SCOTUS: If Arbitration is Too Expensive, Just Buy Some More Money

We haven’t said much about arbitration lately because we’ve been waiting to see what the Supreme Court would do about class arbitration waivers in the American Express case. (See our earlier post on this case here.) Now we know…

Today, an ideologically-divided United States Supreme Court handed down its long-anticipated—albeit unsurprising—decision in American Express Co. v. Italian Colors Restaurant. And while the decision is good news for businesses, consumers are going to have trouble swallowing down this spicy meatball.

Here’s the background: Merchants who accept American Express cards sign an agreement with AmEx that says that all disputes must go through binding arbitration, and that there “shall be no right or authority for any Claims to be arbitrated on a class action basis.” Nonetheless, the merchants filed a class action suit against AmEx, alleging violations of the federal antitrust laws. AmEx moved to compel arbitration, and in response, the merchants submitted an economist’s declaration that stated that plaintiff’s cost of experts would be “’at least several hundred thousand dollars, and might exceed $1 million,’ while the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled.” The district court compelled arbitration and dismissed the case.

The Second Circuit, however, reversed, holding that because the merchants “’would incur prohibitive costs if compelled to arbitrate under the class action waiver,’” the waiver was unenforceable and the arbitration could not proceed.” In 2010, SCOTUS vacated the judgment and remanded the case in light of Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., which held that a party cannot be compelled to class arbitration in the absence of an agreement to do so. The Second Circuit stuck to its guns, even after Concepcion, and then denied rehearing en banc, with five judges dissenting.

So, writing for the 5 member majority, Justice Scalia made it clear–as if it wasn’t already–that the FAA and the Court’s holding in Concepcion, reign supreme. Thus, concerns about an inability to vindicate statutory rights are immaterial:

Respondents argue that requiring them to litigate their claims individually—as they contracted to do—would contravene the policies of the antitrust laws. But the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.

Scalia wrapped it up this way:

The regime established by the Court of Appeals’ decision would require—before a plaintiff can be held to contractually agreed bilateral arbitration—that a federal court determine (and the parties litigate) the legal requirements for success on the merits claim-by-claim and theory-by-theory, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success. Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure. The FAA does not sanction such a judicially created superstructure.

Justice Kagan—who, after her dissent here and her brilliant dissent in Genesis Healthcare, is now my favorite writer on the court—wrote the dissent, joined by Justices Breyer and Ginsburg (Justice Sotomayor took no part in the decision). Her main point is that this case is nothing more than a prospective waiver of federal rights wrapped up in different cloth. For example, no one would think that contractual language or even crafty procedural requirements in a contract could insulate a party from liability for violations of federal statutes. As such, “the rule against prospective waivers of federal rights can work only if it applies not just to a contract clause explicitly barring a claim, but to others that operate to do so.” Yet that is exactly what the court is permitting when it places arbitration above all else. It’s a great read. To whet your appetite, here are her opening paragraphs in full:

Here is the nutshell version of this case, unfortunately obscured in the Court’s decision. The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability—even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.

And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.

Boom! And here’s how she brings it all home:

The Court today mistakes what this case is about. To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled. So the Court does not consider that Amex’s agreement bars not just class actions, but “other forms of cost-sharing . . . that could provide effective vindication.”  In short, the Court does not consider—and does not decide—Italian Colors’s (and similarly situated litigants’) actual argument about why the effective-vindication rule precludes this agreement’s enforcement.

As a result, Amex’s contract will succeed in depriving Italian Colors of any effective opportunity to challenge monopolistic conduct allegedly in violation of the Sherman Act. The FAA, the majority says, so requires. Do not be fooled. Only the Court so requires; the FAA was never meant to produce this outcome. The FAA conceived of arbitration as a “method of resolving disputes”—a way of using tailored and streamlined procedures to facilitate redress of injuries. In the hands of today’s majority, arbitration threatens to become more nearly the opposite—a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability. The Court thus undermines the FAA no less than it does the Sherman Act and other federal statutes providing rights of action. I respectfully dissent.

(I’m looking forward to more Scalia v. Kagan battles next term.)

Just as some courts have taken a skeptical view of whether Concepcion applies to a given case, my sense is that many courts may take a similar course with AmEx. Stay tuned.

About Brian Jones

I represent clients in all aspects of business litigation, but focus my practice on complex litigation and arbitration matters concerning insurance and reinsurance, antitrust, class actions, securities, real estate disputes, and contract matters. I am the co-chair of the Bose McKinney & Evans Insurance Group. I was listed in the 2017 and 2016 "Best Lawyers in America" for Insurance Coverage and named a "Rising Star" in Insurance Coverage by Super Lawyers in Indiana in 2014. I was also named a "Rising Star" in Business Litigation by Super Lawyers in Indiana in 2013 and 2012, and a 2010 “Rising Star” in Business Litigation in Texas. I am a member of the State Bars of Indiana and Texas, the Defense Research Institute, a former member of the Pro Bono College of the State Bar of Texas, and I am licensed to practice before all state courts in Indiana and Texas, as well as all federal courts in Indiana, the Northern, Western, and Southern Districts of Texas, the Northern District of Illinois, and the United States Courts of Appeals for the Fifth, Seventh, and Eleventh Circuits. I received my bachelor’s degree, cum laude, in political science and my master’s degree in teaching from Trinity University, where I was elected to Phi Beta Kappa. I received my doctor of jurisprudence degree from the University of Texas School of Law, where I was the Director of Communications for the Legal Research Board and a member of the Phi Delta Phi Honor Society. Before attending law school, I taught high school geography, government and economics in San Antonio, Texas.
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