Supreme Court Decisions Make Arbitration Compulsory

In a trio of decisions, the U.S. Supreme Court has outlined a mechanism that could eviscerate commercial as well as consumer class actions where the underlying contract incorporates an arbitration provision and a class waiver. In 2010, the Supreme Court decided Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. This decision was followed by AT&T Mobility LLC v. Concepcion, and more recently by American Express Co. v. Italian Colors Restaurant. These decisions seem to have settled the issues of the enforceability of a class waiver under the Federal Arbitration Act (FAA), and the right to have these claims arbitrated on an individual basis.

A company should consider an arbitration provision with an explicit class waiver in any commercial or consumer contract where there is a significant danger of a large number of small damage cases that can be economically brought only in a class action. Through incorporation of a specific waiver of class arbitration, a company will be able to compel individual arbitration and effectively eliminate class action exposure.

Arbitration, though, has its own downside. There is no right of review, and a bad decision will usually stand. Often rules of evidence are not applied. In certain circumstances, several individual arbitrations can be more costly and adverse to a business than a class resolution that secures the benefits of a class-wide settlement. Additionally, while companies may assume that arbitration is business-friendly, in some cases consumers may find a forum receptive to their claims.