U.S. Supreme Court Rules That Arbitration Agreements Trump Class Action Antitrust Claims

On June 20, 2013, the U.S. Supreme Court decision in American Express Co. v. Italian Colors Restaurant,¹ further weakened the rights of prospective class action plaintiffs to achieve collective relief. In the 5–3 decision,² the Court ruled that a contractual waiver of class action arbitration is enforceable under the Federal Arbitration Act (FAA) even when each plaintiff’s cost of arbitrating on an individual basis exceeds the potential recovery. In reaching its conclusion that the plaintiffs could not pursue their monopolization claims under § 1 of the Sherman Act on a class action basis, the Court observed that "the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim."

The decision in American Express marks the second time this term, following the Court’s March 2013 decision in Comcast Corp. v. Behrend,³ that the Court has raised the bar for private plaintiffs seeking to vindicate anticompetitive harm. Acknowledging the trend, the dissent described the Court as “bent on diminishing the usefulness of Rule 23,” the class action procedure, and threatening to "insulate wrongdoers from liability" under the antitrust and other federal statutes that provide private rights of action.

The Case

In American Express, the plaintiffs are merchants that accept American Express cards. Their agreement with American Express requires all disputes between the parties to be resolved by arbitration and contains a class action waiver: "There shall be no right or authority for any Claims to be arbitrated on a class action basis."

Plaintiffs commenced a class action in federal court against American Express and a subsidiary for violations of the antitrust laws. Plaintiffs alleged that American Express used its monopoly power in the market for charge cards (i.e., cards that require the holder to pay the full outstanding balance each month) to force merchants to accept American Express credit cards at rates approximately 30% higher than the fees for competing credit cards. Plaintiffs argued that this constitutes an illegal tying arrangement and sought treble damages.

In the District Court, American Express moved to compel individual arbitration under the terms of its merchant agreement. Plaintiffs opposed the motion because the estimated cost of an expert analysis to prove the antitrust claims, alone, would be "at least several hundred dollars, and might exceed $1 million," while the maximum recovery for each individual plaintiff was $12,850, or $38,549 when trebled. The District Court granted American Express’s motion and dismissed the lawsuit. The Court of Appeals reversed, ruling that the class action waiver was unenforceable because plaintiffs could not "effectively vindicate" their antitrust claims due to the “prohibitive costs” if compelled to arbitrate individually.

The Supreme Court granted certiorari to consider the question "[w]hether the Federal Arbitration Act permits courts . . . to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim."

The Decision

The majority of the Supreme Court, in an opinion written by Justice Scalia, held that an agreement to arbitrate, including terms that specify with whom the parties choose to arbitrate and the rules under which the arbitration will be conducted, is valid and enforceable unless a contrary congressional command requires otherwise. Therefore, a class arbitration waiver, like that found in American Express’s merchant agreement, is enforceable absent an overriding federal law. The Court concluded that the antitrust laws do not contain such an override because they make no mention of class actions and, in fact, were enacted before the advent of the class action procedure.

The Court also held that the "effective vindication" exception to the FAA did not invalidate the class arbitration waiver. Although the majority acknowledged that a party’s prospective waiver of a "right to pursue" federal statutory remedies would be unenforceable, "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." Because the plaintiffs could individually arbitrate their antitrust claims against American Express – even if doing so would be economically irrational – the Court concluded that they could effectively vindicate their rights.

The dissent criticized the majority’s analysis of the "effective vindication" rule, observing that the "prohibitive" cost of individual arbitration foreclosed, not just diminished, plaintiffs’ right to pursue their antitrust claims. The dissent also called the majority out for ignoring other constraints on the merchants that permitted no avenue aside from a class action by which the plaintiffs could effectively assert their claims.

The American Express decision is likely to encourage sophisticated parties to limit the ability of their contractual counterparties to assert claims on a class action basis. In conjunction with the Comcast decision earlier this year, the American Express decision is also a further signal to class counsel and businesses alike that the U.S. federal courts are an increasingly inhospitable forum for class actions.

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¹ – U.S. –, slip op. 12-133 (2013).

² Justice Sonia Sotomayor took no part in the consideration or decision of the case.

³ 133 S. Ct. 1426 (U.S. 2013).