Italian Colors Restaurant, along with other merchants, sued American Express in a class action lawsuit for alleged antitrust violations for compelling merchants to accept American Express credit cards and pay exorbitant rates. In the agreements those merchants signed with American Express, they agreed to use bilateral arbitration rather than class actions in resolving any disputes. Italian Colors argues that this bilateral arbitration clause would create prohibitive costs for any pursuit of their legal rights. This effectively immunizes American Express from any liability under the Sherman Antitrust Act. Therefore, courts must not enforce the arbitration agreement in this context. American Express contends that courts should adhere to the terms of arbitration agreements unless the terms would violate substantive United States law. From a policy standpoint, Italian Colors claims that arbitration is a poor vehicle to vindicate antitrust claims because the length of time an arbitral proceeding would take would create problems for potential claimants, creating difficulty in pursuing a claim before the statute of limitation expires and removing a disincentive for corporate abuse. American Express notes the myriad benefits of arbitration over litigation, specifically arguing that arbitration is more beneficial to lower income plaintiffs and less subject to abuse by frivolous or vengeful lawsuits.
Questions as Framed for the Court by the Parties
Whether federal arbitration law recognizes an “effective vindication” exception to class-arbitration waivers that allows courts to ignore arbitration agreements and permit class-action lawsuits where individual plaintiffs’ claims are so small that no single plaintiff would rationally bring a bilateral, one-on-one arbitration to vindicate federal rights.
Can courts refuse to enforce class-arbitration waivers and permit class-action lawsuits where a plaintiff’s individual claim is worth much less than the cost of bringing that claim?
Italian Colors Restaurant (“Italian Colors”) represents a group of merchants who sued American Express for alleged antitrust violations. See Brief for Petitioner, American Express Company, et al. at 7–8; Brief for Respondent, Italian Color Restaurants, et al. at 5. Italian Colors alleges that American Express uses its monopoly power in the “premium” and “corporate” credit card markets to compel merchants to accept “ordinary” American Express credit cards at exorbitant rates and that such behavior constitutes an unlawful tying arrangement under the Sherman Act. See Brief for Petitioner at 8; Brief for Respondent at 5. Additionally, American Express includes a bilateral arbitration clause in its agreement with merchants that strictly forbids class-action arbitration and prevents the sharing of information by arbitral claimants. See Brief for Petitioner at 8; Brief for Respondent at 9.
Despite the arbitration clause, Italian Colors sued in court, claiming that the market study necessary to prove its antitrust claim would cost hundreds of thousands of dollars, while the average merchant only had approximately $5000 in damages. See Brief for Petitioner at 9. Consequently, Italian Colors argued that the district court should ignore the arbitration clause because a class-action lawsuit was necessary to “effectively vindicate” its antitrust claim. See Brief for Respondent at 9. The district court disagreed and granted American Express’s motion to compel arbitration. See Brief for Petitioner at 9. Subsequently, the Second Circuit Court of Appeals reversed, holding that the effective-vindication question was for courts, not arbitrators, to decide, and that Italian Colors had shown that arbitration would not allow it to effectively vindicate its antitrust claim. See Brief for Respondent at 9–10.
The Supreme Court vacated the Second Circuit’s decision and remanded for further consideration in light of the Supreme Court’s decision in Stolt-Nielson S.A. v. AnimalFeeds International Corp., where the Supreme Court held that a party may not be compelled to submit to class arbitration absent a contractual agreement to do so. See Brief for Petitioner at 11; Brief for Respondent at 11; 130 S. Ct. 1758 (2010). Nonetheless, the Second Circuit reached the same conclusion, stressing that it ordered a class-action lawsuit, not class-action arbitration. See Brief for Petitioner at 12–13. Subsequently, the Second Circuit sua sponte reconsidered its ruling yet again in light of the Supreme Court’s decision in AT&T Mobility, L.L.C. v. Concepcion, where the Supreme Court held that the Federal Arbitration Act preempted California’s state law on unconscionable class-action arbitration waivers. See Brief for Respondent at 11–12; 131 S. Ct. 1740 (2011).
Italian Colors argued that Concepcion complemented Stolt-Nielsen and held only that state law could also not compel class arbitration; American Express argued that Concepcion rejected the Second Circuit’s “prohibitive cost” justification for permitting the class-action lawsuit to proceed. See Brief for Respondent at 12; Brief for Petitioner at 14–15. For the third time, the Second Circuit sided with Italian Colors and held that none of the interim Supreme Court decisions overruled the initial effective-vindication rule. See Brief for Respondent at 12.On May 29, 2012, the Second Circuit denied an en banc rehearing over the dissenting votes of five justices. See Brief for Petitioner at 15. On November 9, 2012, the Supreme Court agreed to hear arguments over whether Italian Color’s inability to “effectively . . . vindicate” its federal statutory rights in an arbitral forum permitted courts to invalidate arbitration agreements. See; Brief for Petitioner at 1–2; Brief for Respondent at id.
