The U.S. Supreme Court Upholds the Use of Arbitration Clauses that Prohibit Class-wide Litigation

In American Express Co. v. Italian Colors Restaurant, 2013 WL 3064410, U.S., (June 20, 2013), the U.S. Supreme Court upheld an arbitration provision that required merchants to arbitrate disputes instead of taking claims to court and, most importantly, prohibited merchants from joining together to bring class-wide arbitration claims. While the case did not involve any employment-related laws, the Court’s decision may support the application of the same conclusion to arbitration agreements with employees.

Italian Colors argued that the Federal Arbitration Act (“FAA”) barred the enforcement of the arbitration agreement’s class claim waiver because it effectively deprived the restaurant of its right to assert an antitrust cause of action. The restaurant argued that this was so because individual arbitration of such a case would be cost-prohibitive.

In the 5-3 decision, the Court rejected the restaurant’s argument. The Court held that, under the FAA, parties must abide by the terms of the arbitration agreements they sign unless a contrary congressional command overrides that mandate, and no such command applied here.

In reaching its conclusion, the Court rejected the restaurant’s “effective vindication” argument. The restaurant had argued that the arbitration provision was unlawful because it amounted to a “prospective waiver” of the restaurant’s federal statutory rights. The Court acknowledged that, while an arbitration provision that barred the assertion of a particular statutory right, or imposed unreasonable filing or administrative fees, would prevent the effective vindication of a statutory right, the Court held that was not the case here. The Court explained that, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”

Although the Italian Colors decision arose in a commercial context, the implications of that decision for employers may be significant. For years, employers have wrestled with effectively drafting arbitration provisions that include class action waivers. Now, with the Italian Colors decision, the Court generally endorsed the use of class action waivers in arbitration agreements.

Nonetheless, there may be an open issue for employers. The National Labor Relations Board takes the position that class arbitration waivers violate Section 7 of the National Labor Relations Act. Section 7 gives employees the right to engage in concerted activities. The Board reasons that the right to act concertedly – which would include filing a class arbitration claim – is a substantive federal right that employers cannot compel employees to waive. See D.R. Horton, Inc., 357 NLRB. No. 184 (2012) (appeal pending). Despite the Board’s position on this issue in the context of unfair labor practice cases, many courts have declined to apply the Board’s approach to arbitration claims under the FAA. Please click here to read our previous alert about this subject – “Update Regarding Validity of Arbitration Agreements Waiving Class Claims” (May 22, 2012).

In sum, the Italian Colors decision certainly provides support for employers to use (or continue using) class waivers in arbitration agreements; however, at least for the time being, there is some uncertainty as to whether the Italian Colors decision will be treated as trumping the Board’s view that employers cannot lawfully force employees to agree to such waivers.