US Supreme Court upholds freedom of contract principle in antitrust class arbitration


[co-author: Davide Rossetti]

In the recent case of American Express co. et. al. v. Italian Colors Restaurant et al., the US Supreme Court  addressed the validity of a contractual waiver to class arbitration where the cost of individually arbitrating a federal statutory antitrust claim made it cost prohibitive to raise those claims independently rather than as part of a collective class.  The Court’s conclusion in favor of upholding the agreement can be seen as a further re-affirmation of the principles of freedom of contract.

Background: individually or as a class?

An agreement between the petitioners, American Express and a subsidiary, and the respondents, merchants who accept American Express cards, required all of their disputes to be resolved by arbitration and prohibited arbitration on a class action basis.  Nonetheless, the respondents filed a class action in federal court arguing that American Express and its subsidiary had used their monopoly power in the market to charge higher rates than those for competing credit cards in violation of federal antitrust (also called anti-competition) laws.

The petitioners applied to compel individual arbitration under the Federal Arbitration Act (FAA).   In support of the position that they should not be precluded from bringing their claims as a class, the respondents submitted a declaration from an economist who opined that each individual respondent would have to expend substantially more on experts to support their case than they would ultimately be permitted to recover if successful on the merits.  The respondents further argued that the waiver to class arbitration should not be enforced, since it would prevent the respondents from pursuing statutory claims.

The lower district court granted the motion and dismissed the class lawsuits.  The Court of Appeals reversed this decision, holding that because of the prohibitive costs the respondents would face, the class-action waiver was unenforceable.

In a 5-3 decision, the US Supreme Court reversed the decision of the Court of Appeals and determined to enforce the waiver.

The US Supreme Court's reasoning

The US Supreme Court emphasized that there is a well-held view that arbitration is a matter of contract.  Further, the FAA requires the courts to “rigorously enforce” arbitration agreements according to their terms unless the agreement has been “overridden by a contrary congressional command.”   Looking then at the antitrust laws in question, the Court found there to be no evidence of such intent.  The Court held that the “antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.”  The Court further reasoned that while Congress had taken some measures to facilitate these types of claims, such efforts could not be interpreted to infer that Congress intended whatever “departures from normal limits” were required so as to permit antitrust goals to be advanced at all costs.  In sum, the Court held that the antitrust laws do not “evince an intention to preclude a waiver of class action procedure.”

The Court then turned to the respondents' argument that the arbitration agreement should not be enforced, since enforcing it (and the waiver) would preclude the respondents from “effectively vindicating”  their statutory rights. This argument, grounded in prior jurisprudence, stems from the Court’s prior willingness to grant an exception to its pro-arbitration stance and invalidate on public policy grounds arbitration agreements that constitute a prospective waiver of a party’s right to pursue a statutory right.  The Court, however, held that the exception did not apply in the present case.  The court considered that just because the parties had contracted in a manner that makes it "not worth the expense" to pursue a statutory remedy does not mean that the right to pursue that remedy had been eliminated altogether.  More pointedly, the class-action waiver merely limited the arbitration to the two contracting parties; it did not foreclose that party from pursuing the cause of action in all. Because then contractual parties would not be prevented from effectively vindicating their statutory claim in arbitration, the Court was not required to invalidate the contractual waiver.

Writing for the minority, Justice Elena Kagan (with whom Justice Ruth Bader Ginsburg and Justice Stephen Breyer dissented), summed up the decision as follows:  The monopolist gets to use its monopoly power to insist on a contract that effectively deprives its victims of all legal recourse – and the “nutshell version” of the Court’s opinion is “too darn bad.”

From now onwards

The pro-arbitration reasoning of the US Supreme Court suggests that companies will successfully be able to stave off antitrust class actions so long as they include in their agreement to arbitrate an explicit contractual waiver, which will hold sway however burdensome an individual action might be.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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