An Unrecognized Blockbuster; Amex and Class Arbitration

July 22, 2013
Guest Post

by Suzette M. Malveaux, Associate Dean for Academic Affairs and Professor of Law, Columbus School of Law, Catholic University of America

On June 20, 2013, as the general public, legal pundits and media anxiously awaited the Supreme Court to issue its blockbuster cases of the year on affirmative action, voting rights and marriage equality, American Express was handed down.  This case is about the enforceability of an arbitration agreement that forbids merchants from pursuing their federal antitrust claims against American Express as a class action.  Not the stuff most people are talking about at the dinner table . . . unless it’s mine.  That day, most media trumpeted that there were “no major decisions today,” and, with a few exceptions, made little or no mention of the case.  Others went so far as to claim that the public had been “cruelly trick[ed]” into learning about class action arbitration instead. In reference to American Express, Vanity Fair proclaimed that “[j]urisprudence diehards will argue that this morning’s . . . B-side ruling[] . . . [is] important too.  These nerds are not wrong . . .  .”  Vanity Fair is right, on both accounts.  While I usually prefer to go by “professor,” I embrace the magazine’s conclusion and urge others to do the same.

To fully appreciate the magnitude of American Express, it is necessary to first understand what the case was about.  A group of merchants who accept American Express cards accused the company of using its monopoly power to force them to accept credit cards at an inflated rate.  The merchants brought a class action against Amex, alleging that this tying arrangement -- embodied in a form contract -- violated federal antitrust laws.  The parties had agreed in advance to resolve all disputes in arbitration.  This agreement also contained a clause forbidding class actions in arbitration.

Thus, the issue before the lower courts was whether the class arbitration waiver was enforceable where the merchants had established that costs made it impossible for them to arbitrate their claims individually.  The evidence demonstrated that the cost of an expert analysis necessary to prove the merchants’ claims (“at least several hundred thousand dollars, and might exceed $1 million”) far surpassed each individual’s potential recovery (some by ten times).   And in the absence of any possibility of cost-sharing with Amex, this made the class action structure the only viable way to proceed.  Without a mechanism for aggregating the costs of litigation, it would be impossible for the merchants to challenge Amex’s alleged unlawful business practices.  Under these circumstances, the class arbitration waiver would function as an exculpatory clause, effectively giving Amex a pass for violations of federal antitrust laws.

In a 5-3 decision written by Justice Scalia (joined by the Chief Justice and Justices Thomas, Alito and Kennedy), the Court concluded that even if a proposed class of plaintiffs proves that it is economically infeasible to individually pursue their cases in arbitration, an arbitration agreement that forbids them from bringing the case as a class action is enforceable under the Federal Arbitration Act (FAA).  In other words, a class arbitration waiver means what it says.  Pursuant to an arbitration agreement’s terms, a party is compelled to pursue its claim individually -- regardless of whether individual arbitration is impossible or irrational to bring.

The result is that companies like Amex will be able to immunize themselves from liability for claimants with little money or for claims worth less than the cost to bring them.  As Judge Posner has reminded us in the context of small-value claims, “[t]he realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.” The notion that American Express will lead to a different result strains the bounds of credulity. 

It is not surprising that the Court’s ruling greatly defers to the enforceability of an arbitration agreement.  This is part of a larger trend by the Court for almost three decades to strictly enforce such agreements under the FAA.

But what is surprising about the Court’s ruling is its abject refusal to deal with reality.  That is, the Court concludes that so long as an arbitration agreement allows a plaintiff to assert a right, it doesn’t matter if the terms of the agreement make it impossible to vindicate that right. As the Court states, “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.” Really?

The Court has stated in numerous cases that arbitration is sufficient “so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum.” As stated by Justice Kagan in the dissent, the purpose of the “effective vindication rule” is “to prevent arbitration clauses from choking off a plaintiff’s ability to enforce congressionally created rights.”

However, this standard has been drastically narrowed by American ExpressThe “effective vindication exception” now only applies to those contract terms that forbid “the assertion of certain statutory rights,” even if the terms in reality foreclose the enforcement of those rights.  Narrowing the “effective vindication exception” to this degree takes elevating form over substance to a whole new level.  If a court cannot enforce a prospective waiver of federal rights in an arbitration agreement, why should the court be able to do so when procedure accomplishes the same thing?  What American Express tells us is that so long as you can bring your case in theory, it doesn’t matter what is true in practice.

