By Andrew Longstreth 

WASHINGTON (Reuters) - The U.S. Supreme Court appeared divided during oral arguments over a disputed arbitration clause that American Express Co has with merchants who accept its cards.

As part of a contract with American Express, merchants agree to settle disputes in arbitration. But a group of them brought antitrust class action claims in court, arguing it would not have been feasible for each merchant to arbitrate.

The issue before the Supreme Court on Wednesday was whether the arbitration clause, which prohibits class claims, should be enforced if plaintiffs can prove they would not be able to effectively exercise their federal rights as a result.

At oral argument, Paul Clement, an attorney for the merchants, said the record in lower courts established that it would have been prohibitively expensive for each merchant to bring an individual arbitration.

Conservative Justice Antonin Scalia was skeptical of the argument. When the antitrust statute at issue in the case, the Sherman Act, was passed in 1890, it did not allow for private class actions, he said.

He said that before antitrust class actions were introduced, plaintiffs routinely decided not to bring a Sherman Act claim because it was too expensive.

"I don't see how a federal statute is frustrated or is unable to be vindicated if it's too expensive to bring a federal suit," Scalia said.

In the class action before the Supreme Court, a group of small businesses, including the name plaintiff Italian Colors Restaurant from California, accused American Express of an illegal tying arrangement. They claimed that American Express required them to accept its consumer credit cards that come with high-transaction fees as a condition of accepting its personal charge cards and corporate cards, in which areas it has a dominant position.

The merchants argue that the costs of bringing individual arbitration claims would have dwarfed the small recoveries they could receive. If there were not a feasible alternative to bringing their claims, they argued that no claims would be brought at all.

Justice Stephen Breyer said under that theory, other plaintiffs may be able to avoid arbitration simply by finding expensive experts or employing an elaborate theory for relatively simple cases.

"I'm concerned about that," Breyer said.

IN AN 'ODD POSITION'

Clement responded that it was the district court's job to sort out whether the plaintiffs have met their burden of proof as to whether it would be feasible to bring a claim in arbitration. He faulted American Express for not contesting the cost estimates put forth by the merchants.

Chief Justice John Roberts said that forcing defendants to contest those findings put them in an "odd position."

Michael Kellogg, who argued for American Express, framed the case as a direct assault on the Supreme Court's 2011 AT&T Mobility LLC v. Concepcion decision, which ruled that the Federal Arbitration Act pre-empted a California state-law rule that prohibited certain arbitration agreements that did not allow for classwide clams.

Kellogg faced some tough questioning from Justices Elena Kagan and Ruth Bader Ginsburg, both on the court's liberal wing.

Ginsburg noted that the arbitration agreement at issue in the Concepcion case had features that made it more attractive than American Express's agreement for plaintiffs to bring arbitration claims.

Kellogg conceded that the AT&T agreement had features that could save plaintiffs costs, but he said that ultimately the issues of cost were not relevant to the case before the court.

Justice Sonia Sotomayor, who sat on a 2nd U.S. Circuit Court of Appeals panel that considered the case, did not participate in oral arguments.

A decision is expected by the end of June.

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.

For the United States of America: Deputy Solicitor General Malcolm Stewart.

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