Contributed by Glenn S. Grindlinger

Last week, in American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013), the United State Supreme Court held that an arbitration provision in a commercial agreement prohibiting the parties from arbitrating matters on a class-wide basis was enforceable under the Federal Arbitration Act (“FAA”) even if the cost of arbitrating individual claims was economically prohibitive. American Express is the latest in a series of Supreme Court decisions holding that the terms of an arbitration agreement must be strictly enforced. The Court’s opinion is likely to strengthen the hand of franchisors who seek to avoid class and collective actions by franchisees when they require the arbitration of disputes in the franchise agreement.

Background

Since 1999, American Express has had a mandatory provision in its contracts with merchants requiring disputes between the merchant and American Express to be submitted to arbitration. The key language of the arbitration provision at issue provided that “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” Believing that American Express was using its market power to increase rates that it charged merchants, a group of businesses filed a class action complaint in federal court in New York claiming that American Express was violating federal antitrust laws.

American Express moved to compel arbitration of the dispute pursuant to the merchant agreement it had with each of the plaintiff-merchants. The merchants opposed American Express’ motion, arguing that the arbitration agreement prohibited class-wide arbitration and that the cost to pursue claims on an individual basis, as compared to the limited amount of potential damages that are available to any individual merchant, was so high that it was not feasible to pursue the claims. Specifically, the plaintiffs submitted a declaration from an economist who estimated that, in order to prove the antitrust claims, plaintiffs would have to have an expert conduct an analysis, which would be at least several hundred thousand dollars; the maximum that each individual plaintiff could recover was under $40,000. The district court granted American Express’ motion and compelled arbitration. Plaintiffs appealed to the U.S. Court of Appeals for the Second Circuit.

The Court of Appeals reversed the district court. It held that the prohibition on class arbitration in the agreement was unenforceable because plaintiffs “would incur prohibitive costs if compelled to arbitrate under the class action waiver.” Indeed the Court of Appeals noted, if it were to enforce the class action waiver, it “would grant [American Express] de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery.” American Express then petitioned the Supreme Court to hear the case.

The Supreme Court agreed to hear and decide the issue of “whether the [FAA] permits courts . . . to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.”

The Supreme Court’s Decision

Writing for a 5-3 majority (Justice Sotomayor recused herself), Justice Scalia rejected the assertion that requiring the merchants to arbitrate their claims individually would “contravene the policies of the antitrust laws.” Justice Scalia noted that absent “congressional command” to the contrary, the FAA requires that courts enforce the terms of an arbitration agreement as they have been written.

Next, the Court considered the merchants’ claim that the class action waiver prevents them from vindicating their rights due to the prohibitive costs of litigating the claims individually. The Court rejected this argument as well, holding that the litigation costs do not prevent the merchants from pursuing their claims; rather the class action waiver merely inhibits the merchants’ ability to prove a statutory remedy. As Justice Scalia wrote, “[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue the remedy” (emphasis in original).

According to the Court, this difference was critical. If American Express’ arbitration agreement had prevented the merchants from asserting certain statutory rights, the agreement might not be enforceable. However, in the conclusion of the Court’s majority, the arbitration agreement did no such thing. It did not prohibit or prevent the merchants from bringing any claims that they had against American Express; rather, it only required the parties to bring those claims individually and in arbitration. Accordingly, the Court reversed the decision of the Court of Appeals.

Practical Implications

American Express continues the trend of very strong statements by the Roberts’ Court in favor of mandatory arbitration provisions and class action waivers in the business sector. It reinforces the fact that franchisors and franchisees alike need to consider the value and potential costs of arbitration clauses. As this blog has previously advocated, arbitration clauses need to be carefully drafted. For franchisors, the American Express decision reinforces the need to specifically include class action waivers and invoke the FAA in their arbitration clauses. For franchisees, the decision reminds us that federal courts are more and more likely to enforce all aspects of arbitration clauses. Potential franchisees in particular need to consider whether they are willing to accept the possible and probable result that any arbitration clause will be enforced as written.

For more information about this topic, including an Alert focusing on employment considerations flowing from the American Express decision, please contact Glenn Grindlinger at ggrindlinger@foxrothschild.com.