The courts in Canada and the U.S. have shown a very definite preference to let matters go to arbitration rather than litigation. The advantages for the parties include the fact that it is often cheaper and faster to proceed with arbitration than a protracted lawsuit. Of course, this also serves to benefit the courts as well as their swelled lists of lawsuits get relieved (if only slightly).
Matters can go to arbitration one of two ways. After the dispute arises, the parties can voluntarily agree to go to arbitration. While this can occur in some instances, often one party has more money or other interests at stake and want to proceed with litigation. The other, more common, way that arbitration arises is through a clause in the contract that requires arbitration. Given its benefits, I almost always insist that my clients have arbitration clauses in their contrats. However, the benefits from arbitration do not come without a price. One of the costs has been in recent years the loss of class action litigation. Is this truly a cost? That depends on who you ask. One person will applaud the existence of class action lawsuits because it allows companies to be held accountable for their wrongdoing. If all I have suffered is a $500 loss, then I’m not likely to sue over it. However, if the company has taken $500 from 1,000 people, it has improperly made $500,000 and now we’re talking about serious money. If I’m out $500, I won’t do anything about it nor will most people except write a letter or lodge a complaint somewhere but that’s it. Without class actions, the argument goes, the company will not be made to account for its wrongdoing. The flip side, though, argues that while this is true, class action lawsuits end up being excuses for unscrupulous lawyers and litigants to take runs at companies with the goal of extorting large settlements from those companies because it is cheaper to pay out the settlements than to fight the class action litigation. From my experience, I see that there is merit in both arguments.
In any event, the result has been that corporations have attempted to use arbitration clauses to avoid class action lawsuits. One such company was American Express. In its agreements with merchants, the merchants were required to agree that any disputes they had with American Express would not only not be litigated, but that the merchants would agree not to start any class action lawsuits. The merchants eventually sued and American Express brought a motion to dismiss the lawsuit on the basis that it should be arbitrated individually rather than a class action. The U.S. District Court for the Southern District of New York granted the motion, dismissed the action and the merchants appealed. The U.S. Court of Appeals, Second Circuit, in a decision released a week ago, allowed the appeal, reversed the District Court’s decision and sent the matter back down for further consideration.
In essence, the Court held that where it can be shown that the costs of forcing the complainants to individual arbitrations would significantly outweigh the benefits of pursuing the arbitration, the benefits of class action litigation to enforce rights enacted by law (that is “statutory rights”) will outweigh the benefits of arbitration. In this particular case, the merchants complained that American Express’ actions were anti-competitive and thus breached the Sherman Act. I should note that, of course, these are merely allegations and have not in any way been proven. The evidence put before the court was that in order for the merchants to prove their claims would require experts to assemble further evidence which would cost between hundreds of thousands and millions of dollars. The benefits of such efforts, if done on only an individual basis, would be tens of thousands of dollars at best. Ultimately, the Court decided that the policy in favour of permitting class actions – especially to support statutory rights – should outweigh the policy in favour of upholding arbitration clauses. In essence, the Court performed a rationally explained toss of the coin between two equally positive policies.
It should be noted that this case can be easily restricted to its facts and is not to be seen as suddenly opening the floodgates to litigants trying to get around arbitration clauses. Private claims (that is, those based on contract disputes or other wrongdoing that cannot be said to run afoul of any legislative provisions) are clearly not included in the Court’s reasoning. Moreover, the Court goes to great lengths to state on a few occasions that it is expressly notruling on whether such clauses are generally unenforceable. However, this decision makes it clear that there is now a dent in the once almost impenetrable armour given to arbitration clauses and the preference of the courts to let matters go to arbitration without any sort of interference. It will be interesting to see if this is the start of further “exceptions” being made in future cases. I, myself, would not necessarily welcome such a result since I would have tossed the coin in favour of arbitration (as have many other U.S. courts outside of New York). But the progeny of this decision will be interesting to watch as either the Amex decision will be quickly restricted to its own facts and “left to die on the vine” so to speak or else it will be quickly followed by other courts that will use it to fashion new exceptions. Time will tell.