Arbitration ruling divides litigation bar

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US justices’ decision spurs calls to Congress

The chasm between civil defense attorneys who extol the virtues of mandatory arbitration agreements and members of the plaintiffs’ bar who say the pacts strip consumers of their right to redress was widened by the U.S. Supreme Court last month.

The court ruled June 20 in American Express Co. v. Italian Colors Restaurant that claimants can’t avoid a waiver of class arbitration on the grounds that the cost of individual arbitration would be prohibitively high.

Defense lawyers and business groups say the decision is far from a game-changer, and essentially reinforces the justices’ previous ruling in AT&T Mobility v. Concepcion, which said that laws requiring class-wide arbitration proceedings are trumped by the Federal Arbitration Act.

“American Express makes it clear that the FAA defines arbitration as taking place on an individual basis and not a classwide basis,” said Archis Parasharami, a litigation partner in Mayer Brown’s Washington office. “The decision here is a pretty small step from Concepcion.”

But plaintiffs’ attorneys and consumer advocacy groups say the court’s ruling goes much further, making it impossible for aggrieved consumers, small businesses and other litigants to join together to seek relief when none has the financial wherewithal to do it alone.

“It’s a dramatic sea change with respect to arbitration,” said F. Paul Bland Jr., senior attorney at Public Justice in Washington. “The Supreme Court has always said that arbitration clauses would only be enforced if parties can effectively vindicate their substantive statutory rights. What the Supreme Court did [in American Express] is effectively turn that into its opposite.”

The decision also is renewing calls for Congress to step in and make changes.

“The only way to restore rights under landmark federal and state laws is for the U.S. Congress to amend the FAA in order to restore the rights of consumers, employees and small businesses,” said Julia Duncan, Public Affairs Director of Federal Programs at the American Association for Justice in Washington.

The Concepcion connection

The ruling stems from an effort by a group of businesses asserting antitrust claims against American Express to arbitrate on a classwide basis. The cost of bringing the claims individually would top $1 million, they claimed, while potential recovery would not exceed $13,000. The federal common law principle of “effective vindication” required classwide arbitration to be allowed, even where prohibited by a mandatory arbitration agreement, because they could not otherwise get relief, they argued.

But in a 5-3 ruling, the court disagreed. Relying heavily on the Concepcion ruling, the court found that the FAA’s mandate to carry out arbitration agreements by their terms could not be ignored, even when it brings hardship to one of the parties.

“Truth to tell, our decision in AT&T Mobility all but resolves this case,” Scalia wrote. “We specifically rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

In dissent, Justice Elena Kagan disagreed, and warned that the majority’s decision allows a large company such as American Express “to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”

Call to Congress

Duncan agreed with Kagan’s assessment, saying the ruling could reach beyond the antitrust arena to other claims brought under federal labor, consumer and employment statutes, including Title VII.

Large companies are now incentivized, she said, to include restrictive arbitration clauses in contracts when they know litigation costs will run high.

“The court essentially said that even if a corporation violates those laws, if a contract has a forced arbitration clause in it, you cannot pursue your rights under those laws [as a class] even if you prove to a court that you would not be able to do so alone because it would be too expensive,” said Duncan.

Others agree with Scalia’s take, saying the case breaks no new legal ground, but simply shows the precedential effect of Concepcion in action.

“Concepcion essentially dictated the result — it was expected,” said Gregory Cook, a partner in the Birmingham, Ala., office of Balch & Bingham LLP.

Still, plaintiffs’ lawyers are using the case to renew their call for passage of the proposed Arbitration Fairness Act, legislation that has been repeatedly filed in recent congressional sessions. The bill, reintroduced in May by Sen. Al Franken, D-Minn., would bar enforcement of pre-dispute arbitration agreements in claims alleging employment, consumer, antitrust and civil rights violations.

“This case is not just about arbitration,” Bland said. “It’s about individuals and small businesses who are going to abandon their claims” because they can’t afford them.

“They are not going to pursue them in court and they are not going to pursue them in arbitration.”