In a decision one justice called a “betrayal of our precedents,” the Supreme Court today ruled that corporations can use arbitration clauses to insulate themselves from liability.
The decision culminates a thirty year judicial effort by the Court to turn an innocuous 1920s statute, the Federal Arbitration Act, into a weapon used to thwart enforcement of rights by consumers, employees, and small businesses.
In American Express v. Italian Colors Restaurant, a restaurant filed a class action complaining that American Express had used monopoly power to force merchants to accept credit cards at rates approximately 30 percent higher than the fees for competing credit cards, in violation of antitrust statutes. American Express moved to compel arbitration based on a clause in its agreement with the restaurant that provided, in part, “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.”
The restaurant -- invoking a line of Supreme Court cases that held open the possibility courts could invalidate arbitration clauses that effectively precluded vindication of federal statutory rights -- opposed arbitration. It demonstrated that costs of litigating an individual claim were “’at least several hundred thousand dollars, and might exceed $1 million,’ while the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled,” and argued that preclusion class resolution effectively precluded it from vindicating its claim.
The Second Circuit agreed, having held that “the only economically feasible means for . . . enforcing [respondents’] statutory rights is via a class action.” The Supreme Court reversed.
The Court, with Justice Scalia writing for a five person majority, first found nothing specific in the antitrust laws - no “congressional command “ - requiring the Court to reject the waiver of class arbitration.“The antitrust laws do not ‘evinc[e] an intention to preclude a waiver’ of class-action procedure.”
The Court also found no “entitlement to class proceedings for the vindication of statutory rights” flowing from congressional approval of Rule 23, noting that in AT&T Mobility v. Concepcion it already had rejected the argument that “federal law secures a nonwaivable opportunity to vindicate federal policies by satisfying the procedural strictures of Rule 23 or invoking some other informal class mechanism in arbitration.”
Turning to doctrine that seemingly permitted ignoring a class action ban the Court noted, “It would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” But, the Court continued, “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.”
Justice Kagan, writing in dissent and joined by Justices Ginsburg and Breyer (Justice Sotomayor took no part in the case), called the majority decision “a betrayal of our precedents, and of federal statutes like the antitrust laws.”
She found that the arbitration clause in question “imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability -- even if it has in fact violated the law.”
She noted that, under the majority decision, “The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”
The high court’s drive to shunt cases began in the 1980s, and today’s opinion is a logical extension of it. In 1984 it ruled that Section 2 of the Federal Arbitration Act, which requires specific enforcement of certain arbitration agreements, applied to actions pending in state courts. At one point a majority of the sitting members of the Rehnquist Court acknowledged that that decision was wrong, but they did not reverse it, leaving their misinterpretation of statute to be corrected by Congress.
The Federal Arbitration Act was enacted in 1925 at the behest of large corporations that could not get specific enforcement of pre-dispute agreements to arbitrate large commercial disputes with other large corporations. At the time it was enacted, Congress did not believe it had the power, under the commerce clause, to apply the Act to disputes in state courts, so it wrote the act as a set of rules applicable only to cases otherwise within federal jurisdiction.
In a 1983 case the Court announced a federal policy in favor of arbitration agreements. This was consistent with Congressional focus on the remedy of specific enforcement of agreements otherwise valid. In a recent decision the Court quoted the 1980s decision but elided “agreements.” We now have, courtesy of the Court, and not of Congress, a federal policy in favor of arbitration.
That policy reached its zenith today, trumping the policy of fair competition, trumping the policy favoring private enforcement of antitrust laws, and trumping the first amendment right to ask the government to resolve private disputes.
The Court has made a mess of things. It is not apt to clean up after itself. If people are to have their day in court, Congress must return it to them. For people who care about the law, those are two frightening thoughts.