Employment Law: Arbitration agreements will be strictly enforced under the Federal Arbitration Act

Insight Into The Consequences Of How You Deal With Contracts & Arbitration

The U.S. Supreme Court on June 20, 2013 continued its recent trend of strictly enforcing the terms of arbitration agreements. The Court held a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act (FAA). The Court reached this decision even when faced with facts showing the cost of proving an individual claim in arbitration exceeds the potential recovery.  The Court’s opinion will  likely make such class action waivers ironclad. The sole legal exceptions to this new rule are: specific legislation allowing suit over arbitration; or, evidence of unconscionability (terms that are unjust or grossly unfair) under state law.  These exception would establish “grounds . . . for the revocation of any contract” under the FAA’s savings clause, 9 U.S.C. § 2.

American Express enters into arbitration agreement with merchants. The merchant agreements contain a class arbitration waiver.  Numerous merchants brought an antitrust class action against American Express in federal court.  American Express filed a motion to compel separate arbitrations with each individual merchant.  The Court held the class arbitration waiver in the merchant agreement was enforceable. The arbitration agreement could not be invalidated despite the high cost of individually proving the merchants’ antitrust claims against American Express.  The Court’s broadly worded decision provides important guidance. It expands application of the FAA to agreements to arbitrate all types of federal statutory claims. The Supreme Court’s opinion turned on three grounds:  (1) there is no statutory language that trumps the FAA’s requirement for arbitration agreements to be “rigorously enforced” according to their terms; (2) just because an individual claim is expensive to prove doesn’t grant the right to class arbitration (“effective vindication” exception); and, (3) to override arbitration provisions due to cost prevents the speedy resolution of claims because courts and parties must first determine the costs of proving each element of plaintiffs’ claims and the potential damages that could be recovered.

The Court appears to be asserting the following rule: class action proceedings are an exception to the rule and not an entitlement.   The practical reality many individual arbitration cases simply will not be brought because of class action waivers due to the high cost of proving certain individual claims. Thus, absent fraud, duress or unconscionability arbitration agreements will generally be held enforceable.

In Plain English

If you sign a contract with an arbitration agreement that means neither you nor the other party can file a lawsuit to enforce the agreement. If the agreement also says you are waiving your right to class arbitration, that means there is no right to class arbitration.  A court cannot help either party get out of the agreement just because individual arbitration is expensive or inconvenient, even if a federal statutory right is involved.  The Federal Arbitration Act requires arbitration agreements to be strictly enforced according to their terms.  If you want to undo an arbitration agreement or a class arbitration waiver, you’ll need to do one of the following:  (1) show that there was no actual agreement or that the terms are so unfair or one-sided that they will not be enforced under state law; or, (2) find a statute that guarantees your right to file a lawsuit and/or to bring class proceedings for a particular claim.

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