November 2008

In a welcomed move, the 2nd Circuit Court of Appeals has ruled that a party (American Express) that did not sign an arbitration agreement can not compel consumers to arbitrate their claims against that party.

Hopefully, this will help end the trend of sending consumer claims into arbitration when those claims do not arise from any contractual relationship between the parties. An article detailing the ruling is reprinted below.

2nd Circuit: Plaintiffs in Credit Card Antitrust Case Cannot Be Compelled to Arbitrate

Mark Hamblett
New York Law Journal
November 11, 2008
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Plaintiffs who claim a conspiracy by American Express to cover up an antitrust plot with other major credit card companies on foreign currency transactions won a victory as a federal appeals court said they cannot be compelled to arbitrate.

The 2nd U.S. Circuit Court of Appeals ruled the plaintiffs could not be forced into arbitration because American Express was not a signatory to the MasterCard, Visa and Diners Club credit card agreements that included the arbitration clauses.

The court’s decision came in Ross v. American Express Co., 06-4598-cv, a related case to the multidistrict class action litigation, In Re Currency Conversion Fee Antitrust Litigation, 01-md-01409, now pending before Southern District of New York Judge William Pauley.

In the multidistrict currency conversion case, cardholders are claiming that card companies and major issuing banks have engaged in a Sherman Act conspiracy to fix higher fees for transactions involving foreign currency.

In Ross, the plaintiffs are the same cardholders in the multidistrict litigation, but they are not American Express (Amex) cardholders. The Ross plaintiffs charged in their complaint that American Express plotted with the other major card companies “to fix, maintain, and conceal the artificially inflated” foreign currency fees at issue in the multidistrict litigation. They alleged that American Express was part of the “collusive arrangement between and among the MDL defendants” — in part by holding a series of meetings on including compulsory arbitration agreements “in an effort to impede consumer litigation.”

In the Ross case, Pauley held in 2005 that the plaintiffs could be compelled to arbitrate their claims, but only after a trial to determine the validity of the arbitration clauses.

The judge said “a non-signatory to an arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where careful review … discloses that the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.”

The 2nd Circuit reversed in a decision by Judges Rosemary Pooler and Peter Hall and, sitting by designation, Eastern District of New York Judge David Trager. Pooler wrote for the panel.

“Arbitration is a matter of contract, but the plaintiffs have not entered into any contract whatever with Amex, let alone any contract containing an arbitration clause,” Pooler said.

So the question for the court was whether it would employ any one of a number of common law principles that would allow a nonsignatory to enforce an arbitration agreement, including equitable estoppel. The answer was no.

“The district court’s opinion improperly extends the principle of compelling arbitration through equitable estoppel to a situation where the requisite contractual basis for arbitration does not exist,” Pooler said.

Second Circuit cases applying estoppel against a party trying to avoid arbitration, she noted, have in common that nonsignatories have some kind of “corporate relationship” to a signatory, such as cases involving subsidiaries, affiliates and agents.

And the court has extended that concept beyond affiliated corporate entities to other situations, including where a nonsignatory to a construction contract could compel arbitration because it was explicitly required by the contract to perform certain tasks. That case was Choctaw Generation Ltd. P’ship v. American Home Assurance Co., 271 F. 3d 403 (2d Cir. 2001).

But there are limits, Pooler said, and those limits were exceeded here, because the case “utterly” lacked the “further necessary circumstance of some relation between Amex and the plaintiffs sufficient to demonstrate plaintiffs intended to arbitrate this dispute with Amex.”

Merrill G. Davidoff of Berger & Montague in Philadelphia represented the plaintiffs.

“We think some of the lower courts, including the lower court in this case were misapplying and ‘overapplying’ the doctrine of equitable estoppel to throw cases into arbitration that shouldn’t have been there and we think the court of appeals has appropriately reined in the application of that doctrine,” he said.

American Express spokesperson Joanna Lambert said the company was disappointed in the decision and was reviewing its options. Jonathan Jacobson of Wilson Sonsini Goodrich & Rosati argued for American Express.

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