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.
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
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
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
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."
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
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
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.
Follow us on Twitter @ReutersLegal | Like us on Facebook