June 20, 2013

June 20, 2013:
Supreme Court holds that an arbitration agreement that waives class arbitration is enforceable under the FAA even when the cost of proving an individual claim far exceeds the potential recovery.  Am. Express Co. v. Italian Colors Rest.570 U.S. 228 (2013).

Italian Colors Restaurant and other merchants entered into agreements with American Express that allowed them to accept American Express charge cards from their customers.  The agreements contained an arbitration provision that waived class arbitration.  Alleging that American Express used its monopoly power for charge cards to impose rates 30% higher than rates for competing credit cards, the merchants filed a class action suit in federal court for violation of section one of the Sherman Act.  The merchants opposed American Express' motion to compel individual arbitration on the ground that arbitration of the Sherman Act claims individually would be cost prohibitive.  They filed a declaration of an economist stating that the cost of an expert analysis sufficient to prove the antitrust claim would be between several hundred thousand dollars and a million dollars, while each merchant stood to recover only $12,850 in damages, or $38,549 trebled.  The district court compelled arbitration, but the Second Circuit reversed, reasoning, as the merchants contended, that the waiver of class arbitration was unenforceable because the cost of proving each antitrust claim individually was prohibitive.  The Supreme Court reversed, holding that the class action waiver in the arbitration provision was enforceable.  

Justice Scalia authored the majority opinion, which was joined by four other justices.  He first noted that under the FAA, arbitration agreements must be enforced absent a "contrary congressional command" and determined that the antitrust laws contained no such contrary command.  Justice Scalia then turned to Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.473 U.S. 614 (1985), which held that an arbitration agreement that prospectively waived a party's right to pursue a statutory remedy could be invalidated on public policy grounds (the "effective vindication" exception).  Justice Scalia said that the exception would apply if an arbitration provision forbade the assertion of a statutory right.  Also, the exception might apply if an arbitration provision imposed filing or administrative fees that rendered arbitration 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."  570 U.S. at 236 (emphasis in original).  Class action legal relief was not available until 1938 (forty-eight years after passage of the Sherman Act in 1890), when the Supreme Court adopted the Federal Rules of Civil Procedure.  "[T]he individual suit that was considered adequate to assure 'effective vindication' of a federal right before adoption of class-action procedures did not suddenly become 'ineffective vindication' upon their adoption."  Id. at 236-37. 

Italian Colors continues a trend.  In the past three years, the Supreme Court has handed down eight decisions concerning arbitration.  Each of these decisions has favored arbitration.  The Court has consistently affirmed the validity of arbitration agreements and the effectiveness of class action waivers in such agreements.  It has rejected attempts by state courts to invalidate arbitration agreements based on public policy grounds.  And it has affirmed the authority of arbitrators to decide matters such as their own jurisdiction.  

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