U.S. SC to decide if FAA permits courts to invalidate arbitration agreements

By Jessica M. Karmasek | Feb 28, 2013

WASHINGTON (Legal Newsline) -- The U.S. Supreme Court heard arguments Wednesday in a case that questions whether the Federal Arbitration Act permits courts to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal law claim.

In American Express Co. v. Italian Colors Restaurant, the nation's high court will decide if corporations can force arbitration on small businesses and individuals, even when it can be proven that the forced arbitration clause in the contract is too costly or inherently unfair.

Forced arbitration clauses are typically hidden in the fine print of most consumer contracts, from credit cards and cell phone contracts to nursing home and student loan contracts.

American Express Company and American Express Travel Related Services Company Inc. -- the defendants in the case -- petitioned the Court to review a judgment by the U.S. Court of Appeals for the Second Circuit.

The named plaintiffs are retail businesses, most with annual revenues between $5 million and $40 million, that chose to accept American Express cards for purchases.

Each plaintiff entered into a written Card Acceptance Agreement with American Express. The agreement contains a provision requiring bilateral rather than class arbitration.

The crux of the plaintiffs' complaint is that American Express' "Honor All Cards" policy, which requires merchants that wish to accept American Express cards to accept American Express' charge cards as well as its credit cards, constitutes an "unlawful tying arrangement" under the Sherman Act.

The named plaintiffs sought to bring suit on behalf of "all merchants that have accepted American Express charge cards."

American Express, in response, moved to compel arbitration.

The plaintiffs did not dispute that the arbitration clause in the agreement covers their antitrust claims. However, they argued that the arbitration agreement's class action waiver precluded them from "effectively vindicating [their] federal statutory rights in the arbitral forum" because each plaintiff would face "costs amounting to hundreds of thousands of dollars, despite seeking average damages of only $5,000."

A district court granted the motion to compel arbitration and dismissed the plaintiffs' lawsuits, rejected their "prohibitive costs" argument.

Because the costs plaintiffs identified -- expert and attorney's fees -- would be incurred whether in court or in arbitration, the court held that they provided no basis to avoid arbitration.

The Second Circuit reversed.

It concluded that the class-action waiver provision in the parties' arbitration agreement was invalid under the "federal substantive law of arbitrability" -- i.e., the body of judicial decisions interpreting the FAA, a section of which provides that arbitration agreements "shall be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

American Express, in its petition filed with the Court in July, contends that the Second Circuit's decision, if left unaddressed, will "abrogate the FAA's core requirement that courts enforce the intent of the parties who enter into arbitration agreements."

"Class-arbitration waivers are 'commonly used' in commercial arbitration agreements, and the Second Circuit's 'broad ruling,' 'in the hands of class action lawyers, can be used to challenge virtually every... agreement with such a clause,'" the company wrote.

"Under the panel's rule, 'every class counsel and every class representative who suffers small damages can avoid arbitration by hiring a consultant (of which there is no shortage) to opine that expert [or other] costs would outweigh a plaintiff's individual loss.' And, given how many American businesses can be sued in the courts of the Second Circuit, the decision below will, absent review, become the de facto nationwide rule and make that circuit the new magnet for class-action plaintiffs seeking to evade (AT&T Mobility v.) Concepcion and Stolt-Nielson (v. Animalfeeds International Corp.), and to circumvent mandatory commercial arbitration agreements."

But some argue that consumers often have no choice but to either agree to arbitration or forego the service or product.

"The reality is that corporations hide forced arbitration clauses in the fine print of their contracts, hand-pick their own biased arbiter, and then leave consumers and small businesses with high fees and no opportunity for public review or real accountability," Ellen Taverna, legislative director of the National Association of Consumer Advocates, said Wednesday.

"In this case, American Express is hiding behind a forced arbitration clause to attempt to grant itself immunity for violating antitrust laws and cheating small businesses."

The National Association of Consumer Advocates, or NACA, is a nonprofit association of consumer advocates and attorney members who represent consumers victimized by fraudulent, abusive and predatory business practices, according to its website.

NACA argues that Concepcion has made it more difficult for consumers and employees to challenge mandatory arbitration clauses.

In that case, Vincent and Liza Concepcion attempted to sue AT&T over a 2002 cell phone purchase.

At the time, the cell phone company had advertised the phone as free, but then it charged customers for tax on the phone's normal price.

In response, the couple brought a class action on behalf of everyone who had taken advantage of the AT&T offer. However, the contract the couple signed said all disputes had to go to an arbitrator.

The question before the nation's high court was whether the Federal Arbitration Act prohibits states from mandating that class arbitration be available as a part of every arbitration agreement.

The act, originally passed by Congress in 1925, says states must apply the same rules to arbitration as they do to normal court cases.

In a 5-4 vote, the Court ruled in Concepcion that companies can enforce contracts that bar class action lawsuits.

NACA contends that in previous decisions the Court has suggested that arbitration is acceptable so long as parties can "effectively vindicate their substantive rights."

The group points to In re American Express Merchants Litigation, in which a group of small business merchants brought a class action alleging that American Express violated antitrust laws with a tying arrangement by using its monopoly power over charge cards to force merchants to take all American Express-branded credit cards and pay higher fees.

Citing its arbitration clause with the merchants, American Express moved to force the case into individual arbitration with no class action possible.

The merchants presented evidence to the Court to show that the costs of an individual arbitration would have been many times more than the possible maximum amount of damages that each would recover.

Because the arbitration clause prevented the sharing of costs that a class action would allow and did not provide any other means for the merchants to recover those costs, it would be impossible for the merchants to vindicate their rights under federal antitrust law in individual arbitration, NACA noted.

In Italian Colors Restaurant, a decision favoring forced arbitration over small businesses could wipe out hope for any access to justice and allow corporations to get away with "widespread wrongdoing" by eliminating statutory rights under the antitrust laws, even for laws that forbid individuals from waiving their rights, the consumer advocacy group argues.

"Lower courts have imposed a very high bar for consumers to show that they cannot effectively vindicate their rights," NACA Executive Director Ira Rheingold said Wednesday. "A Supreme Court ruling for American Express would eliminate this already difficult route for consumers to resist arbitration clauses and get their claims heard in court."

He added, "It is imperative that Congress and federal regulatory agencies act now to protect the rights of consumers, employees and small businesses to hold wrongdoers accountable."

The U.S. Chamber of Commerce, among others, has filed an amicus brief in support of American Express.

The Chamber, in its brief filed with the Court in December, argues that the Second Circuit's refusal to enforce the parties' agreements to arbitrate on an individual basis "threatens to destroy the advantages of arbitration and to deter companies from entering into arbitration agreements."

The Chamber's Institute for Legal Reform owns Legal Newsline.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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