Details: American Express v. Italian Colors Restaurant

Earlier today the Court decided that an arbitration agreement that precludes arbitration brought by a class of plaintiffs is enforceable under the Federal Arbitration Act (FAA) even if the proposed class of plaintiffs proves that it would be economically infeasible for individuals to pursue arbitration on their own.

The case arose out of a dispute between American Express (“Amex”) and a group of merchants who accept American Express cards for payment.  The merchants claimed that Amex violated federal antitrust laws by using its monopoly power in the credit card market to charge inflated fees.  The merchants had an agreement with Amex requiring all disputes to be resolved by arbitration, and that agreement provided that there was “no right or authority” to arbitrate on a “class action basis.”  The merchants, however, formed a class and sued, arguing that the cost to an individual merchant to arbitrate vastly exceeded the potential recovery possible, and that Amex had used its monopoly power to compel arbitration agreements that preclude the enforcement of congressionally created rights.

Amex moved to compel individual arbitration of each dispute under the agreement and the FAA.  The merchants fought that motion with testimony from an expert witness who testified that the costs of proving each antitrust claim (at least several hundred thousand dollars) would dwarf the potential recoveries of individual actions (roughly $12,000-38,000).  The district court granted the motion and dismissed the suits.  After several years of litigation, including one “grant, vacate, and remand” order from the Supreme Court, the Second Circuit held that individual arbitration could not be compelled.

In a five-to-three decision, the Court reversed the decision of the Second Circuit.  Justice Scalia’s opinion for the Court (joined by the Chief Justice and Justices Kennedy, Thomas, and Alito) holds that the FAA does not permit courts to invalidate arbitration agreements simply because the cost of individual arbitration may be high.  According to the Court, nothing in federal law guarantees plaintiffs “an affordable procedural path to the vindication of every claim.”  Moreover, the Court found that the judicially created “effective vindication” exception to the FAA could not be applied simply because individual arbitrations are more costly to litigate than they are often worth.

Justice Thomas wrote a concurring opinion to underscore that the result was required by the plain meaning of the FAA.  Justice Kagan (joined by Justices Ginsburg and Breyer) dissented, arguing that the FAA does not preclude exceptions to arbitration agreements when necessary to enforce congressionally created rights.  Justice Sotomayor was recused from the case because she was a judge on the panel that decided the case in the Second Circuit.