Continuing its warm embrace of arbitration and its disdain for class actions, the Supreme Court on Thursday ruled that agreements between companies and their customers can prohibit class action arbitration, even if that makes it harder for plaintiffs to vindicate their claims.
The 5-3 ruling in American Express Co. v. Italian Colors Restaurant broke along usual ideological lines, with conservatives forming the majority and liberals objecting.
The decision was a high-stakes follow-on to AT&T Mobility v. Concepcion, the controversial 2011 ruling that the Federal Arbitration Act pre-empts state laws barring the waiver of class arbitration in consumer agreements. Consumer groups complained that without class action arbitration, the high cost of pursuing individual complaints against a company, compared with the small damages a single plaintiff might collect, would discourage claims and effectively make companies immune from challenge on issues of antitrust or labor and employment law.
The decision Thursday was a win for the credit card company over a group of merchants, led by an Oakland, California restaurant, that accept American Express cards. In spite of a class action waiver in their agreements with American Express, the merchants filed a class action challenging what they viewed as an illegal "tying" arrangement on antitrust grounds.
Amex sought to compel individual arbitration, but the U.S. Court of Appeals for the Second Circuit ruled the class action waiver was unenforceable because the cost of proving the antitrust violation was so prohibitive that the plaintiffs could not effectively pursue individual cases.
Justice Antonin Scalia, writing for the majority, said "the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy." Scalia said that if class arbitration waivers are tossed out, arbitration would get bogged down in preliminary litigation in federal court over the cost of evidence and testimony needed in the arbitration, compared with potential damages.
"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," Scalia wrote.
In a stinging dissent, Justice Elena Kagan said that the court had turned the pursuit of individual claims against a company through arbitration into a "fool's errand," with the result in this case that "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."
The majority, Kagan added, was stating in effect, "Too darn bad." She also said, "The FAA was never meant to product this outcome." Justices Ruth Bader Ginsburg and Stephen Breyer joined the dissent. Justice Sonia Sotomayor recused in the case, likely because she was a judge on the Second Circuit at earlier stages of the litigation.
Some commentators saw the decision as another nail in the coffin for some types of class actions.
"Today, the Supreme Court took another big step down the road of permitting companies to use arbitration agreements to entirely insulate themselves from class action liability," said Vanderbilt University School of Law professor Brian Fitzpatrick. "The writing is on the wall now more clearly than ever: there is little future for consumer and employment class actions, and even shareholder class actions may not survive."
Consumer advocates attacked the decision as a huge defeat for consumers and another sign of the pro-business bias of the Roberts Court. "Today, a majority of the Supreme Court expanded the power of major corporations to deny Americans access to justice," Nan Aron, of the liberal Alliance for Justice, said in a statement. "It is the latest in a series of decisions that make it significantly more difficult to hold big businesses accountable for their actions. Congress must act to ensure that the rights our laws secure for all Americans are not subsumed by arbitration clauses and a corporate-friendly Court."
But business advocates said the ruling will improve the efficiency of arbitration and actually benefit consumers, who can pool resources and expert testimony to mount individual cases.
"Small claims can be—and increasingly are—brought in arbitration by lawyers making a business of recruiting large numbers of clients using the Internet and social media," said Mayer Brown partner Andrew Pincus, who argued for AT&T in the Concepcion case. "In American Express, for example, the plaintiffs acknowledged that they could bring their claims effectively in arbitration as long as they could share the same lawyers and experts—and American Express agreed that such cost-sharing is completely permissible."
Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, said, “The purpose of this case was to torpedo the ability of two parties to resolve their disputes through arbitration instead of litigation. Today’s ruling yet again upholds arbitration. The only people who lose under today’s decision are those in the plaintiffs’ bar who want to cash in by forcing disputes into already overburdened courts.”
Michael Kellogg of Kellogg, Huber, Hansen, Todd, Evans & Figel represented American Express before the high court, and Paul Clement of the Bancroft firm argued on behalf of the merchants challenging the company.
Tony Mauro can be contacted at email@example.com.