Bilateral Arbitration v. Class Action

court room scene to represent bilateral arbitration v. class action lawsuit conceptLawsuits don’t rectify every legal dispute. For example, bilateral arbitration is also a popular conflict resolution solution used by many companies. Trouble can arise, however, when one party wants to handle things in court while their opposition advocates for bilateral arbitration.

The lawsuit versus arbitration conflict was at the center of American Express Co. v. Italian Colors Restaurants. In brief, the Plaintiffs, Italian Colors Restaurants, et al, wanted a judge to nullify a provision in the American Express vendor contract which stipulates arbitration as the sole avenue of resolving a legal dispute.

A noteworthy lawsuit, American Express v. Italian Colors raises two pertinent legal questions:

  1. Can an arbitration agreement be tossed out by a judge in favor of a class action lawsuit? If so, under what circumstances?
  2. What constitutes “effective vindication” when it comes to dismantling an arbitration resolution contract?

The U.S. Supreme Court has weighed in on the above questions, and it looks like strict enforcement of class action waivers is the decided law of the land. In addition, it appears that the high court has a narrow definition of “effective vindication.”

American Express Co. v. Italian Colors Restaurants Class Action Lawsuit

American Express Co. v. Italian Colors Restaurants (AmEx v. ICR) was fundamentally an antitrust dispute. ICR, along with other merchants, believed that AmEx was using “its monopoly power to force them to accept the company’s charge cards at merchant fees at approximately 30% higher than…competing cards, in violation of federal antitrust laws.” As such, many merchants banned together and tried to file a class action against the credit card behemoth. Their only problem: the AmEx contract, which all the potential class members signed, specifically stipulates that any legal disputes are to be settled via bilateral arbitration instead of a class action lawsuit.

Their only problem: the AmEx contract, which all the potential class members signed, specifically stipulated that any legal disputes are to be settled via bilateral arbitration instead of a class action lawsuit.

Instead of giving up, however, the class attempted to file. Members asked the courts to kill the bilateral arbitration clause. In addition, they argued that bilateral arbitration creates “prohibitive costs” and unfairly “immunizes” American Express from the Sherman Antitrust Act. Additionally, the class argued that bilateral arbitration should be jettisoned as a viable option because, in this case, bilateral arbitration:

  • takes a long time
  • is costly
  • creates unfair statute of limitation problems for members of the proposed class
  • removes disincentive for corporate abuse

On the other hand, Amex argued that arbitration, as a method for settling disputes, is more cost effective for small businesses and “less subject to abuse by frivolous or vengeful lawsuits” than class action cases.

What is Effective Vindication?

The idea of “effective vindication” was central to this case. What is it? Effective vindication is a sometimes applied legal concept that allows courts to waive arbitration clauses under certain circumstances. Typically, bilateral arbitration provisions are sometimes waived when individual claims would be so small that nobody would bother going through the hassle. In other words, who is going to take the time and money to sue someone for $20? As such, the theory goes, the possibly guilty party unfairly benefits by dint of an unintended logistics loophole.

Bilateral Arbitration v. Class Action: The Legal Arguments

The plaintiffs in the case argued that AmEx leveraged its “monopoly power” in the “premium and corporate” credit card markets to compel merchants to accept “ordinary” American Express credit cards at very high rates. The would-be class argued that the AmEx system is a clear-cut example of an unlawful “tying arraignment.”

What is a Tying Arraignment?

A tying arraignment is when a seller makes the buyer purchase one product in order to purchase a second product. It’s an arraignment that makes one product conditional on the other.

A district court first heard Italian Colors v. AmEx, and the ruling was in favor of Amex. Then, the Second Circuit Court of Appeals, convinced of the plaintiff’s “effective vindication” arguments, reversed the decision, ultimately reasoning that the matter of law at hand was a question for the courts, not arbitrators.

American Express made several arguments in their defense throughout this conflict:

  1. Arbitration costs less than class action lawsuits and, therefore, helps the national economy. Italian Colors and crew countered by arguing that the cost of individually arbitrating each of these cases is “financially irrational.”
  2. In a sly argument of logic, the defense reasoned that precedence and current statutes demand that court enforce arbitration agreements “unless congress itself” excludes a given term. And since, the defense argued, class action suits did exist when Congress passed the Federal Arbitration Act, then clearly Congress did intend to allow for class actions as an exemption to honoring arbitration agreements.
  3. To poke holes in the plaintiffs insistence that courts shouldn’t honor arbitration clauses when doing so would deny the affected parties “effective vindication,” Amex argued that the FAA does not intend to give de facto immunity to one party via arbitration.
  4. Amex argued that invalidating an agreement because it lacks a class arbitration clause is contradictory to the goals of the FAA.
  5.  Amex argued that prohibitive costs can only be calculated by looking at ‘”filing fees, arbitrators fees and other administrative fees imposed by the arbital forum that would not be required to sue in court.” As such, the plaintiffs did have enough of a claim to take action.
  6.  Amex ultimately contended that the effective vindication rule should apply when “substantive federal law” is violated, and this case merely deals with the process by which parties agreed to resolve disputes.

In the end, the Supreme Court of the United States ruled in favor of American Express in a 5-3 decision. So what does that ultimately mean, you ask? Bottom line: It exceptionally tough to dismantle a class action waiver in a contract.

Do you need assistance drafting a contract or other legal document? If yes, contact Kelly Warner Law today.

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