The policy issues in this case center on precisely how much deference courts owe to arbitration agreements. On the one hand, American Express and its amici argue that arbitration generally has broad, positive benefits that bolster the national economy, including lower prices for consumers and higher wages for employees. On the other hand, Italian Colors and its amici assert that antitrust claims are complex and expensive to litigate or arbitrate, which necessitates class action because it is financially irrational for any claimant to proceed individually.
Arbitration Confers Enormous Benefits
A group of law professors (“Law Professors”) traces the history of judicial hostility toward arbitration agreements and notes that such hostility derives from “jurisdictional jealousy.” See Brief of Amicus Curiae Distinguished Law Professors (“Law Professors”) in Support of Petitioner at 14–15. The Law Professors argue that the Federal Arbitration Act was a groundbreaking statute that diverged from traditional hostility toward arbitration and allowed private parties to contract for a “streamlined, efficient alternative to judicial process.” See id. at 16. Moreover, the Equal Employment Advisory Council (“EEAC”) argues that arbitration is a more accessible forum for lower-income individuals to pursue their claims. See Brief of Amicus Curiae Equal Employment Advisory Council (“EEAC”) in Support of Petitioner at 17. EEAC further states that arbitration is typically quicker than traditional litigation, where even workers who obtain lawyers on a contingency-fee basis must spend large amounts of time completing the litigation. See id. at 17–18. EEAC worries that these benefits will disappear if courts force workers to submit to class-action litigation instead of the individualized arbitration that the workers agree to ex ante. See id. at 18.
Additionally, the Financial Services Roundtable (“FSR”) argues that the ability to waive class-action arbitration is not worrisome because the class-action mechanism is subject to abuse. See Brief of Amicus Curiae Financial Services Roundtable (“FSR”) in Support of Petitioner at 17. FSR notes that class-action lawsuits often involve enormous fees for class counsel while leaving small awards for the class members. See id. at 10–12. As an example, FSR notes that class members in the Bank of Boston case received $8.76 each, while class counsel received $8.5 million. See id. at 11. FSR argues that class-action lawsuits often constitute “judicial blackmail” and that settlement of frivolous claims increases the price of a product or service. See id. at 12–13.
Antitrust Law Differs from Other Arbitral Subject Matter
Italian Colors and The Committee to Support Antitrust Laws (“COSAL”) concedes that arbitration is appropriate in many fields but counter that antitrust law implicates numerous concerns that make arbitration a poor forum. See Brief of Amicus Curiae The Committee to Support the Antitrust Laws (“Cosal”) in Support of Respondent at 27. COSAL argues that the average antitrust lawsuit takes over six years to complete, which is three times longer than the average federal lawsuit takes to go from initiation to disposition. See id. at 19 (citing Daniel Crane, Optimizing Private Antitrust Enforcement, 63 Vand. L. Rev. 675, 692 (2010)). COSAL notes that if class-action arbitration agreements are enforced, claimants may have to wait six years before they can take advantage of any “preclusive effects” of the first arbitration. See id. at 19–20. Moreover, COSAL notes that arbitrators’ rulings are often confidential and thus cannot serve as grounds for collateral estoppel, and because the Clayton Act has a four-year statute of limitations, waiting for results in an ongoing arbitration may terminate another plaintiff’s claim. See id. at 20.
COSAL argues that antitrust law allows private plaintiffs, in addition to the Department of Justice, to bring suit because the prospect of private causes of action deters such unlawful behavior. See Brief of Cosal at 20. In cases like this one, where there are millions of potential victims but each individual victim can only recover a small amount in damages, COSAL states that corporate actors will not be deterred from engaging in unlawful behavior if claimants must pursue individual arbitration claims. See id. at 22, 24–26. Because of these considerations, COSAL urges that a ruling for American Express will make these schemes profitable and gut the antitrust statutes of their functions. See id. at 27 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985)).
This case addresses when arbitration agreements should be enforced according to their terms, and specifically whether “prohibitive costs” or the loss of “effective vindication” allow courts to override arbitration agreements that mandate bilateral, rather than class action, arbitration.
Deference to Arbitration Agreements
American Express notes that, according to the Federal Arbitration Act (“FAA”) and past precedent, parties in arbitration contracts can agree to whichever terms they see fit. See Brief for Petitioner at 20. It further asserts that the agreed upon terms can encompass a wide variety of areas, including bilateral (as opposed to class action) arbitration. See id. at 21. American Express asserts that choosing bilateral arbitration is a procedural decision that falls within the scope of the FAA because bilateral arbitration does not affect party’s substantive remedies. See id.The crux of American Express’ argument is that courts enforce arbitration agreements according to their terms “unless Congress itself” intended to exclude those terms from arbitral agreements. See id. at 22. American Express then points to the legal backdrop against which Congress enacted the FAA, a backdrop that did not permit class action lawsuits. See id. at 23.
