Supreme Court Considers Enforceability of Arbitration Clause’s Class Action Waiver in Antitrust Case

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Supreme Court heard arguments yesterday regarding whether merchants alleging an antitrust violation by American Express Company are able to vindicate their rights under the Sherman Act if they are required to pursue individual arbitration. The Supreme Court Justices appeared divided on the issue, and a unanimous decision like the Court’s recent holding in FTC v. Phoebe Putney Health System, Inc. appears unlikely (American Express Co. v. Italian Colors Restaurant, Dkt. 12-133).

At issue is a decision of the U.S. Court of Appeals in New York City (667 F.3d 204, 2012-2 Trade Cases ¶78,125), holding unenforceable a class action waiver contained in the mandatory arbitration clause of their commercial contracts with American Express. American Express had invoked the clause in response to a lawsuit by the merchants challenging a purported illegal tying arrangement requiring merchants who accepted American Express’s charge card to also accept all of American Express’s credit cards. The Court granted the petition for certiorari on November 9, 2012.

Complaining merchants had argued that the arbitration agreement would prevent them from pursuing their Sherman Act claims against American Express because they would have to pay prohibitively high costs to engage in individual arbitration when compared to their possible recoveries. It was estimated that an expert could cost as much as $300,000.

“The holding of the court of appeals is the arbitration agreement cannot be enforced because it has a class action waiver,” said Michael K. Kellogg, arguing on behalf of American Express at the February 27 proceeding. “That is clearly reversible error.”

Kellogg objected to the idea of federal district courts conducting a “free-floating inquiry . . . into the costs and benefits of each case” when determining whether to refer cases to arbitration. “The arbitrator in the first instance can deal with how to cost effectively arbitrate the claims in issue,” he added.

According to Paul D. Clement, who argued for the merchants, the problem with the arbitration agreement is that it precludes the antitrust claim from going forward. “Here it's a combination of no class arbitration, no way to shift costs, because they don't provide cost shifting, and no way to share costs because of the confidentiality,” Clement contended.

Justice Elena Kagan appeared to sympathize with the merchants. She noted that potential claimants need economic evidence to help them prove their claims. “[I]t is, of course, true in the real world that to prove a successful antitrust claim, you need economic evidence,” Justice Kagan said.

Clement pointed out that Professor Herb Hovenkamp, in a friend-of-the court brief, said that claimants, in arbitration or litigation, need a market power expert to make their antitrust case. According to Clement, it would be too costly for a single merchant to hire such an expert in individual arbitration and to effectively vindicate its claim.

Chief Justice John Roberts questioned whether the arbitration agreements permitted or prohibited the complaining merchants from pooling resources to get the expert advice they needed. He pondered whether the merchants could get together through a trade association and prepare an antitrust expert report about what American Express was doing.

“Our position is that multiple claimants in arbitration could share the costs of an expert for preparation of a report,” said Kellogg in response.

Justice Antonin Scalia suggested that the merchants faced with arbitrating their antitrust claims individually would be in the same position as plaintiffs were before class actions were permissible.

“I don't see how a Federal statute is frustrated or is unable to be vindicated if it's too expensive to bring a Federal suit,” Justice Scalia said. “That happened for years before there was such a thing as class action in Federal courts. Nobody thought the Sherman Act was a dead letter, that it couldn't be vindicated.”

“If you couldn't do it in court, you don't have to be able to do it in arbitration, it seems to me,” Justice Scalia said.

Justice Ruth Bader Ginsburg pointed out, however, that “even in the days before we had Rule 23, when you were bringing a suit in Federal court you could have multiple plaintiffs joining together.” Under the arbitration agreement at issue, the arbitration needed to be one on one. Joinder mechanisms were prohibited.

Attorneys: Michael K. Kellogg (Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC) for American Express Co. Paul D. Clement (Bancroft PLLC) for Italian Colors Restaurant.