Earlier today, the Supreme Court issued its decision in American Express v. Italian Colors Restaurant, a 5-3 decision, with Justice Sotomayor taking no part in the consideration of the case. (Click here for a copy of the decision.)
The case involved small merchants who brought a class action in court against American Express for allegedly engaging in antitrust violations. American Express responded to the lawsuit by asking the court to compel individual arbitration because the parties had entered into arbitration agreements with class action waivers. The merchants argued against enforcement of the arbitration agreements by relying on evidence from an economist who showed that the cost of proving the complex antitrust claims would be at least several hundred thousand dollars and possibly exceed $1 million, while an individual plaintiff would only recover about $13,000, or $39,000 when trebled.
The Supreme Court believed that its earlier Concepcion decision controlled this case, and the Supreme Court found that the class action waiver was enforceable. According to the majority, the Federal Arbitration Act does not permit courts to invalidate arbitration agreements on the ground that they do not permit class arbitration. In Mitsubishi Motors, an earlier decision from 1985, the Supreme Court had found that antitrust claims were subject to arbitration “so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum.” In American Express, the Court dismissed this “effective vindication” language as mere dicta and inapplicable to these facts. The Court reasoned this dicta may invalidate an arbitration agreement where administrative or filing fees were so high as to make arbitration impracticable, or where an arbitration clause forbids the assertion of statutory rights. However, this dicta would not apply here where the cost of proving a claim is too high.
Justice Kagan wrote a stinging dissent, characterizing the Court as “bent on diminishing the usefulness of Rule 23” and “dismant[ling]” class actions.
The Federal Arbitration Act (FAA) and the class action rule have always been on a collision course. When two people agree to arbitrate a dispute just between the two of them, that two-party proceeding necessarily precludes a class action. However, when the FAA was enacted in 1925, modern class actions did not even exist, and so the drafters of the FAA never contemplated the fact pattern involved in American Express or Concepcion. It is time for Congress or the Rules Committee to attempt to harmonize the FAA and class actions, perhaps by enacting the Arbitration Fairness Act and limiting the use of arbitration. As I explain in my new book, Outsourcing Justice, the FAA was designed to cover simple, routine contract disputes between merchants from different states, not complex statutory claims. The drafters had a sincere, good faith belief in the FAA as a tool to facilitate the resolution of simple contract disputes. The FAA was never intended to serve as a defense for widespread, corporate wrongdoing.