Kendra L. Clark

In American Express Co. v. Italian Colors Restaurant,[1] the United States Supreme Court held with a 5-3 majority that the Federal Arbitration Act (FAA) does not allow courts to invalidate a contractual waiver of class action arbitration on the grounds that individual plaintiff’s arbitration costs exceed their potential recovery.  The Court clarified that the FAA requires courts to enforce arbitration agreements in accordance with the terms enumerated in the original contract.[2]  The Court additionally rejected the appellant’s arguments that the Court should apply the effective vindication exception because it found the cost to pursue a remedy does not impede the right to pursue a remedy.[3]

The FAA was statutorily enacted in 1947 to codify Congressional intent regarding the enforceability of arbitration agreements in certain contracts.[4]  The FAA explicitly mandates that contractual arbitration provisions are deemed “valid, irrevocable, and enforceable,”[5] and courts have an unadulterated duty to uphold such provisions as the parties intended at the time of contracting.[6]  The Court later developed a narrow exception to the FAA requirements known as the  effective vindication doctrine.[7]  The effective vindication exception is designed to prevent a “prospective waiver of a party’s right to pursue statutory remedies” when a plaintiff seemingly has no legal remedies available.[8]

Italian Colors Restaurant, along with several other merchants, filed a class action suit against American Express and its subsidiary company for violating §1 of the Sherman Antitrust Act and sought treble damages pursuant to §4 of the Clayton Antitrust Act.[9]  Under the private contracts between American Express and each merchant, parties agreed that there “shall be no right or authority for any Claims to be arbitrated on a class action basis.”[10]  Italian Colors Restaurant, protesting the unfair arbitration clause, challenged the enforcement of the class action arbitration waiver and submitted an economist’s report that estimated an individual merchant’s case-related costs to be around several hundred thousand dollars, while the average recovery for each individual merchant would only be a few thousand dollars.[11]  Italian Colors Restaurant, in an effort to overcome the cost barrier, wanted the court to acknowledge the prohibitive costs of arbitrating separately and rule the class action arbitration waiver unenforceable.  American Express sought to compel individual arbitration pursuant to the original contract between the parties and the FAA.

Congress enacted the FAA to ensure arbitration clauses are enforceable.  The Court, in acknowledgment of Congress’s intent, stated that “arbitration is a matter of contract.”[12]  The Court reasoned that antitrust laws do not guarantee an “affordable procedural path,” but that the primary concern is upholding a clear contract to which both parties agreed.[13]

The Court then rejected the merchants’ argument that the class action waiver language should be invalidated on public policy grounds under the effective vindication exception.[14]  The Court ruled that the class action waiver does not prevent each merchant from pursuing statutory remedies, but rather prevents them from collectively pursuing a remedy together.[15]  Each merchant still has the right to arbitrate separately under the antitrust laws, thus the effective vindication exception does not apply.

Justice Kagan, with whom Justice Ginsburg and Justice Breyer join, wrote a separate dissenting opinion to proclaim that the FAA must be read in accordance with the statutory rights provided by the antitrust laws and in light of the entire contract.[16] The dissent highlighted that the contract not only contains a class action arbitration waiver, but also prevents merchants from informally arranging with one another to produce a common expert report to reduce arbitration costs.  The dissent argues that the class action arbitration clause is part of a larger monopoly contract and should be invalidated to allow a cost effective antitrust suit.[17]

The Court has continually applied strict adherence to the FAA, even when general contract defenses such as unconscionability may apply.[18]  For example, in AT&T Mobility v. Concepcion, the Court determined that the FAA functions as federal preemption, and thus takes precedence over varying state standards of contract law.[19]  The Court cited the importance of promoting arbitration while upholding contractual language.[20]

The Supreme Court’s ruling will require judges to strictly uphold arbitration agreements without regard to long-standing principles of equity, bolstering the enforceability of class action arbitration waivers.  This bright-line rule provides structure and predictability, but it also reinforces a discrepancy in bargaining power.  If larger firms can include a provision preventing class action arbitration in contracts, then those companies can utilize their bargaining power and market dominance to ensure smaller businesses are forced to accept the waiver.  While larger firms may be able to absorb the costs of arbitrating separately, smaller organizations will likely suffer from this holding, and heavy arbitration costs may end up being passed onto the consumer. Furthermore, if smaller organizations cannot afford arbitration costs, they may refrain from pursuing legal remedies at all. The Court’s stringent rule clearly upholds the FAA, but also challenges fundamental equity principles in contract law such as unconscionability. In upcoming years, the Court will need to further elaborate and reconcile the FAA with standard contractual defenses.

The Supreme Court, through its application of the FAA, held that courts must uphold class action arbitration waivers as stated in the original contract between the parties, regardless of whether the process is more costly. Contracting parties must be aware of each clause contained within an agreement, along with the potential ramifications.