Bilateral Arbitration v. Class Action: American Express Co. v. Italian Colors Restaurants

bilateral arbitration case studyBilateral arbitration is a popular conflict resolution solution. Troubles arise, however, when one party wants a trial and the opposition advocates for arbitration.

American Express Co. v. Italian Colors Restaurants is a good example of this common legal conflict. A noteworthy lawsuit, it raises two pertinent questions:

  1. Can judges toss arbitration agreements in favor of class action lawsuits? If so, under what circumstances?
  2. What constitutes “effective vindication” when dismantling arbitration resolution contracts?

The U.S. Supreme Court weighed in on the above questions, via  AmEx v. ICR. The verdict? Strict enforcement of class action waivers is the law of the land. In addition, the case clarified the high court’s definition of “effective vindication.”

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

An antitrust dispute, American Express Co. v. Italian Colors Restaurants (AmEx v. ICR), ICR accused AmEx of wielding a “monopoly power” that forced the restaurant chain “to accept the company’s charge cards and merchant fees at approximately 30% higher than…competing cards, in violation of federal antitrust laws.”

In fact, a group of merchants wanted to file a class action against the credit card behemoth. The problem: AmEx’s contract, which all potential class members signed, specifically stipulates bilateral arbitration, over class actions, to resolve legal disputes.

Regardless, the class filed. They argued that bilateral arbitration creates “prohibitive costs” and unfairly “immunizes” American Express from the Sherman Antitrust Act. Additionally, the class reasoned that bilateral arbitration should be jettisoned as a viable option, for this case, because it:

  • Takes a long time;
  • Costs more money;
  • Creates an unfair statute of limitation problem; and
  • 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.

Bilateral Arbitration v. Class Action: The Legal Arguments

The plaintiffs argued that Amex leveraged its “monopoly power” in the “premium and corporate” credit card markets, which forced merchants to accept “ordinary” American Express credit cards at very high rates. The would-be class argued that Amex’s system amounts to an unlawful “tying arraignment.”

Tying Arraignments?

A tying arraignment is when a seller makes the buyer purchase one product in order to purchase a second product.

A district court  first ruled in favor of Amex. But the Second Circuit Court of Appeals, moved by the plaintiff’s “effective vindication” arguments, reversed the decision, ultimately reasoning that the case posed a question for the courts, not arbitrators.

American Express made several arguments in its defense, including:

  1. Arbitration costs less than class actions. ICR et al countered that the cost of individual arbitration for each of these cases is “financially irrational.”
  2. To poke holes in the “effective vindication” argument, Amex reasoned that the FAA does not intend to give de facto immunity to one party via arbitration.
  3. Invalidating an agreement because it lacks a class arbitration clause is contradictory to the goals of the FAA.
  4.  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.”

Ultimately, the Supreme Court sided with American Express in a 5-3 decision. What does that ultimately mean? Bottom line: It’s exceptionally tough to dismantle a class action waiver in a contract.