Second Circuit Reaffirms Refusal to Enforce Arbitration Clause

Arbitration provisions have been the subject of recent lawsuits, especially those found in credit card agreements. In July 2010, the Minnesota Attorney General, Lori Swanson, filed suit against the National Arbitration Forum, alleging, inter alia, that mandatory arbitration provisions in credit card agreements are unconscionable and unenforceable.

Most recently, on Monday, March 8, 2011, the Second Circuit Court of Appeals reaffirmed its earlier decision not to enforce a mandatory arbitration clause in a credit card agreement. The court’s earlier decision in In re Am. Express. Merchs. Litig. in 2009 held that the pre-dispute arbitration clause in American Express’ credit card agreements was not enforceable because it contained a provision requiring card holders to waive their rights to bring a class action suit. The Supreme Court granted certiorari in 2010 and remanded the case back to the Second Circuit.

The Second Circuit’s 2009 decision applied the Supreme Court’s analysis laid out in dicta in Green Tree Financial Corp.-Alabama v. Randolph. In Greentree, the Supreme Court ruled that a mandatory arbitration clause was unenforceable against a party who proves that the costs of arbitration of a federal statutory claim are so high, such that the arbitration costs effectively prohibit that party from vindicating statutory rights. Accordingly, the Second Circuit concluded that individual arbitrations would be cost-prohibitive and preclude cardholders from asserting their statutory rights under federal antitrust laws. Thus, the arbitration clause was unenforceable.

Subsequent to the Second Circuit’s decision, the Supreme Court ruled in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. that arbitration clauses, which are silent on the issue of class arbitrations, could not be read by arbitrators as reflecting the parties’ agreement on the issue of class arbitration. Pursuant to this decision, American Express petitioned for certiorari, which was granted.

Upon remand, the Second Circuit again concluded that the pre-dispute arbitration clause was unenforceable, determining that the Stolt-Nielsen decision did not alter its previous analysis because Stolt-Nielsen focused on the ability of arbitrators, not courts, to interpret clauses in mandatory arbitration provisions.

This spring, the Supreme Court is set to make another decision regarding class arbitrations in AT&T v. Concepcion. The issue in AT&T is whether the Federal Arbitration Act preempts states from mandating that class arbitration be available as part of an arbitration agreement.