It has been a few bad weeks for American Express. We wrote a couple of weeks ago about the Second Circuit's decision invalidating class action waivers in arbitration agreements with it merchants. Now the Third Circuit has piled on. In a decision earlier this week it held that class actions waivers in arbitration agreements between American Express and its customers are unenforceable under New Jersey Law, where individual actions would be uneconomical to pursue.
The latest decision, Homa v. American Express Co., actually goes a little further than the earlier case. It discussed two features that are likely to have an influence on other cases. In addition to the underlying issue -- whether to enforce contract provisions limiting the right to assert class claims in arbitration of small claims that would other wise not be economically feasible on their own -- the same issue as decided by the Second Circuit last month -- the Third Circuit addressed two other important questions:
1. Would it enforce a contract choice of law provision that directed the Court to the law of a state -- Utah -- where such provisions would likely be enforced? Or would it refuse to do so because such a result would offend a significant public policy of the forum -- New Jersey? It took the latter path, applying New Jersey substantive law to invalidate the contract's class action waiver -- holding that it was unconscionable under New Jersey law.
This result, not unheard of in traditional choice of law analysis, presents a potential barrier to attempting to draft around certain unfavorable rules by choosing the law of a friendly forum in contract documents. It also underscores the importance of being the first to the courthouse. The choice of the forum, and with it the right to choose the whole law -- both substantive rules and conflict rules -- of the forum has always been thought to be strategically important. That is why, even where a defendant is entitled to a transfer of venue, the plaintiff keeps his original choice of law that comes from his selection of the original forum. The Supreme Court made that clear in its decision in 1964 in Van Dusen v. Barrack and the rule has been applied consistently ever since.
As a result of all of this, whether the case is started by a party seeking to compel arbitration under contract limits that prohibit class claims or is started as an action to invalidate such provisions, the choice of the forum will likely determine the outcome. In these circumstances, the choice of the forum -- which will choose under its conflict rules what substantive rule to apply -- will be as important as any other decision in the case. That probably means that a contract choice of forum provision is likely to be as important as a contract choice of law provision. It is probably more likely a jurisdiction will honor a choice of forum provision than it will honor a choice of law provision. If the case is sent to a forum friendly to contract limits like class action waivers, then, as they say, school's out.
2. The second collateral issue addressed by the Third Circuit in its decision in Homa was whether the Federal Arbitration Act pre-empts a state rule that would invalidate class action waivers. It held that it did not, relying on a history of cases under the FAA that looked to state law to determine enforceability of an arbitration agreement.
Since a decision under state law would not normally be reviewable by the Supreme Court under the adequate state ground doctrine, it is this issue -- the question of preemption of the FAA on this issue -- that could ultimately provide the hook for the Supreme Court to review the developing body of cases -- accelerated now in just the last few weeks -- on the viability of class action waivers in arbitration agreements.