In Law360 Expert Analysis, Robbins LLP Attorneys Discuss Consumer Protection & Arbitration Agreements
By Kevin A. Seely and Michael J. Nicoud
As Featured in Law360 Expert Analysis on August 27, 2013
On June 20, 2013, the U.S. Supreme Court issued its opinion in American Express Co. et al. v. Italian Colors Restaurant, once again defining the bounds of what is appropriate in an arbitration agreement. In a 5-3 decision (Justice Sonia Sotomayor abstained), the Supreme Court appeared to further erode protections available for consumers who believe that they have been victimized by one-sided, unfair arbitration agreements. However, comments by the justices during oral arguments leave some hope for consumers.
Merchants Alleged American Express Engaged in Illegal Anti-Competitive Practices
Italian Colors Restaurant was one of many merchants that were seeking redress for allegedly anti-competitive behavior by American Express. Italian Colors contended that American Express (and a wholly owned subsidiary) used its monopoly power derived from its prominence in the corporate and premium card markets to force merchants to accept a form contract — with certain unfavorable terms — in violation of antitrust laws. American Express sought to compel arbitration of Italian Colors’ claims pursuant to the form contract’s arbitration clause.
The One-Sided Arbitration Clause Appeared to Prohibit Cost-Sharing and Cost-Shifting
The form contract’s arbitration clause was blatantly and unapologetically one-sided — in favor of American Express — making the prospect of arbitration extremely unpalatable for merchants. The clause expressly prohibited class actions, joinder or consolidation.
It contained a confidentiality provision prohibiting the sharing of information relating to the arbitration proceedings, which Italian Colors contended made it impossible to pool resources with other plaintiffs. Worse still, even if Italian Colors prevailed at arbitration, it could not shift any of the costs of arbitration to American Express.
Italian Colors contended that the arbitration agreement should not be upheld because it imposed “prohibitive costs” and provided for no incentives to arbitrate, preventing the merchant from the “effective vindication” of its federal statutory rights to pursue claims for antitrust violations under the Sherman Antitrust Act.
The “effective vindication” doctrine had emerged from earlier Supreme Court cases where the court expressed its willingness to invalidate arbitration agreements on public policy grounds if they operated as a prospective waiver of a party’s rights to pursue statutory remedies. However, thus far, the court has declined to strike down an arbitration agreement on this ground.
Arbitration Would Have Been Prohibitively Expensive
The arbitration clause’s cost-sharing and shifting prohibitions were particularly problematic for Italian Colors because of the cost of expert analysis needed to prove its antitrust claims.
Italian Colors’ unchallenged expert testimony established that expert reports would be required to substantiate key elements of Italian Colors’ claims, such as whether there was monopoly market power, whether that power was actually used, and the dollar amount of damages. Significantly, Italian Colors’ expert opined that this would cost at least several hundred thousand dollars and could easily exceed $1 million.
Italian Colors argued that what truly made these costs unreasonable was that given the prohibitions on class actions, joinders and even sharing information, each plaintiff would have to spend at least several hundred thousand dollars for their own expert. In exchange, that plaintiff could hope to achieve, at best, trebled damages amounting to about $38,000 with no opportunity to shift costs to American Express if successful.
The Supreme Court Narrowly Construed the Issue to Uphold the Arbitration Agreement
It would seem common sense to many that the ability to recover at most $38,000 by spending at least several hundred thousand dollars could hardly be considered “vindication” of any right, let alone the “effective vindication” of that right. However, the majority’s response was, as Justice Elena Kagan succinctly put it in her dissent, “Too darn bad.”
Justice Antonin Scalia’s majority opinion wasn’t quite so boldly worded. Instead, the majority focused the issue as one of class arbitration — despite the constant protestations of Italian Colors in its briefing that it was not insisting on class arbitration. The majority reasoned that courts had to “rigorously enforce” arbitration agreements by their terms, unless the Federal Arbitration Act had been “overridden by a contrary congressional command.”
The majority rejected the plaintiff’s invitation to apply the “effective vindication” doctrine, holding that it would only apply where the agreement constituted a prospective waiver of a party’s right to pursue statutory remedies. Critically, the court held that the fact that pursuing the remedy was not worth the expense involved did not equate to preventing the “effective vindication” of a plaintiff’s rights.
