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2d Circut Holds Class Action Waiver Unenforceable

On January 30 the US Court of Appeals for the Second Circuit issued a ruling with broad ramifications for franchise disputes.

In re American Express Merchants' Litigation, Jan 30 2009 (pdf)

The case involved a claim by merchants who accepted American Express cards. After a suit was filed, AmEx moved to compel arbitration under a clause which barred the merchants from bringing a class action proceeding.

The lower court agreed with AmEx, but the Court of Appeals disagreed. It is important to remember that arbitration provisions may be voided on grounds which would cause a similar result in the absence of a requirement to arbitrate. In other words, the Court of Appeals rationale was based on a ground applicable to all contracts.

The merchants stated that it would be cost-prohibitive for the merchants to bring individual claims against AmEx. The merchants produced testimony showing that each individual merchant would at best win between $9,000 to $38,000 but that the cost for discovery and expert witnesses would range from several hundred thousand dollars to a million dollars or more.

The Court of Appeals found that the cost-prohibitive nature of bringing individual claims would deprive the merchants of their statutory remedies. The rationale of the ruling is applicable to class-action waivers in both arbitration and litigation.

Mindful of the firestorm which this ruling will cause, the Court conducts a detailed analysis of arbitration, with citations to many of the significant arbitration rulings of recent years.

The Court may read the election returns, but they did not want their decision to be seen as reflective of any populist sentiment.

The Court claimed they ignored the "small business" schtick of the merchants, and that the rationale under which they reached their decision would be applicable irrespective of the size of the Plaintiff: the question was simply whether it would be cost-effective for a Plaintiff to vindicate statutory rights, not how much money the Plaintiff could afford to spend on litigation.

Finally the Court specifically noted that it was not holding class action waivers per se unenforceable, but rather that each such case is fact-specific.

The 2d Circuit is hardly the 9th, and indeed the Court noted that it need not reach the argument of Plaintiffs that the waiver would be unconscionable as applied to merchants based in California; the Court said that this ruling is applicable to all the merchants since the ruling involves the federal rights of the litigants.

Coming from a respected federal bench with expertise in commercial litigation, this ruling will influence both state and federal jurists, and will be one of the most-discussed commercial cases of 2009.

A measure of the high stakes involved is the submission of amici briefs from the Business Roundtable (represented by Hogan & Hartson), Trial Lawyers for Public Justice (Paul Bland is one of the leading lobbyists for the Arbitration Fairness Act ), the American Antitrust Institute (brief here ), and Atlantic Legal Foundation .

The current make-up of Congress makes it unlikely that there will be any success with overturning this ruling legislatively; indeed this ruling may add momentum to existing efforts to curb arbitration provisions in adhesory contracts .

Stay tuned... it's going to be an interesting year.

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