WASHINGTON (Legal Newsline) -- The U.S. Supreme Court, in a 5-3 ruling Thursday, said 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.
In American Express Co. v. Italian Colors Restaurant, defendants American Express Company and American Express Travel Related Services Company Inc. petitioned the court to review a judgment by the U.S. Court of Appeals for the Second Circuit.
"The parties here agreed to arbitrate pursuant to that 'usual rule,' and it would be remarkable for a court to erase that expectation," Justice Antonin Scalia wrote for the majority, which included Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito.
"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 (Federal Arbitration Act) does not sanction such a judicially created superstructure."
Justice Elena Kagan filed a dissenting opinion, in which Justices Ruth Bader Ginsburg and Stephen Breyer joined.
Kagan said in the hands of the majority, arbitration threatens to become a mechanism "easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability."
"The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse," she wrote. "And here is the nutshell version of today's opinion, admirably flaunted rather than camouflaged: Too darn bad.
"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."
Justice Sonia Sotomayor took no part in the consideration or decision of the case.
The plaintiffs in the case 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 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, rejecting 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 Supreme Court in July, argued 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."
The U.S. Chamber of Commerce, among others, filed an amicus brief in support of American Express.
The Chamber, in its brief filed with the court in December, argued 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.
DRI: The Voice of the Defense Bar also filed a brief, siding with American Express, in December.
DRI represents more than 20,000 defense attorneys, commercial trial attorneys and corporate counsel.
"Today's opinion reinforces the core principles that arbitration is a matter of contractual agreement, and that courts must be faithful to the terms of the contract," DRI amicus co-author Jerrold J. Ganzfried said in a statement Thursday.
"In addition, the court reiterates its understanding of the important, practical ways in which class arbitration differs from the bilateral arbitration to which the parties agreed."
But consumer advocates, and others, argue that the court's decision favoring forced arbitration over small businesses will 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.
"Today's Supreme Court decision is a major blow to America's consumers, employees and small businesses. The Supreme Court ruled that corporations can use the fine print of contracts to grant themselves a license to steal and violate the law," American Association for Justice President Mary Alice McLarty said in a statement Thursday.
"It is imperative that Congress and federal agencies act to protect individuals and small businesses from the abusive practice of forced arbitration. Without Congressional action, all federal and state civil rights, employment, antitrust and consumer protections are at risk of being wiped away by the fine print."
AAJ, also known as the Association of Trial Lawyers of America, represents plaintiff trial lawyers in the United States.
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.