The U.S. Supreme Court recently ruled against business owners who took American Express to court in a class action lawsuit over a dispute involving credit card fees. The merchants had signed an agreement with Amex that disputes would be handled through arbitration. The agreement also prohibited class action lawsuits. The court’s decision could make it more difficult for individuals to join together in a class action lawsuit when aggrieved by an employer or a business.
American Express v. Italian Colors Restaurant started with a feud between businesses. Accusing the credit card company of antitrust violations, several restaurant owners and other small businesses got together and filed a lawsuit under the federal laws against creating monopolies. They said that American Express used the clout it got from its charge card to force them to accept American Express’ credit cards. Merchants pay a percentage of their credit card business to the credit card companies. American Express charges a higher percentage than MasterCard or Visa. The small business owners said they had to accept Amex credit cards at fees about 30% higher than the fees for competing credit cards.
American Express moved to have the legal action brought into individual arbitration under the Federal Arbitration Act (FAA). The business owners countered that the cost of expert analysis necessary to prove the antitrust claims would greatly exceed the maximum recovery for an individual plaintiff. They submitted a declaration from an economist who estimated that the cost of an expert analysis necessary to prove the antitrust claims would be “at least several hundred thousand dollars and might exceed $1 million” while the maximum recovery for an individual plaintiff would be $12,850 or $38,549 when tripled under the maximum allowable damages. The District Court dismissed the lawsuits. The Second Circuit reversed and remanded, holding that because of the prohibitive costs, the class-action waiver was unenforceable and arbitration could not proceed.
The U.S. Supreme Court decided to hear the dispute in order to answer the question whether the FAA permits courts to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.” The nation’s top court held that the FAA does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery. And consistent with that text, courts must “rigorously enforce” arbitration agreements according to their terms. The court also pointed out that arbitration is a matter of contract.
But, while agreements to arbitrate are matters of contract they can be difficult to escape. One 2008 University of Michigan study found mandatory arbitration clauses in 93 percent of the employment contracts it surveyed and in 77 percent of the consumer contracts it surveyed.
Class action lawsuits can be an important mechanism for obtaining justice when an individual claim is worth very little – as in this instance — and in preventing further unfair or unscupulous practices by well-funded companies. When hundreds of consumer claims are bundled togther in a lawsuit, large companies take notice and, in most cases, enter into a meaningful settlement to compensate victirms. In addition, class action lawsuits can cause corporations to change their business practices so that other citizens are not victimized by the same practices in the future.
Democratic Senator Al Franken, co-sponsor of the Arbitration Fairness Act criticized the court’s ruling and predicted that the decision will destroy access to the courts for workers and consumers. “Today’s Supreme Court decision is a boon for corporate giants that will drastically curtail the rights of small businesses and consumers to seek justice,” said Sen. Franken. “This decision gives enormous corporations the unbridled ability to deny small businesses their day in court when they aren’t being treated fairly, and instead forces them to abide by whatever a private arbiter decides. And there’s no question that this decision will ultimately affect the ability of consumers and workers to have access to the courts. All of this only underscores the need for Congress to pass my Arbitration Fairness Act, which would fix this injustice.”
The court’s decision was not unanimous. The 5-3 decision broke among political party lines. Observing that an arbitraiton clause may not thwart federal law, Justice Elena Kagan wrote, “Our decisions have developed a mechanism–called the effective vindication rule–to prevent arbitration clauses from choking off a plaintiff ‘s ability to enforce congressionally created rights. That doctrine bars applying such a clause when (but only when) it operates to confer immunity from potentially meritorious federal claims.”
She also noted that the court’s decision would turn the pursuit of individual claims against a company into a fool’s errand.
Baltimore, Maryland-based Belsky, Weinberg & Horowitz has been fighting for the victims of negligence for many years. Call us at 410-234-0100 or email us for a free consultation and let us help you.