that the mandatory arbitration clause was an unconscionable “contract of adhesion” under California state law, and pointed out a number of claimant-friendly provisions in AT&T’s contract that made it easy for an individual claimant to arbitrate his or her claims (including procedures for low-cost telephonic or written arbitration for low-value claims, a prohibition on AT&T recovering attorneys’ fees, and a generous minimum award if the arbitrator awarded the claimant more than AT&T’s last settlement offer.)

Last year, in American Express Co. v. Italian Colors Restaurant, the Supreme Court took a significant additional step by upholding an arbitration clause banning class actions even though, unlike Concepcion, the case arose under federal rather than state law and the arbitration clause contained no unusually claimant-friendly provisions. In Italian Colors, eight merchants sought to bring an antitrust class action against American Express in federal court, contending that the company’s class action waiver was invalid because the high cost of prosecuting an antitrust claim made it economically unfeasible for a single plaintiff to “effectively vindicate” its rights. The Supreme Court rejected plaintiff’s arguments and upheld the arbitration clause and class action waiver, holding that arbitration agreements must be “rigorously enforced” under the FAA and that the effective vindication doctrine prohibited only agreements that completely foreclosed claimants from asserting federal claims (and possibly agreements that imposed prohibitively expensive filing fees and the like), not agreements that make such claims more difficult or expensive to prosecute.

Contributing Author

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Lawrence T. Gresser

Lawrence T. Gresser is a co-founder and the managing partner of Cohen & Gresser LLP and a member of the firm’s Litigation and Arbitration practice...

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Contributing Author

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Scott D. Thomson

Scott D. Thomson is counsel in Cohen & Gresser LLP’s Litigation and Arbitration practice group.

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