Yesterday the U.S. Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant delivered a devastating blow to small businesses, consumers and employees. In a 5-3 opinion, the Supreme Court held that corporations can force arbitration on small businesses and individuals even when it can be proven that the forced arbitration clause in the contract is too costly or inherently unfair.
This case follows CompuCredit v. Greenwood and AT&T Mobility v. Concepcion – two recent Supreme Court decisions that have made it significantly more difficult for consumers and employees to challenge even the most abusive mandatory arbitration clauses. However, in previous Supreme Court decisions, the Court suggested that arbitration is acceptable so long as parties can “effectively vindicate their substantive rights.” In In re American Express Merchants Litigation, a group of small business merchants brought a class action in court alleging that American Express is violating antitrust laws with a tying arrangement by using its monopoly power over charge cards to force merchants to take all AmEx-branded credit cards and pay higher fees. Citing its arbitration clause with the merchants, AmEx moved to force the case into individual arbitration with no class action possible.
The merchants presented ample evidence to the court to show that the costs of an individual arbitration would have been many times more than the possible maximum amount of damages that each would recover. For example, the costs of a single antitrust market study necessary for each arbitration would exceed $1 million, while each claimant’s potential damages would be no more than $5,000. Because the arbitration clause prevented the sharing of costs that a class action would allow and did not provide any other means for the merchants to recover those costs, it would be impossible for the merchants to vindicate their rights under federal antitrust law in individual arbitration.
Yesterday’s decision favoring forced arbitration substantially impairs individuals’ access to justice and allows corporations to get away with widespread wrongdoing by eliminating statutory rights under the antitrust laws, even for laws that forbid individuals from waiving their rights. In the dissent, Justice Elena Kagan said the ruling would let wrongdoers immunize themselves against lawsuits. She said American Express had used its market clout to foist the contract on retailers.
“If the arbitration clause is enforceable, Amex has insulated itself from antitrust liability -- even if it has in fact violated the law,” Justice Kagan wrote. “The monopolist gets to use its monopoly to insist on a contract effectively depriving its victims of all legal recourse.
“Yesterday’s Supreme Court ruling for AmEx exacerbates an already very difficult route for consumers to resist arbitration clauses and get their claims heard in court, said NACA’s Legislative Director, Ellen Taverna.”
“It is imperative that Congress and federal regulatory agencies act now to protect the rights of consumers, employees and small businesses to hold wrongdoers accountable,” added Ellen Taverna.
This decision makes it all the more vital for Congress to pass the Arbitration Fairness Act to provide individuals with a choice to arbitrate a claim rather than forcing them into arbitration. Furthermore, the Consumer Financial Protection Bureau (CFPB) has the power to ban or regulate forced arbitration and is in the process of completing an arbitration study mandated under the Dodd-Frank Act. We hope the CFPB acts quickly to prohibit pre-dispute arbitration agreements in all consumer financial products and services contracts. Finally, the Securities and Exchange Commission can and must protect its investors and preserve the integrity of securities markets by exercising authority granted to it under the Dodd-Frank Act to issue a rule to prohibit forced arbitration and class-action bans in brokerdealer contracts with investors.