How SCOTUS’s Amex ruling may help businesses evade class actions

August 22, 2013

Now that the U.S. Supreme Court has pretty much knocked down all barriers to contracts prohibiting classwide arbitration, via 2011’s AT&T Mobility v. Concepcion and last term’s American Express v. Italian Colors, have businesses actually rushed to add mandatory individual arbitration clauses to their contracts? A new study of agreements between franchisors and franchisees finds that they have not, and theorizes that the side effects of arbitration, including the limited right to appeal, may deter some businesses from adopting mandatory arbitration clauses. What’s more, the study’s authors – two law professors with long expertise in arbitration – hypothesize that the Supreme Court’s Amex ruling may permit businesses to prohibit class litigation without the collateral consequences of arbitration agreements.

In “Sticky’ Arbitration Clauses?: The Use of Arbitration Clauses after Concepcion and Amex,” Peter Rutledge of the University of Georgia and Christopher Drahozal of the University of Kansas look specifically at contracts in the franchise industry, which they say were predicted to be revamped after the court’s Concepcion ruling to include mandatory arbitration clauses. (Rutledge and Drahozal have previously studied mandatory arbitration clauses in credit card agreements, but Drahozal told me that his work as a special advisor to the Consumer Financial Protection Bureau precludes him from publishing on issues before the CFPB.) The empirical data they collected (from 68 franchisors listed as the top franchising opportunities in Entrepreneur Magazine and from a random sample of 239 franchise agreements filed with the Minnesota Department of Commerce) indicates that Concepcion did not actually have much of an impact on franchise contracts. The percentage of franchisors using arbitration clauses increased from 39.7 percent before the ruling to 44.1 percent in 2013, or 49.4 percent of franchises in 2011 to 50.6 percent in 2013. Not all of those clauses, moreover, include class arbitration waivers. In 2011, 77.8 percent of franchisors with arbitration clauses prohibited classwide actions; by 2013, after Concepcion, the percentage was up to 86.7 percent. Those numbers, write Rutledge and Drahozal, show “at most a slight shift to arbitration following Concepcion, and certainly not the ‘tsunami’ predicted by some commentators.” (Hat tip to Andrew Trask of McGuireWoods, author of the Class Action Countermeasures blog.)

The professors include the caveat that their data is only on franchise contracts, and they note that other businesses – particularly online consumer giants such as Sony, Netflix, eBay and Instagram – have inserted post-Concepcion mandatory arbitration clauses in their contracts. (Sony and Netflix switched over to arbitration after defending big data breach class actions, they point out.) The two years since Concepcion may also not have been enough time for a robust assessment of the ruling’s impact, Rutledge and Drahozal wrote. And in a phone interview, Drahozal emphasized that this study didn’t directly measure whether Concepcion has led to a decline in class action litigation.

Despite the caveats, I was quite interested in a theory Rutledge and Drahozal offered for why Concepcion and the court’s follow-up in Amex haven’t led every franchisor in the country to insert mandatory arbitration clauses and classwide waivers in contracts with franchisees. Part of the explanation may simply be inertia, or what the professors call “contract stickiness.” But they don’t think that’s the whole story. Arbitration, they explain, is often a good alternative to litigation, but it’s not without costs. “An arbitration clause does more than simply reduce the risk of class actions; it removes the case altogether from a judicial forum,” they wrote. “By using an arbitration clause, parties agree to use a bundle of dispute resolution services, a bundle that includes avoiding class actions but has other features (such as) decision makers selected by the parties, procedures paid for by the parties, and, importantly, a very limited appeals process that, generally, cannot be altered by contract.” Those can be significant collateral consequences, the paper said: “For businesses that perceive themselves as unlikely to be sued in a class action, these ‘bundling costs’ may discourage them from using an arbitration clause.”

That conclusion, Drahozal told me, would be consistent with what he and Rutledge previously found in a pre-Concepcion study of arbitration agreements in the credit card industry. The biggest credit card issuers, which were presumably the most likely to be targeted in class actions, typically included mandatory arbitration clauses in consumer contracts. Smaller banks and credit unions were less likely to mandate arbitration, probably because they were less likely to be sued in class actions.

But what if there were a way for businesses to obtain the benefit of a prohibition on classwide claims without incurring the side effects of arbitration? Here’s why all you defense lawyers should read Rutledge and Drahozal: They suggest that the Supreme Court’s Amex ruling may support just such a best-of-both-worlds scenario. The means to that end is a contract provision that bars class action litigation, not just classwide arbitration. (The professors use the phrase “non-arbitral class waivers,” but that doesn’t have a very felicitous ring to it.) According to the professors, Amex can be read to endorse prohibitions on class action litigation as well as classwide arbitration.

Rutledge and Drahozal contend that the Supreme Court’s decision in Amex does not depend on American Express’s use of an arbitration clause to bar classwide claims, but instead on the court’s conclusion that a prohibition on group action does not prevent individual contract signers from vindicating their statutory rights. “Nothing in that analysis depends in any way on the fact that the class waiver used an arbitration clause,” the professors wrote. “Rather, central to the court’s analysis seems to be that at the time Congress enacted the antitrust laws, class actions under the Federal Rules of Civil Procedure had not yet been adopted, an argument that would apply as well to non-arbitral class waivers.”

In fact, according to Drahozal, some franchise contracts already contain clauses prohibiting class action litigation. (Such provisions are much rarer in the consumer and employment context, he told me.) Some courts that have evaluated class action waivers have upheld them; others have not, usually because they’re deemed to be unconscionable, as some courts found classwide arbitration waivers to be before the Concepcion decision. Drahozal said the unsettled state of the law on class action waivers is a lot like the pre-Concepcion uncertainty on arbitration provisions barring classwide claims. A company that wants to be sure it won’t face a group action can do so through a mandatory arbitration clause. A business that wants to preserve its ability to defend itself in court can insist on contractual class actions waivers, though it has to be willing to risk their invalidation.

I asked Drahozal why a business couldn’t do both through contract provisions that attempt to bar class actions but, if they’re invalidated, mandate individual arbitration. The professor said companies could theoretically do that, so long as they don’t mind the risk of spending money to defend their class action waiver.

Any employment or consumer class action defense lawyers ready to advise your client to take that risk? Seems to me that you don’t have much to lose.

(Reporting by Alison Frankel)

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