By Andrew Longstreth 

Feb 26 (Reuters) - The U.S. Supreme Court will hear arguments on Wednesday in a case that could determine the extent to which companies might rely on arbitration clauses to fend off class action lawsuits.

Through contracts with consumers and other parties, companies often require disputes to be settled through arbitration. Those arbitration clauses also frequently prohibit plaintiffs from banding together to bring one action on behalf of a larger class.

Consumer advocates claim the clauses give unfair advantages to companies. But in recent years, the Supreme Court has upheld their enforcement under the Federal Arbitration Act, which was intended to encourage their use.

In the class action before the Supreme Court, a group of merchants accuse American Express of violating antitrust law. The group, small businesses including Italian Colors Restaurant from California, claimed that American Express required them to accept its consumer credit cards that come with high transaction fees as a condition for accepting its personal charge cards and corporate cards, where it has a dominant market position.

Several class actions were filed against American Express, and they were consolidated in the Southern District of New York in 2003. Although the merchants had agreed to arbitrate their disputes, they claimed that individual arbitrations would be prohibitively expensive in light of their potential recoveries.

At the district court, they showed that conducting a required antitrust study in arbitration would cost at least several hundreds of thousands of dollars. Meanwhile, the largest-volume merchant could hope to recover only $38,549.

The merchants argued that as a result, the arbitration agreement denied their ability to effectively vindicate their rights under U.S. antitrust law.

OVERTURNED

The 2nd U.S. Circuit Court of Appeals in New York agreed in an opinion last year and overturned the district court judge's decision granting American Express's motion to compel bilateral arbitration.

In its appeal American Express argued that the 2nd Circuit's decision conflicts with the Supreme Court's recent rulings that have vindicated the use of arbitration agreements.

The credit card company cited a 2011 decision, AT&T Mobility LLC v. Concepcion, in which the Supreme Court upheld contracts that required customers to submit to individual arbitrations to resolve disputes, and to waive their right to pursue class action litigation. In that case, the Supreme Court found that a California state law rule declaring arbitration agreements with certain features unenforceable was pre-empted by the Federal Arbitration Act.

In a brief filed with the Supreme Court, lawyers for American Express pointed to Concepcion's holding that an arbitration barring class action claims is enforceable even "if class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system."

Consumer advocates warn that a Supreme Court decision in favor of American Express could effectively immunize companies from certain claims. They argue that if the Supreme Court blesses arbitration agreements that bar class actions - in some cases the only effective way to bring a legal claim - it would ensure that no action would be taken at all.

In an amicus brief filed on behalf of the merchants, lawyers for Public Justice, a public interest law firm, wrote that the Federal Arbitration Act would become the "Federal Corporate Immunity Act."

The merchants have also received support from the U.S. government. Solicitor General Donald Verrilli argued in a brief that a decision in favor of American Express could allow companies to use one-sided arbitration agreements that "would deprive a range of federal statutes of their intended deterrent and compensatory effect."

CHAMBER SUPPORT

American Express has the backing of the business community, including the Chamber of Commerce. In an amicus brief, the chamber argued that the 2nd Circuit's decision was the result of an intense effort to undermine the Supreme Court's ruling in Concepcion by plaintiffs' lawyers, who can make huge fees in class action settlements.

The 2nd Circuit's decision provides a road map for plaintiffs' lawyers to avoid rulings enforcing arbitration agreements, the chamber said.

Any plaintiffs' attorney, the chamber warned in its brief, will be able to "retain an expert to assert the costs of proving a plaintiff's claim would outweigh the potential recovery -thereby providing the factual predicate needed to avoid arbitration on an individual basis under the Second Circuit's approach."

Theodore Frank, founder of the Center for Class Action Fairness and a frequent critic of plaintiffs' lawyers, said American Express should have contested more vigorously the findings of the district court that the merchants could not effectively vindicate their rights through individual arbitration.

American Express said in a statement that it noted in the district court that the "clause at issue in this case does not prevent plaintiffs from sharing costs, specifically experts."

Frank said that if American Expresses loses, companies will still have options to avoid class action lawsuits. For example, companies could add provisions in their agreements to make it more cost-effective for plaintiffs to arbitrate their claims.

"You'll see memos go out to say 'rework your arbitration agreements,'" Frank said.

The case is American Express Co v. Italian Colors Restaurant, U.S. Supreme Court, No. 12-133

For Italian Colors: Paul Clement of Bancroft.

For American Express: Michael Kellogg of Kellogg, Huber, Hansen, Todd, Evans & Figel.

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