The Supreme Court’s 5-3 ruling on June 20 in American Express Co. v. Italian Colors Restaurant is a landmark in the destruction of legislated rights. By enabling the aggregation of small claims, class action lawsuits play a vital role in enforcing the antitrust and other consumer protection laws. The Court sacrificed enforcement of important and long-standing federal statutes in the name of the Federal Arbitration Act (FAA). This decision is likely to lead to both reduced compensation for victims and weakened deterrence of corporate misbehavior.
The Court held that the FAA compels the enforcement of bilateral arbitration clauses, even when pursuing individual arbitration would be economically irrational. Italian Colors, a small restaurant, had shown that pursuing individual arbitration for its monopolization claim against American Express would require the introduction of expert testimony costing “at least several hundred thousand dollars” and perhaps in excess of $1 million. This expense would be many times larger than Italian Colors’ maximum recovery after mandatory trebling. Even if its claim were to succeed in individual arbitration, pursuing the claim would be a “fool’s errand.” In contrast, aggregation of many comparable claims through a class action in court or other collective process, as Italian Colors sought to do, would make the action feasible.
The class relied upon an established exception to arbitration law, which says that an arbitration clause in a contract is not enforceable if it precludes the vindication of federal statutory rights. Justice Scalia’s majority opinion says, in effect, “You signed the contract, now live with it.” It incredibly treats a form contract presented by a powerful company to a small business or consumer as one negotiated by equals.
Not long ago, most sales transactions were not even accompanied by a contract. With the development of electronic transactions, we already live in an economy in which a vast number of contracts are entered into by clicking a button that affirms you have read and agreed to a lengthy and detailed form contract that cannot be negotiated or modified. This applies both to consumers and to businesses, and we can only expect the electronic contracts of adhesion to multiply.
The Court’s narrow conception of the effective vindication exception gives corporate defendants broad latitude to craft arbitration clauses for preventing the effective vindication of statutory rights. What the Court has done is invite sellers to insert provisions in their form contracts that require arbitration of any dispute and forbid class arbitrations. Bingo. A corporate lawyer who does not advise the client to include such a clause may be engaged in malpractice. Big corporations that dictate terms win, less powerful businesses and consumers lose.
We applaud Justice Kagan’s heated dissent. She observed the importance of the Sherman Act’s private cause of action “not solely to compensate individual, but to promote ‘the public interest in vigilant enforcement of the antitrust laws.’” For claims like that of Italian Colors, she said, the result of the decision is “[l]ess arbitration, poorer enforcement of federal statutes.” As Justice Kagan correctly recognized, a large company can now obtain illegal overcharges from consumers and also exercise its market power through form contracts to prevent injured parties from seeking legal redress. Over the past three years, the Court, in several decisions interpreting the FAA and the Federal Rules of Civil Procedure, has made it more difficult for plaintiffs to bring even meritorious class actions. In its conclusion, the dissent sarcastically noted that the majority’s consistent hostility to class actions likely also explains this latest holding: “To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23 [the framework for class actions], everything looks like a class action, ready to be dismantled.”
While the Italian Colors case was about small business victims who are direct purchasers from the defendant, undeterred anticompetitive behavior also injures end-use consumers and the economy as a whole. Some consumer class actions under state laws remain (barely) alive, despite all of the obstacles constructed over recent years by the Supreme Court. Some cartels may still be challenged by classes in ways we can predict this Court will try to narrow. It is now urgent to support a legislative fix, such as the Arbitration Fairness Act, S. 878, introduced by Senator Al Franken, and H.R. 1844, introduced by Congressman Hank Johnson.
Bert Foer is President of the American Antitrust Institute. Sandeep Vaheesan is the Institute’s Special Counsel.