Supreme Court Enforces Class Action Arbitration Waiver

In a significant victory for businesses, the United States Supreme Court recently held that a contractual waiver of class arbitration can be enforced under the Federal Arbitration Act (FAA). American Express Co. v. Italian Colors Restaurant, — U.S. – (June 20, 2013). At issue in Italian Colors was American Express’s form merchant contract, which contained such a class arbitration waiver. The plaintiff restaurant sued American Express for alleged federal anti-trust violations and argued that the contract’s class arbitration waiver effectively precluded it from pursuing its remedy, since the expense of proving its individual claim far outweighed its potential recovery. The Second Circuit Court of Appeals sided with the restaurant. The United States Supreme Court reversed, siding with American Express.

The pivotal issue was whether the judicially-created “effective vindication” exception to the FAA applied to the restaurant’s federal anti-trust claims. The FAA deems arbitration clauses presumptively valid and enforceable, but that presumption only applies “so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985).

Justice Scalia, writing for the majority, rejected the restaurant’s argument that the class arbitration waiver effectively precluded it from pursuing its federal anti-trust remedy, due to the heavy expense associated with pursuing its individual claim. The majority held that the effective vindication exception guarantees a litigant’s right to pursue a statutory remedy, but does not concern itself with the potential cost of doing so. As Justice Scalia wrote, “[t]he 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.” Since American Express’s contract did not preclude the restaurant from pursuing its anti-trust claim, the effective vindication exception did not apply, notwithstanding the cost to the restaurant of pursing that claim.

In a blistering dissent, Justice Kagan summarized the issue before the Court, and the Court’s decision, as follows: “The owner of a small restaurant (Italian Colors) thinks that American Express . . . has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents it from doing so. That term 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. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse . . . And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.”

The full impact of Italian Colors remains to be seen, but legal commentators agree that it will likely stifle class action litigation, thus representing a significant victory for businesses.

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