Class Action Waivers in Arbitration Agreements Held Unenforceable by Second Circuit

  The strong policy in favor of arbitration has made it virtually impossible to resist enforcement of arbitration agreements over the last couple of decades.  Arbitration is now generally favored in a vast array of cases, including those asserting statutory rights protected by special legislation (Gilmer v. Interstate, 500 U.S. 20(1991)).  The viability of arbitration agreements is generally a decision by arbitrators, not courts (Prima Paint Corp. v. Flood & Conklin Mfg Co., 388 U.S. 395 (1967)).  And, courts have even disallowed parties to change by agreement the standard for reviewing arbitration awards (Hall Street Asso. v. Mattell,          U.S.          (2008)), all making it more difficult to challenge the enforceability of an arbitration agreement or the enforcement of an award rendered by an arbitrator.

   Despite this, one fertile defense to arbitration recently gaining ground is the claim that arbitration, because of its expense or other procedural complexity, makes it too difficult for consumers to vindicate important rights.  This theory was recently given new support by the decision in the Second Circuit federal court of appeals in In re American Express Merchants Litigation, 2009 WL 214525, which refused to enforce a provision in an arbitration agreement that prohibited consumers from asserting aggregate or class claims in arbitration.  At issue in the case was whether the arbitration agreement, by requiring plaintiffs who would assert only miniscule claims in their individual names, were essentially deprived of a forum because the cost of such actions would be prohibitive in relation to the likely recovery.

  Because the court believed plaintiffs forced to ligitate, if at all, as individuals, would forego any remedy, the court invalidated the aggregate litigation waivers.  Although it did no do so expressly, the Court invited the parties on remand to sort out whether, with the aggregate waivers gone, the arbitration agreements as a whole would be invalidated.

  This litigation provides a thoughtful review of the history of arbitration agreement that limit remedies.  The brief of the American Antitrust Institute as amicus, in particular, is devoted to exploring this history.  It is a useful read for anyone interested in the movement towards invalidating arbitration agreements that are too onerous for certain litigants (from the burdens of international litigation to costs that are too onerous to consumers or individual litigants).

   Kentucky courts have struggled with the problem as well, with no well defined resolution.  Decisions of the Court of Appeals have, in fact, seemed to point in opposite directions.  One panel of the Court, for example, in Schnuerle v. Insight Comm. (2006-CA-002121-MR (9-26-08)), was willing to enforce an arbitration provision that contained a collective action waiver, like American Express Merchants.  Two months earlier, a different panel was willing to invalidate an arbitration agreement in Mortgage Electronic Reg. v. Abner, 260 S.W.2d 351 (2008), which prohibited an arbitrator from reforming the underlying contract and that limited damages to a few compensatory items.

   While the issues in these cases were different enough that a purest might find them reconcilable, the basic approaches to the same problem seem very different.  All of this is new enough that, like the federal cases, Kentucky courts may take some time to find a clear path.  In the meantime, for litigators struggling with the enforcement of arbitration agreements, both before and after the rendition of an award, there is plenty of new ammunition in these cases.