The Court concludes that no matter how serious the potential violation, a federal antitrust claim like this one must die on the vine -- not because it is meritless, but because the claimants can’t afford to prove it.  It is common knowledge that there are some claims that cannot be brought individually because of the enormous resources involved; thereby necessitating some form of collective action or cost-sharing.  The majority protects arbitration agreements -- often found in contracts of adhesion -- that forbid such solutions.

The Court justifies its position on the grounds that it is necessary to protect the speed of arbitration and the will of the parties.  Neither of these is compelling.  First, the Court’s concern that parties will be required to tally the costs and burdens of litigation prior to enforcing a class arbitration waiver is largely overblown.  The process and evidentiary burden already established and appropriately applied for almost three decades is a far cry from the “superstructure” now presaged.

Second, the Court’s emphasis on strict contract enforcement masks the real problem -- misuse of the arbitral forum as a safe haven for misconduct.  Cloaked in concepts of freedom of contract and choice, American Express perpetuates the fiction of consent, ascribing a degree of acumen or bargaining power to plaintiffs that is often not present in modern contracting.  For example, a vast number of contracts are take-it-or-leave-it arrangements that involve very little understanding of the contractual terms and no negotiation.  By anchoring its analysis on the principle that arbitration is simply a matter of contract, the Court is able to paint a picture of plaintiffs attempting to weasel out of a contract and break their promise to arbitrate because of inconvenience or expense. Broad application of American Express threatens to treat all plaintiffs as if they knowingly and willingly chose to refuse class arbitration, even when that “choice” results in defendant’s inevitable immunity.

Who does American Express hurt?  The small business, the average consumer, the every-day worker.  In other words, the “little guy.”  The case reminds us of how much money and power matter. Given the proliferation of class arbitration waivers in business, consumer and increasingly employment contracts, the impact of American Express could be huge and far-reaching.  Given the opinion’s broad language, its reach may be applied to various federal statutes, beyond the scope of anti-trust claims.

Although the opinion’s language is broad, the Court’s analysis is potentially subject to certain limiting principles.  First, class arbitration waivers will be enforced absent very few exceptions: a congressional command that explicitly forbids such waivers or evidence of “grounds . . . for the revocation of any contract” under the FAA’s savings clause -- such as unconscionability under state law.  The Court emphasized that arbitration is a matter of contract, whose terms must be strictly enforced, absent congressional command to the contrary.  Thus, legislation that forbids class action waivers can reign in the impact of the Court’s opinion.

Second, in analyzing Congressional intent of the federal anti-trust laws, the Court concluded that the high cost of pursuing such claims was already mitigated by the availability of treble damages under 15 U.S.C. § 15. This provision conceivably cushioned the blow that antitrust goals could not be pursued at any cost, or even an affordable one.  The presence of such enhanced damages helped the Court arrive at its extraordinary position that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” This means that based on the specific relief available under a particular statute, the Court may arrive at a different conclusion.  Claims brought under statutes where there is no financial safety net may lead to a more sympathetic Court interpretation.

Third, the Court concluded that effective enforcement of the federal antitrust laws does not require a class action option.  In arriving at this conclusion, the Court found relevant the fact that such laws predated the class action Rule 23, and were thus silent about the procedural device.  In the majority’s eyes, this chronology meant that surely antitrust claims could be vindicated outside of aggregate litigation; indeed, they had been so all along.  Suspending the simplistic and ahistorical lens through which the Court saw this issue, there is a silver lining.  The Court leaves open the possibility that sequence matters.  For other federal statutes postdating Rule 23, it becomes more difficult to argue that collective actions are not critical to effective enforcement and that Congress did not intend for class actions to be front and center.

In sum, although the scope of American Express’s impact is uncertain, it is clear that this case is one of the “major” Supreme Court cases of the term.  Despite the lack of hype surrounding American Express, it is a gateway case -- leading to the under-enforcement of substantive rights so dear to many of us.  In addition to us “jurisprudence diehards” and “nerds,” Justice Kagan, in her dissent, correctly forebodes: “In the hands of today’s majority, arbitration threatens to become . . . a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability.” A blockbuster, if there ever was one.