2nd Cir Invalidates Class Action Waiver in Amex-Merchant Antitrust Litigation
The U.S. Court of Appeals for the Second Circuit recently held that: (1) the question of the enforceability of a class action waiver provision within a merchant card acceptance contract was properly decided by a court, rather than an arbitrator; and (2) the class action waiver provision was unenforceable under the Federal Arbitration Act. A copy of the opinion is attached.
Plaintiff merchants appealed a District Court decision granting Amex’s motion to compel arbitration of a Card Acceptance Agreement pursuant to the Federal Arbitration Act (“FAA”). The agreement at issue contained a class action waiver provision which sought to preclude a signatory from either “litigating a claim in court” or “participat[ing] in a representative capacity or as a member of any class of claimants pertaining to any claim subject to arbitration.”
The Second Circuit reversed, holding that “the issue of the class action waiver's enforceability was a matter for the court, not the arbitrator” and that “the class action waiver in the Card Acceptance Agreement cannot be enforced in this case” because such enforcement would “grant Amex de facto immunity from antitrust liability by removing the plaintiffs’ only [economically] feasible means of recovery.” Amex then appealed to the Supreme Court, which vacated the appellate decision and remanded for further consideration in light of Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010), which held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”
On remand, the Court declined to accept Amex’s argument that its previous decision could not stand in light of Stolt-Nielsen. Although “Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so…[i]t does not follow…that a contractual clause barring class arbitration is per se enforceable,” the Court ruled.
Explaining its holding, the Second Circuit first noted that Section 2 of the FAA, 9 U.S.C. § 2, provides that an agreement to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract” and thus that “Section 2 ‘create[s] a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the’ FAA.” Further, “[c]lass action lawsuits are well-recognized by the Supreme Court as a vehicle for vindicating statutory rights,” particularly where “the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action.”
In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Supreme Court ruled that “statutory claims may be the subject of an arbitration agreement… unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.” However, the Court noted, in Gilmer, “a collective and perhaps a class action remedy was…available.” Conversely, in the instant case, the question is whether a “mandatory class action waiver in the [agreement] is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement of the waiver would be to preclude their…claims…in either an individual or collective capacity.”
The Court noted that the Fourth Circuit previously ruled that a plaintiff could challenge “a class action waiver clause on the grounds that it would be a cost prohibitive method of enforcing a statutory right, provided that a plaintiff set forth sufficient proof to support such a finding.”
Similarly, the Court also noted that the Seventh Circuit previously ruled that “if a party could demonstrate that the prohibition on class actions likely would make arbitration prohibitively expensive, such a showing could invalidate an agreement.”
Finally, Court referenced Supreme Court dicta which states that “in the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party's right to pursue statutory remedies for antitrust violations,” such an agreement would be contrary to public policy.
Thus, the Second Circuit ruled that “an agreement which in practice acts as a waiver of future liability under the federal antitrust statutes is void as a matter of public policy.” Further, the Court noted, the Supreme Court has previously ruled that “an agreement which confers even ‘a partial immunity from civil liability for future violations’ of the antitrust laws is inconsistent with the public interest.”
Examining the record, the Court concluded that the “evidence before us establishes, as a matter of law, that the cost of plaintiffs’ individually arbitrating their dispute with Amex would be prohibitive, effectively depriving plaintiffs of the statutory protections of the antitrust laws.” Because “Amex has brought no serious challenge to the plaintiffs’ demonstration that their claims cannot reasonably be pursued as individual actions, whether in federal court or in arbitration,” the Court concluded, “enforcement of the class action waiver in the [agreement] ‘flatly ensures that no small merchant may challenge [Amex] under the federal antitrust laws.’”
Thus, the Second Circuit ruled that, because the “class action waiver in this case precludes plaintiffs from enforcing their statutory rights, we find the arbitration provision unenforceable.”
However, the Court noted, “two caveats… still apply.” First, “[o]ur decision relies…on the need for plaintiffs to have the opportunity to vindicate their statutory rights” – i.e., “the record demonstrates that the size of any potential recovery by an individual plaintiff will be too small to justify the expense of bringing an individual action.” Moreover, Court noted that “we do not conclude here that class action waivers in arbitration agreements are per se unenforceable [or that] they are per se unenforceable in the context of antitrust actions,” but rather that “each case which presents a question of the enforceability of a class action waiver in an arbitration agreement must be considered on its own merits, governed with a healthy regard for the fact that the FAA ‘is a congressional declaration of a liberal federal policy favoring arbitration agreements.’”
Ill App Allows 30-Day Deadline in Deposit Account Agreement for Providing Notice of Forged Check
The Illinois Appellate Court for the First District recently confirmed that the terms of a deposit account agreement between a bank and its customer supersede the UCC, and allowed the deposit account agreement’s 30-day period of time for the customer to notify the bank of a forged check before his claim is barred.
