Supreme Court says cost of arbitration doesn’t invalidate agreement

Credit card giant American Express can prevent merchants from banding together in an antitrust suit because federal arbitration law does not invalidate a contract’s class-action waiver based simply on the cost of individual arbitration, the U.S. Supreme Court has ruled.

Hearing the company’s appeal for the second time, the high court rejected the merchants’ contention that the waiver denies vindication of their rights and said courts must strive to enforce contracts according to their terms.

(Westlaw users:  Click here for more stories from Westlaw Journal Class Action).

“Antitrust laws do not guarantee an affordable procedural path to the vindication of every claim,” Justice Antonin Scalia wrote for the 5-3 majority.

He was joined in the majority by Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Anthony Kennedy.

(Click here for the opinion).

In a blunt dissent, Justice Elena Kagan said the antitrust case goes beyond the question of the class action vehicle and suggested the majority is chipping away at class action procedure established by Federal Rule of Civil Procedure 23.

“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,” Justice Kagan wrote.

She was joined in the three-judge minority by Justices Ruth Bader Ginsburg and Stephen Breyer.

Justice Sonia Sotomayor, who was involved in an appeal of the suit as a member of the 2nd U.S. Circuit Court of Appeals, recused herself and did not take part in the decision.

Attorney David Harris of Greensfelder, Hemker & Gale, who was not involved in the suit, said via email that this case “is just the latest in a series of arbitration-related decisions handed down by the court in recent years, all of which have signaled that such agreements should be enforced by the courts.”

In 2010 the high court ruled 5-3 that an arbitration panel cannot force a party into class-wide arbitration when the parties did not consent to it as part of a contract.  Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (Apr. 27, 2010).

On June 10 the court unanimously affirmed an arbitrator’s decision to allow class arbitration of doctors’ disputes with an insurer, finding that the parties had agreed to allow the arbitrator to determine whether the contract permitted class treatment.  Oxford Health Plans v. Sutter, No. 12-135, 133 S.Ct. 2064 (U.S. June 10, 2013).

’Unlawful restraint of trade’

Italian Colors Restaurant, in Oakland, Calif., sued American Express in 2003 alleging the company used its power as the world’s leading issuer of credit cards to force the restaurant to pay high fees for each credit card transaction by a customer.

Numerous other merchants across the country filed subsequent antitrust suits against American Express, and the cases were consolidated in the U.S. District Court for the Southern District of New York in 2004.

The merchants alleged American Express engaged in an “unlawful restraint of trade” in violation of the Sherman Act, 15 U.S.C. § 1.

The District Court granted the company’s motion to compel arbitration, based on a class-action waiver in its contract with merchants that required individual arbitration to resolve disputes.

The 2nd Circuit reversed the ruling in January 2009, finding that the waiver violated the Federal Arbitration Act, 9 U.S.C. § 1, and was unenforceable because individual arbitration would be too expensive for merchants.

American Express sought review by the Supreme Court.  In May 2010 the high court reversed the decision without comment and sent the case back to the appeals court for reconsideration in light of the justices’ ruling in the antitrust case Stolt-Nielsen

In February 2012 the 2nd Circuit said Stolt-Nielsen had no bearing on its decision and again said the contract’s class-action waiver could not be enforced.

American Express again appealed to the Supreme Court.  The high court granted review last November 2012.

Waiver doesn’t prevent ‘pursuit’ of vindication

Before the Supreme Court, Italian Colors had argued that the cost of individual arbitration, including paying for expert analysis of the economic impact of avoiding the transaction fees by refusing to accept American Express cards from customers, was prohibitive of vindicating their antitrust claims.

According to the Supreme Court opinion, the cost of individual arbitration was estimated in the hundreds of thousands of dollars, and the restaurant could expect less than $40,000 in treble damages if successful.

In approving the contract’s class-action waiver, the high court majority rejected the prohibitive-cost argument.

The “effective vindication” rule expressed in several previous high court decisions would only invalidate an arbitration agreement if it affected a party’s “right to pursue statutory remedies,” the majority said.

The merchants’ contract with American Express does not eliminate their ability to pursue their rights, but merely limits arbitration to two parties, the majority said.

The majority concluded its opinion by citing its recent landmark ruling in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011).

“Truth to tell, our decision in AT&T Mobility all but resolves this case,” Justice Scalia wrote.

In AT&T Mobility v. Concepcion the court ruled 5-4 that the Federal Arbitration Act preempts state laws banning class-action waivers in arbitration agreements.  The court in Concepcion, which involved claims for damages of small individual dollar amounts, rejected the idea that a class action is necessary simply because damages are low.

According to Harris, the court’s decision in favor of American Express “cuts off one of the widely discussed avenues for invalidating class-action waivers following Concepcion: claiming that enforcement would eliminate a plaintiff’s ability to ‘effectively vindicate’ his rights due to the high cost of individual arbitration.”

’Too darn bad’

In a biting dissent, Justice Ginsburg said the majority’s decision, which she says provides American Express immunity from antitrust liability, can be summed up in one phrase: “Too darn bad.”

She said the contract’s arbitration clause makes “pursuit of the antitrust claims a fool’s errand.”

The minority focused its dissent on the “effective vindication” rule that the majority said did not apply.

According to the dissent, Italian Colors’ suit presents exactly the kind of claims the rule was meant to address.

The rule bars arbitration clauses that obstruct a claimant’s rights and that confer “immunity from potentially meritorious federal claims” by making arbitration “gravely difficult,” the minority said.

According to the minority, making arbitration too expensive is an obstacle to vindicating a claimant’s rights.

Additionally, the minority said, the antitrust suits against American Express go far beyond the contract’s class-action waiver.

The contract’s arbitration clause provides no way of sharing, shifting or shrinking the cost of dispute resolution, the dissent said.

The clause bars consolidation of claims, prevents merchants from getting a common expert report in support of their claims and does not allow for shifting arbitration costs to American Express in the event that a merchant successfully argues its claims.

According to the minority, the majority decision give merchants this choice: “Spend way, way, way more money than your claim is worth or relinquish your Sherman Act rights.”

American Express Co. et al. v. Italian Colors Restaurant et al., No. 12-133, 133 S. Ct. 2304 (U.S. June 20, 2013).