Supreme Court to hear Amex arbitration case

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December 6, 2012

Supreme Court to hear Amex arbitration case 

Steven M. Sellers

The Federal Arbitration Act and federal antitrust statutes will go head to head in an arbitration case that involves a contract provision barring merchants from filing a class action against American Express Co. The Supreme Court’s grant of certiorari follows a complicated history of appeals through the Second Circuit.

The Supreme Court agreed to consider the interplay of the Federal Arbitration Act (FAA) and the substantive protections of federal antitrust statutes in granting certiorari in an arbitration case that involves a contract provision barring merchants from filing a class action against American Express Co. (American Express Co. v. Italian Colors Restaurant, No. 12-133 (U.S. cert. granted Nov. 9, 2012).)

The case percolated in the Second Circuit for three years and spawned three sets of appeals—including one on a summary remand by the Supreme Court—culminating in a 2-0 panel decision in favor of the plaintiff merchants. The Second Circuit held that the cost of individually arbitrating the plaintiffs’ disputes would be prohibitive and therefore would deny the substantive protections of federal antitrust law. The court rejected the defendant’s request for rehearing en banc. (In re Am. Express Merchants’ Litig., No. 06-1871-cv (2d Cir. May 29, 2012).)

The litigation stemmed from a contract clause that required plaintiff store owners to “honor all cards” issued by American Express, to submit to individual arbitration, and to waive their right to a class action. The plaintiffs argued that the contract forced them to accept all types of American Express cards at greatly increased cost and as a condition of accepting the company’s premium cards. This “tying arrangement,” they argued, violated the antitrust provisions of the Sherman Act, and the class action waiver deprived them of the only economically feasible remedy.

The Second Circuit panel in the first appeal (Amex I) agreed with the plaintiffs that the waiver provision would render individual arbitrations too expensive. The Supreme Court vacated that judgment in light of its 2010 decision in Stolt-Neilsen S.A. v. Animal Feeds Intl. Corp., in which it held that there must be a contractual basis to demonstrate that a party agreed to submit to class arbitration. In Amex II, the court reaffirmed its ruling. After that, the Supreme Court decided AT&T Mobility LLC v. Concepcion, holding that the FAA preempted a state law that barred class action waivers as unconscionable. Reconsidering its decision again in light of Concepcion, the Second Circuit reaffirmed its ruling in Amex III earlier this year.

The full court went on to deny en banc review, but exposed a schism in doing so. Judge Rosemary Pooler, a member of the panel that decided the last iteration of the case, wrote that “Amex III gives full effect to a long line of Supreme Court precedent preserving plaintiffs’ ability to vindicate federal statutory rights, rather than eviscerating more than 120 years of antitrust law by closing the courthouse door to all but the most well-funded plaintiffs.” She distinguished the case from Concepcion, which she said dealt with preemption rather than the “vindication of statutory rights analysis” at issue in Amex III.

Five judges dissented from the denial of en banc review, including Chief Judge Dennis Jacobs, who contended that the case conflicted with Concepcion and created a split with the Ninth Circuit. That circuit held in Coneff v. AT&T Corp. that the FAA preempted a Washington state law that banned class action waivers. Jacobs contended that the panel opinion “impairs the [FAA’s] strong federal policy favoring the enforcement of arbitration agreements, and frustrates the goals of arbitration by multiplying claims, lawsuits, and attorneys’ fees.” Judge Jose Cabranes observed in his dissent that “this is one of those unusual cases where one can infer that the denial of en banc review can only be explained as a signal that the matter can and should be resolved by the Supreme Court.”

Deepak Gupta of Washington, D.C., counsel for the plaintiffs, emphasized the unique posture of the case. “The question here is very different from the question in Concepcion,” said Gupta. “This isn't about a conflict between federal arbitration law and state unconscionability law, as Concepcion was. Nor is it really a case about the right to bring class actions. This case is about whether an arbitration agreement should be enforced even where nobody disputes that doing so would deprive the plaintiffs of their ability to vindicate their federal statutory rights—in this case, their rights under the federal antitrust laws,” he said.

Gupta added that the stakes in the case are high. “If the Supreme Court reverses the Second Circuit, it will be eliminating one of the last remaining safety valves in the system,” he said. “Those who favor arbitration should be concerned about that. It would greatly undermine arbitration's legitimacy and the public's confidence in it.”

Paul Bland, a senior attorney at Public Justice in Washington, D.C., agreed. “This is a very extreme case,” said Bland. “The undisputed facts prove that if the arbitration clauses are enforced, there is no remedy whatsoever for the plaintiffs. This case poses the question of whether it’s the Federal Arbitration Act or the Federal Corporate Immunity Act.”

As Trial News recently reported, the Supreme Court will consider several class action cases this term, and the Court heard oral argument in two appeals in October. Those cases both involve the level of evidence class action plaintiffs must produce at the certification stage.

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