Supreme Court Upholds Agreement That Bans Class Arbitration Despite Costs

Yesterday, the United States Supreme Court issued a decision in American Express Corp. v. Italian Colors Restaurant, et al., No. 12-133, (June 20, 2013). The appeal from the United States Court of Appeals for the Second Circuit addressed whether the Federal Arbitration Act (FAA) allows a court to invalidate an arbitration agreement that does not permit class arbitration of a federal law claim.

In the case, a number of small businesses, including Italian Colors Restaurant, accused American Express of violating federal anti-trust law because the company allegedly forced them to accept credit cards with high transaction and other fees in order to accept American Express as a customer payment option. Although each of the merchants reportedly agreed to arbitrate any dispute with the company and the parties’ arbitration agreement did not permit class arbitration, several class action lawsuits were eventually filed. In the class action lawsuits, the merchants argued that obtaining individual arbitral awards would be cost prohibitive and would effectively deny each company’s rights when compared with the potential for recovery.

In 2003, the class action cases were consolidated in the Southern District of New York and ordered to bilateral arbitration. The merchants appealed the case to the Second Circuit which overturned the lower court’s order by stating the class action waiver was unenforceable. In addition, the Second Circuit reconsidered and reaffirmed its own holding after the Supreme Court’s decision in both Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. and AT&T Mobility LLC v. Concepcion. Last May, the Second Circuit denied a request for rehearing of the case en banc.

In a 5-3 decision authored by Justice Scalia, the Supreme Court reversed the decision of the Second Circuit and stated the FAA does not allow the courts to invalidate an arbitration agreement simply because the cost of arbitration may be high.  In addition, the high court said the effective vindication exception to the FAA was not invoked just because the cost of arbitration may be higher than the value of a party’s claim.  The majority also held that the Supreme Court’s previous decision in Concepcion “all but resolves” the American Express case.  Chief Justice Roberts and Justices Alito, Kennedy, and Thomas joined in the majority opinion.

Justice Kagan’s dissent argued that the FAA fails to preclude the courts from granting exceptions to an arbitration agreement where necessary to enforce a party’s congressionally established rights.  According to Kagan, the arbitration clause at issue fell within the effective vindication exception to the FAA.  The dissent also distinguished Concepcion by stating that case was about preemption of state law instead of the interplay between two federal laws as in American Express.  Her dissent was joined by Justices Breyer and Ginsgurg.  Because of her involvement with the case at the Circuit level, Justice Sotomayor did not participate in the decision.

Disputing would like to thank Liz Kramer at Arbitration Nation for her thoughtful commentary on this case.