A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2011/1stDistrict/March/1101887.pdf
The plaintiff customer maintained a personal checking account with defendant Great Lakes Bank (“Great Lakes”) since 1981. In October 2007, someone stole a personal check from the customer, forged the customer’s signature, made it payable to a third-party company in the amount of $7,500, and presented it to Great Lakes for payment. Great Lakes paid the check and debited $7,500 from the customer’s checking account. Although the forged check appeared on the customer’s November 2007 monthly bank statement, the customer did not become aware of the forgery and the payment until March 2008, at which time he notified Great Lakes and asked it to credit his account in the amount of $7,500.
In May 2008, Great Lakes informed the customer that it would not credit his account because plaintiff had failed to timely notify the bank of the forgery pursuant to the terms of the Account Agreement, which provided that a customer who discovers unauthorized signatures must notify Great Lakes of the relevant facts within 30 days of the statement being available to the customer.
Additionally, the monthly statements sent to the customer also mentioned the 30-day notification requirement stating: “Please examine this statement at once. If no error is reported in 30 days, the account will be considered correct. If any discrepancies are noted, please contact our Customer Service Center ***.”
Thereafter, the plaintiff customer filed a complaint alleging conversion and breach of contract seeking reimbursement of $7,500. Great Lakes filed a motion to dismiss, arguing that the conversion claim should be dismissed because Great Lakes did not convert the $7,500 for its own use, and that the breach of contract claim should be dismissed because section 4-406(d)(1) of the UCC did not apply because it was superseded by the terms of the Account Agreement. The trial court granted the motion and the matter was appealed.
In upholding the trial court’s ruling, the appellate court first noted that the relationship between a bank and its customer is governed by the UCC. Section 4-406 of the UCC provides in relevant part that where “a bank sends or makes available a statement. . . the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized” and “ the customer must promptly notify the bank of the relevant facts” where there is an unauthorized payment.
The UCC further provides that if the customer fails to comply with the duties imposed, he is precluded from asserting a claim against the bank related to an unauthorized signature “if the bank also proves that it suffered a loss by reason of the failure.”
However, Section 4-103(a) of the UCC also provides that “this Article may be varied by agreement.”
The customer acknowledged that, pursuant to the terms of the Account Agreement, the customer’s duty to “promptly notify” the bank of any unauthorized charges was modified to mean 30 days from the date the monthly statement was mailed to the customer. The court noted that, although there were no Illinois cases on point, “such an alteration in the notification period is clearly permissible.”
Still, the customer argued that the trial court erred in dismissing his complaint because Great Lakes failed to present evidence showing that it suffered a loss as a result of the untimely notification, as is required under Section 4-406(d)(1) of the UCC. Great Lakes argued that the UCC did not control because the parties contractually agreed, pursuant to the Account Agreement, that the customer would have no claim for reimbursement of an unauthorized check unless he notified the bank within 30 days of receiving his statement.
In ruling in favor of Great Lakes, the court again noted that there was no controlling Illinois law on the issue. Although both parties cited an unpublished federal district court case interpreting Illinois law to support their argument, the court found that “Supreme Court Rule 23(e) provides that unpublished orders are not precedential and has long prohibited their citation by any party ‘except to support contentions of double jeopardy, res judicata, collateral estoppel[,] or law of the case.’” The court noted that since none of the exceptions applied, the parties should not have cited to the unpublished federal district court case and the court did not consider the opinion in its ruling.
However, the court found a Minnesota Supreme Court case persuasive, wherein the court found that a 20-day notice provision of the draft withdrawal agreement was not manifestly unreasonable.
The appellate court agreed with the Minnesota Supreme Court’s reasoning and found that “plaintiff’s failure to notify defendant of the forgery until four months later precluded him from bringing a complaint against defendant” was consistent with precedent from other jurisdictions.
The court noted that during oral argument, the customer asserted that the case should be remanded to the trial court for a determination as to whether the bank’s conduct amounted to a lack of good faith or a failure to exercise ordinary care in violation of section 4-103(a) of the UCC, which permits the parties to vary the terms of the UCC by agreement but provides that the parties “cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care.” However, because the customer “failed to present this issue in his initial complaint or in his briefs” the court found that it was “forfeited on appeal.”
The customer further argued that if the terms of the Account Agreement were interpreted broadly to preclude any claim by a customer who fails to timely notify the bank of an unauthorized transaction, other provisions of the UCC would be rendered meaningless. The court disagreed, finding that Illinois courts have held that “[i]t is a fundamental principle of banking law that the relationship between a bank and its depositor is created and regulated by the express or implied contracts between them.”
The court stated that “the parties agreed pursuant to the terms of the Account Agreement that plaintiff was required to timely discover any unauthorized transactions and notify the bank in order to preserve his claim,” and therefore “because plaintiff failed to notify the bank of the forgery within 30 days, the trial court did not err in finding that plaintiff had no claim against defendant.
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