Revelations From Oral Argument
One of the most critical revelations of the oral argument transcript is that American Express conceded, seemingly for the first time, that cost-sharing was not prohibited. Specifically, it was conceded that the confidentiality provision associated with the arbitration clause would not prevent plaintiffs from pooling resources and sharing the significant expert costs.
Despite the record from the Second Circuit to the contrary, and the protestations of counsel for Italian Colors that American Express had never made this concession before, the court seemed to find this concession valuable to its analysis. Chief Justice John Roberts specifically asked whether the pooling of resources was allowed under the arbitration agreement, and counsel for American Express stated that it was.
Roberts suggested, in an apparent effort to minimize one of the plaintiffs’ “effective vindication” concerns, that the plaintiffs could go to a trade association to seek money to pay for a joint expert report that would be subsequently used in individual arbitration.
Counsel for American Express again responded that such a scenario would not be in violation of the arbitration clause. Similarly, when pressed by Kagan as to whether the confidentiality clause would prevent the pooling of resources to produce a joint report, counsel for American Express stated that it would not apply.
Not only did the court appear to draw out concessions from American Express that it would be permissible for potential plaintiffs to pool resources despite the confidentiality provision, but the court also appeared to challenge the plaintiff’s record regarding the cost of an expert report.
Once again, despite the Second Circuit’s findings seemingly to the contrary, and despite the fact that American Express did not previously challenge the plaintiff’s assertion as to the cost of an expert report, several of the justices strongly suggested that arbitration would not be nearly as expensive as Italian Colors and its expert had contended.
Justice Anthony Kennedy, for example, noted that the proper way to arbitrate the case would be to have an expert in antitrust law be the arbitrator, thus cutting the costs of an expert report by limiting its contents to fewer issues. Similarly, Justice Stephen Breyer suggested that an experienced arbitrator would only require a very limited report on issues that were not conceded.
Overall, several members of the court appeared to be very skeptical that the arbitration would cost anywhere near what plaintiffs had asserted through their expert, and which up until the oral arguments, had appeared to be an undisputed matter of record.
Accordingly, read in the light of the oral argument transcripts, particularly regarding the themes of pooling resources and the true costs of arbitration, the American Express decision may be far more limited than it appears at first glance.
Without the concessions by American Express that the plaintiffs could pool resources, and without the possibilities suggested by the justices as to how the plaintiff might more cost-effectively arbitrate the case, it seems likely that the court would have been much more hesitant to rule in favor of enforcing the arbitration clause.
Challenging Arbitration Clauses After American Express
While at first glance the American Express decision seems like a major departure from the court’s line of cases referencing “effective vindication” of rights, the case may not be as revolutionary as it might initially appear. The holding of American Express leaves a number of avenues for consumers to challenge arbitration clauses.
Even the majority confirmed that in circumstances where the arbitration clause would act as a complete prospective waiver of a party’s right to statutory remedies (including a clause attempting to ban the assertion of certain statutory rights) the “effective vindication” exception would “certainly cover” such a clause.
Similarly, the court noted that filing or administrative fees attached to arbitration that were so high as to make access to the forum impracticable would trigger the “effective vindication” doctrine. Also, Justice Clarence Thomas, in his concurring opinion, made it clear that the formation of arbitration clauses could still be challenged, for example, through a showing of fraud or duress.
It is apparent from the oral arguments that had American Express not conceded that under its arbitration clause, it was permissible for plaintiffs to pool their resources in order to make arbitration more cost-effective, the outcome may have been different.
Thus, consumers should continue to challenge the cost-effectiveness of arbitration clauses in situations where arbitration is economically impractical. The concessions regarding pooling of resources as well as other cost-saving suggestions seem to be what prevented a majority of the court from finding issue with the arbitration clause.
Consumers should establish a clear record of exactly why the arbitration agreement presents actual impediments to the “effective vindication” of their rights. They should also challenge specific provisions with opposing counsel early to create a clear record from the opposition as to how these provisions are to be interpreted and applied.
This strategy puts the consumer in a position to either achieve the necessary concessions to make arbitration feasible, or to be armed with a record of how they are practically stopped from “effective vindication” of their rights, to challenge and defeat the enforcement of an oppressive agreement.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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