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From Banking and Finance Law Daily, June 20, 2013

U.S. Sup. Ct.: Contract Clause Waiving Class Arbitration Not Invalidated by Small Possible Recovery

By Richard A. Roth, J.D.

The fact that a plaintiff’s cost to arbitrate a claim individually would exceed the potential recovery does not permit a court to require class arbitration in derogation of a contractual waiver, a five-member majority of the United States Supreme Court has determined. As a result, merchants alleging antitrust law violations by a charge card company and its subsidiary will be required to arbitrate their claims on an individual basis (American Express Company v. Italian Colors Restaurant, June 20, 2013, Scalia, Justice).

The merchants claimed that the companies used their monopoly in the charge card market to force them to accept the companies’ credit cards, which imposed fees 30 percent higher than those of competing credit cards. (Credit cards permit a user to carry a balance over from one month to the next if interest is paid; charge cards require the balance to be paid in full each month.) According to the merchants, this was a tying arrangement that violated the Sherman Act.

In response to the merchants’ proposed class action, the companies invoked the arbitration clause that was included in the contracts. Since that clause included a waiver of class arbitration, they asked the court to order individual arbitration under the Federal Arbitration Act. The merchants resisted individual arbitration, asserting that the expert witness costs of an individual arbitration proceeding—which they estimated could range from several hundred thousand dollars to more than one million dollars—would far exceed the maximum possible recovery for any individual merchant, which they said would be less than $40,000.

The federal district court agreed with the card companies and ordered arbitration. However, the U.S. Court of Appeals for the Second Circuit reversed that order, deciding that the disparity between the potential cost and the potential recovery made the class arbitration waiver unenforceable. The companies asked the U.S. Supreme Court to review the decision, starting an unusually complex series of events.

First petition for appeal. According to the majority opinion, the Court accepted the appeal, vacated the Second Circuit’s judgment, and returned the case to the appellate court for reconsideration in light of an intervening Supreme Court decision that a company could not be required to submit to class arbitration if it had not agreed to do so (Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp., 559 U.S. 1103 (2010)).

The appellate court, however, restated its original opinion reversing the order, saying that it had not ordered class arbitration, the majority opinion said. Then, the appellate court on its own motion reconsidered its second opinion in light of another, new Supreme Court opinion—AT&T Mobility LLC v Concepcion, 563 U.S. ___ (2011)). AT&T Mobility was found by the appellate court to be inapplicable, the Supreme Court majority opinion said, and the Second Circuit again said the trial court order was reversed. Again, the companies asked the Supreme Court to review the case.

Effect of antitrust laws. The Federal Arbitration Act is an effort to implement the broad principle that arbitration is a matter of contract, according to Justice Scalia’s opinion. Arbitration agreements are to be enforced according to their terms unless there is a contrary congressional mandate. “No contrary congressional command requires us to reject the waiver of class arbitration here,” Justice Scalia wrote.

The antitrust laws do not constitute a “contrary congressional command,” according to the majority opinion. Requiring individual arbitration of antitrust claims would not contravene the intent of the antitrust laws, Justice Scalia wrote, because “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”

The antitrust laws certainly do not show an intent to prevent a waiver of class arbitrations, the opinion continued; in fact, they were enacted long before the adoption of the Federal Rule of Civil Procedure that permits class actions and make no mention of class actions at all. Neither did the subsequent congressional approval of the rules show any intent to prevent a waiver.

The “effective vindication” exception. The majority opinion also addressed the existence of a judicial exception to the FAA that allows the invalidation of agreements that would prevent the “effective validation” of a federal statutory right. Such an exception does exist, Justice Scalia conceded, but does not apply to the merchants’ suit.

The “effective validation” exception applies when the arbitration agreement would interfere with a person’s right to pursue a claim under federal law, the opinion said. For example, the exception would invalidate an arbitration agreement that prevented a person from asserting a statutory right, and it might invalidate an agreement if the fees for arbitration were so high that access to the arbitration forum was impracticable. “But 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,” Justice Scalia wrote (emphasis in the opinion).

The decision in AT&T Mobility not only was applicable but essentially controlled this case, the majority opinion said. That decision said a state law conditioning the enforcement of an arbitration agreement on the availability of class arbitration was preempted because it interfered with fundamental principles about arbitration agreements. Included in that rationale was the rejection of the assertion that class arbitration was necessary to allow the vindication of claims that otherwise might not be practicable to pursue.

Concurring opinion. Justice Thomas wrote a one-paragraph opinion concurring in Justice Scalia’s majority opinion. The concurring opinion, in fact, would have simplified the analysis. As far as Justice Thomas was concerned, the arbitration agreement—including the class action waiver—was to be enforced unless the merchants could successfully challenge the formation of the agreement. Since the merchants had not shown any basis to revoke a contract, the agreement should be enforced, he wrote.

Dissenting opinion. On the other hand, a strongly worded dissenting opinion by Justice Kagan, with which two other Justices joined, argued the “effective vindication” exception made clear the class-action waiver should not be enforced. According to Justice Kagan, the majority opinion ignored much of the reality of the situation the merchants faced and, if the full effect of the complete arbitration clause were considered, it would be clear that enforcing the clause effectively prevented the merchants from pursuing a remedy.

Justice Kagan first pointed out that, according to the merchants, the contract that included the arbitration clause was not the result of negotiations. Rather, the card companies used their monopoly power to force the merchants to accept it.

Second, the dissenting opinion continued, the arbitration portion of the contract included not just a waiver of class actions but also a number of other procedural bars that, operating together, prevented the merchants from being able to pursue their federal law claims:

1. joinder or consolidation of individual arbitration claims or parties was prohibited;

2. a confidentiality provision prevented merchants from agreeing to produce a common expert report; and

3. the merchants’ arbitration costs could never be shifted to the card companies, even if the merchants were completely successful.

Moreover, the card companies had refused any stipulations that would ease the need for the merchants to provide the economic analysis of markets, market power, anticompetitive effects, and damages that is crucial to success in an antitrust case, Justice Kagan noted.

The “effective vindication” exception did not apply only when an arbitration agreement explicitly exculpates a party from liability, the dissenting opinion said. It also applied when the agreement uses a series of provisions to block the assertion of a right granted by federal law.

In this case, the merchants claimed the card companies had used their monopoly power to impose an arbitration clause that effectively deprived them of any ability to pursue their remedies under the antitrust laws, the dissenting opinion said—precisely the situation the “effective vindication” exception should prevent. And the “nutshell” version of the majority’s response, Justice Kagan said, was “Too darn bad.”

Justice Kagan wrapped up her dissent by accusing the majority of using the case as an opportunity to limit the usefulness of class actions in general. “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,” she wrote. The result of the majority’s decision is that arbitration agreements could be transformed from a streamlined way to resolve disputes to a way to block injured persons from asserting their rights and protect those who violate the law from the consequences of their actions.

The case is No. 12-133.

Attorneys: Michael K. Kellogg (Kellogg Huber Hanson Todd Evans & Figel PLLC) for American Express Company. Paul D. Clement (Bancroft PLLC) for Italian Colors Restaurant.

Companies: American Express Company; Italian Colors Restaurant

MainStory: TopStory BankingOperations

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