Italian Colors argues that there is an exception to upholding the terms of arbitration agreements when a party may not receive effective vindication of their statutory rights because of arbitration. See Brief for Respondent at 13. The effective vindication rule applies when the FAA clashes with another federal law. See id. at 13–14. Italian Colors posits that this rule is in place because the FAA favors actual arbitration, but does not go so far as to give a de facto immunity to one party through arbitration. See id. at 14. Effective vindication, as argued by Italian Colors, applies when an agreement to arbitrate would impose “prohibitive costs” upon a claimant. See id.Prohibitive costs must be more than just making vindication of federal statutory rights more difficult or lower incentives to proceed with arbitration, but instead be so costly that they operate as functional immunity for one party. See id. at 14–15.
American Express also points to a prior case, AT&T Mobility LLC v. Concepcion, which it argues forbids courts, state and federal, from refusing to enforce arbitration agreements because they preclude class arbitration. See Brief for Petitioner at 27. The holding in Concepcion, as argued by American Express, centered on the fact that invalidating arbitration agreements that preclude class arbitration is contradictory to achieving the objectives of the FAA. See id. at 28. Because the holding applied to conflict with the objective of a federal act, American Express argues that it also requires federal courts to hold the same way. See id. at 29. Any contradictory holding would frustrate the purpose of the FAA and violate the “‘federal substantive law of arbitrability.’” See id.
Italian Colors counters that Concepcion was merely a case concerning preemption. See Brief for Respondent at 38. The law at issue in Concepcion was a California state law that stood at odds with the FAA. See id. at 39. Because Concepcion preempted a state law, Italian Colors argues, the case has no impact whatsoever on the effective vindication rule. See id.Italian Colors asserts that federal statutory claims are not outside the reach of the FAA, so the FAA cannot remove antitrust protections of the Sherman Act. See id. at 40. Italian Colors also emphasizes that it does not believe that the FAA should be subsumed to effective vindication of state laws, but instead must, in rare instances, yield to effective vindication of federal statutory rights. See id.
Effective Vindication and Prohibitive Costs
Italian Colors asserts that the only issue for effective vindication is whether they are able to vindicate their federal statutory rights in some forum. See Brief for Respondent at 34. Italian Colors notes that their aim is not to seek class arbitration as opposed to the agreed upon bilateral arbitration and thus change the terms of the arbitration agreement, but instead argue that by going to arbitration, it would in effect require them to abandon their claims against American Express. See id. at 35. The issue preventing vindication of the statutory rights of respondents is the cost; they assert that federal court is the only effective method to pursue their claims because of the cost sharing function of a class-action suit. See id.
Italian Colors then asserts that American Express controls whether the effective vindication rule will have an effect on an arbitration agreement. See id. at 37. Italian Colors notes that not only could arbitration remain an effective forum for vindicating their statutory rights, but that bilateral arbitration is possible if American Express is willing to shift or share costs. See id.Italian Colors notes an arbitration clause in Concepcion that provided for cost-shifting given the outcome of arbitration is an example that would allow the parties here to follow the arbitration agreement. See id.
American Express asserts a narrower construction of effective vindication and prohibitive costs. See Brief for Petitioner at 40–41, 45. American Express claims that prohibitive costs do not apply to arbitration or litigation costs, but instead only to “filing fees, arbitrator’s fees, and other administrative fees imposed by the arbitral forum that would not be required to sue in court.” See id. at 41. This interpretation means that the prohibitive costs of arbitration only apply to the basic costs of arbitration above and beyond court costs. See id. at 42. American Express further points to class action litigation costs, notably the fact that Federal Rule of Civil Procedure 23(b)(3) requires a certain amount of damages to pursue a claim in a class action. See id. at 43–44. American Express then analogizes this to arbitration, noting that claiming prohibitive costs do not waive Rule 23 for class action plaintiffs. See id. at 44. American Express claims that if the Court were to rule that prohibitive costs allowed bypassing arbitration agreements but not litigation requirements, it would create an extra hurdle for arbitration, contravening Congress’ intent in enacting the FAA. See id.
American Express argues that the effective vindication rule only applies to arbitration terms that would override substantive federal law. See Brief for Petitioner at 45. This case, American Express claims, merely affects the procedural mechanism through which the parties have agreed to resolve their disputes. See id. at 47. The case the Second Circuit used to argue otherwise, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., American Express asserts, reads as forbidding waivers of federal substantive law regarding liability. See id. at 48.
From a legal standpoint, American Express asserts that courts must uphold agreements between parties to arbitrate rather than litigate unless the agreement contradicts substantive federal law. Furthermore, American Express argues that arbitration is a more effective method for lower income plaintiffs to pursue their claims and that it prevents abusive lawsuits against corporations. Italian Colors responds that courts should not uphold agreements where the prohibitive costs of arbitration would prevent parties from effectively vindicating their federal statutory rights. They also assert that bilateral arbitration will often lead to an effective immunity for corporations because the length of the proceedings may create problems for claimants complying with the statute of limitations, and the cost of initiating proceedings is not worth the smaller amount of damages, leading to a way for corporations to circumvent federal antitrust laws.
- Terry Baynes and Jonathan Stempel, Reuters: Supreme Court to Review Amex Arbitration Case (Nov. 9, 2012).
- Greg Stohr, Bloomberg: Business Groups Get Top U.S. Court Hearing on Arbitration (Nov. 9, 2012).