High Court Hears Arguments On Validity Of Arbitration Clause In Antitrust Action

High Court Hears Arguments On Validity Of Arbitration Clause In Antitrust Action

WASHINGTON, D.C. - (Mealey's) American Express Co. (AmEx) told the U.S. Supreme Court on Feb. 27 in oral arguments that the Second Circuit U.S. Court of Appeals erred in ruling that a mandatory class action waiver clause in AmEx's standardized service contract violated the Federal Arbitration Act (FAA) and erred in denying AmEx's motion to compel arbitration of merchants' antitrust claims under the Sherman Act (American Express Company, et al. v. Italian Colors Restaurant, et al., No. 12-133, U.S. Sup.).

(Oral argument transcript available. Document #81-130328-001T.)


Michael K. Kellogg of Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington, arguing for AmEx, argued that the court below erred in ruling that class procedures were necessary to vindicate the merchants' Sherman Act claims.

Cost Sharing

In response to Justice Ruth Bader Ginsburg's concern that the expense to win an antitrust case such as this one is "enormous" and not worth a single person's while, Kellogg said that "it is up to the arbitrator in the first instance to devise procedures to deal with claims in an efficient and cost-effective manner" and that multiple plaintiffs "could share costs of [an expert] just as they could share the costs of a lawyer."

Kellogg said the Supreme Court in AT&T Mobility LLC v. Concepcion (131 S.Ct. 1740 [2011] [enhanced version available to lexis.com subscribers]), which held that the FAA preempted a California law barring the enforcement of class action waivers in consumer contracts, ruled that "you cannot condition the enforcement of an arbitration agreement on the availability of class procedures." Kellogg noted that "[o]nly 20 percent of putative classes are certified."

Justice Elena Kagan commented that an arbitration clause that "works to prevent us from sharing costs in such a way that we can produce [economic] evidence" prevents effective vindication of the rights to bring an antitrust suit and "frustrat[es] the effect of the Sherman Act."

Kellogg countered that "the only provision at issue here was the class action waiver" and that, at the time the Sherman Act was passed, Congress considered adding class procedures but declined to do so.

Chief Justice John G. Roberts Jr. and Justice Kagan asked Kellogg whether the plaintiffs could pool their money for an antitrust expert report and use them in the arbitrations and whether there would be collateral estoppel effect. Kellogg commented that the confidentiality clause did not prevent the plaintiffs from sharing the report from arbitration to arbitration.

Vindication Doctrine

Paul D. Clement of Bancroft in Washington, representing the merchants, said the Supreme Court has "used the effective vindication doctrine as an assurance that Federal statutory claims would not go unvindicated just because of the arbitral forum."

Clement said that the "combination of no class arbitration, no way to shift costs and no way to share costs because of the confidentiality" in this arbitration agreement precludes the claim from going forward. Clement explained that the confidentiality agreement precludes sharing of information about the sales volumes of the individual merchants and that such information is necessary for a damage calculation in this case because the merchants alleged that AmEx distorted the market "so we can't rely on the market price."

Amicus curiae United States sided with the merchants. Deputy Solicitor General Malcolm L. Stewart of the U.S. Department of Justice in Washington argued that "if it is the case that given the amount of money at stake, the arbitration procedure specified in the contract and the modes of proof that would be necessary in arbitration, if it can be shown persuasively by the plaintiff who bears the burden that no reasonable plaintiff would find it economically feasible to proceed, then the arbitration agreement can't be enforced."

Merchant Fees

Italian Colors Restaurant and other merchants sued AmEx, alleging that AmEx's service contract contained an "honor all cards agreement" whereby merchants were forced to pay supracompetitive fees on AmEx's mass-marketed products or lose a significant portion of sales from businesses, travelers and affluent customers who are traditional users of AmEx cards. The agreement precluded merchants from accepting some AmEx cards and denying others in violation of the Sherman Act, the merchants said.

The merchants further alleged that as a condition of accepting AmEx's cards, they were required to sign a "card acceptance agreement" that contained a mandatory arbitration clause and prohibited the merchants from bringing a class action lawsuit in court and from having any claim arbitrated on anything other than an individual basis. The merchants contended that the agreement violated the FAA.

The U.S. District Court for the Southern District of New York granted AmEx's motion to compel arbitration of the merchants' antitrust claims and the question of whether the class action waivers were enforceable, and the District Court dismissed their cases.

On Jan. 30, 2009, the Second Circuit reversed, finding that the merchants had adequately demonstrated that the class action waiver provision was not enforceable because enforcement of the waiver would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs and "would grant AMEX de facto immunity from antitrust liability." According to the appeals panel, the merchants demonstrated that "the size of the recovery received by any individual plaintiff will be too small to justify the expenditure of bringing an individual action."

The panel found that Section 2 of the FAA provides that an agreement to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The panel held that because a valid ground exists for the revocation of the class action waiver, it cannot be enforced under the FAA.

Stolt-Nielsen And Concepcion

On May 3, 2010, the Supreme Court granted AmEx's petition for a writ of certiorari, vacated the Second Circuit's decision and remanded in light of Stolt-Nielsen S.A., et al. v. AnimalFeeds Int'l Corp. (130 S.Ct. 1758 [2010] [enhanced version]), in which the Supreme Court, in a 5-3 decision on April 27, 2010, held that an arbitration panel exceeded its authority under the FAA by construing an arbitration clause to permit class arbitration of antitrust claims when the clause was silent on that issue.

The Supreme Court subsequently issued its decision in Concepcion.

On Feb. 1, the Second Circuit panel said that its original analysis was unaffected by Concepcion. The Second Circuit remanded to the District Court with the instruction to deny AmEx's motion to compel arbitration, commenting that "each waiver must be considered on its own merits, based on its own record, and governed with a healthy regard for the fact that the FAA 'is a congressional declaration of a liberal federal policy favoring arbitration agreements.'"

AmEx is also represented by Derek T. Ho of Kellogg Huber; Louise M. Parent, Mark G. Califano and Bernadette Miragliotta of American Express Travel Related Services Inc. in New York and Julia B. Strickland of Stroock & Stroock & Lavan in Los Angeles.

The merchants are also represented by Michael H. McGinley of Bancroft and Deepak Gupta, Brian Wolfman, Gregory A. Beck and Jonathan E. Taylor of Gupta Beck. All are in Washington.

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