Third Circuit Rules that American Express May Not Escape Liability for Cheating Consumers by Banning Class Actions
In a triumph for consumers in New Jersey and across the country, the U.S. Court of Appeals for the Third Circuit on February 24, held that held that the Federal Arbitration Act (“FAA”) does not preempt—or wipe away—state laws that protect consumers from abusive contract terms.
In Homa v. American Express Company, the court emphatically rejected American Express’s attempt to immunize itself from liability by banning class actions and choosing less protective state law to govern its contracts with its customers.
“This is one of the most important consumer protection cases in years,” said Paul Bland, the Public Justice staff attorney who argued the case on behalf of the plaintiffs. “Corporations like American Express have been pushing the envelope, trying to use contractual class action bans to avoid accountability for cheating their customers, and arguing that federal arbitration law allows them to this. The Third Circuit saw through this, and recognized that this case was not about arbitration at all. It is an extremely well-reasoned decision that is likely to be influential throughout the country.”
The plaintiffs in the case are cardholders in New Jersey who claim that American Express engaged in a bait-and-switch scheme to cheat them out of the cash rebates they had earned, in violation of the state’s consumer protection laws. They argued that because their claims are complex and individually small, they could not effectively pursue them unless they could bring a class action.
Under the New Jersey Supreme Court’s landmark decision in Muhammad v. County Bank, won by Public Justice and argued by then-Public Justice staff attorney Mike Quirk, class action bans that serve as exculpatory clauses, which give immunity to a company even when it is caught breaking the law, are unconscionable and unenforceable.
However, the federal district court in Homa enforced American Express’s ban on class actions, on grounds that American Express has a contract term saying that Utah law governs the case, and the class action ban would be enforceable under Utah law.
Meanwhile, while Homa was pending, the Third Circuit had stated in Gay v. Creditinform that Pennsylvania law invalidating a class action ban was preempted by the FAA. In the wake of Gay, several federal courts in New Jersey have dismissed consumer class actions in the last year, holding that New Jersey’s state unconscionability law and Muhammad were preempted by the FAA.
The Third Circuit’s decision in Homa flatly rejected both of American Express’s arguments.
First, the court made clear that New Jersey state unconscionability law—and specifically the Muhammad decision’s rule against exculpatory class action bans—is not preempted by the FAA. The court noted that Muhammad did not strike down arbitration clauses, but rather established a “general contract defense, one that applies to all waivers of class-wide actions, not simply those that also compel arbitration.” The court noted that the U.S. Supreme Court has specifically held that arbitration clauses are subject to generally applicable state contract law defenses such as unconscionability.
The court recognized that the FAA preemption language in Gay did not apply to New Jersey law (which merely limits exculpatory class action bans but not arbitration). Even more importantly, Homa makes clear that there is no division among the federal circuit courts of appeal as to whether the FAA preempts state laws that would limit class action bans.
Second, the Court rejected the district court’s decision that Utah law should be applied instead of New Jersey law to the claims under the New Jersey Consumer Protection Act of the New Jersey consumers in the putative class. The Court held that, assuming that the claims of the consumers were individually small (which, in fact, they are), that it would violate a fundamental policy of New Jersey to apply Utah law, based upon the Muhammad case’s strong language about New Jersey public policy.
The court predicted that the New Jersey Supreme Court would hold that New Jersey has a greater interest in the rights of its consumers under its consumer protection laws than Utah would have in barring class action claims against American Express.
Third, the Court held that “if the claims at issue are of such low value as effectively to preclude relief if decided individually, then, under Muhammad, the application of Utah law to the class action waiver is invalid and the class-arbitration waiver is unconscionable.” The court remanded the case to the district court for further factual development.
In addition to Bland, plaintiffs’ counsel included Claire Prestel of Public Justice; Gary Graifmanof Kantrowitz, Goldhamer & Graifman in Montvale, New Jersey; Howard Longman of Stull, Stull & Brody in New York; and Abraham Rappaport of The Law Offices of Abraham Rappaport in Boca Raton, Florida.
Read the Court’s Decision in Homa v. American Express Company.