Supreme Court Rules Small Businesses Must Go It Alone in Arbitration

In American Express Co. v. Italian Colors Restaurant, the U.S. Supreme Court continued its trend of strictly enforcing arbitration provisions at the peril of class-action claims.

By a vote of 5-3, the majority held that the Federal Arbitration Act (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. The decision reinforced AT&T Mobility v. Concepcion, the controversial 2011 decision in which the Court ruled that the FAA pre-empts state laws prohibiting the waiver of class arbitration in consumer contracts.

The Facts of the Case

The dispute centered on an agreement between American Express Co. and a group of merchants who accept American Express cards. The contract requires all disputes to be resolved by arbitration and provides that there “shall be no right or authority for any Claims to be arbitrated on a class action basis.” The merchants nonetheless filed a class action, claiming that petitioners violated the Sherman Act. American Express moved to compel individual arbitration under the FAA, but the merchants argued that the cost of expert analysis necessary to prove the antitrust claims would greatly exceed the maximum recovery for an individual plaintiff.

The Supreme Court’s Decision

The majority began its analysis by highlighting the overarching principle that arbitration is a matter of contract. Moreover, courts should strictly enforce such agreements absent a Congressional mandate that trumps the FAA.

The majority further rejected the “effective vindication” exception established in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. As explained by Justice Antonin Scalia, “The exception comes from a desire to prevent ‘prospective waiver of a party’s right to pursue statutory remedies’; 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.”

“AT&T Mobility LLC v. Concepcion all but resolves this case,” the majority further explained. “There, in finding that a law that conditioned enforcement of arbitration on the availability of class procedure interfered with fundamental arbitration attributes, the Court specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

The Real World Implications

The practical result is that arbitration provisions waiving class action will be enforced regardless of whether or not individual action is too expensive or inconvenient. The only way to avoid such a provision is to invalidate the agreement as unconscionable or otherwise unenforceable under state law, which is generally an uphill battle.

If you have any questions about this case or would like to discuss the legal issues involved, please contact me, Christine Vanek, or the Scarinci Hollenbeck attorney with whom you work.