Retailers Win—And Lose—In Supreme Court Arbitration Ruling

Attorney Mark D. Rasch is the former head of the U.S. Justice Department's computer crime unit and today is a lawyer in Bethesda, Md., specializing in privacy and security law.

When the U.S. Supreme Court Thursday (June 20) ruled in favor of American Express and against a retailer in a dispute about interchange rates, it put retailers in an awkward bind. The ruling was really about whether the retailer could be forced to submit to arbitration. That awkwardness is because retailers hate arbitration when they are the ones being forced to do it (by perhaps a card brand or a QSA or a manufacturer) but they are positively giddy and in love with it when they're forcing it on their shoppers.

As far as Amex is concerned, here's the deal. If you want to accept American Express corporate cards, then, according to the terms of the agreement with Amex, you have to also accept all other Amex cards as well. And you have to agree to all of Amex’s terms. It’s all or nothing—or as antitrust lawyers might argue, an unlawful tying arrangement in violation of the Clayton Antitrust Act. Antitrust lawyers talk like that.

What the Supreme Court ruled was that, even if Amex was engaged in a violation of the antitrust laws, and even if the all-or-nothing agreement was an unlawful tying arrangement, there was, as a practical matter, nothing the retailer could do about it. You see, part of the merchant’s agreement with Amex provided that the merchant could not sue Amex, and could not join with others either to sue or to arbitrate.

As a practical matter, Amex could (and did) thumb its nose at the antitrust laws—with the blessing of the Supreme Court. What this means is that we will see more lawyers using more arbitration agreements not as a means of resolving disputes in a fair and reasonable manner, but as a way of ensuring that, no matter what their client does, they can’t be held responsible. Whether that is good or bad depends on whose side of the arbitration agreement you are on.

At issue in the case was a mandatory arbitration agreement in the Amex contract. Retailers and others use such mandatory arbitration agreements to reduce the costs of litigation, to prevent class-action lawsuits, and generally to discourage groups or individuals harmed by their conduct from having an effective legal remedy. For merchants, keeping themselves from being sued is a good thing.

But it’s not such a good thing when the organizations with which they do business try to use arbitration agreements to do the same thing.

As a general rule, if someone does something to you that you believe is wrongful, injurious, unlawful or just plain bad, you go to your lawyer and ask a simple question: "Can I sue?" Dumb question. The answer is always, "Yes, of course." "Will I win?" Now that’s another question. But in general, particularly in the U.S., people have a right to haul someone else in court and make them answer for what they (allegedly) did. The parties engage in discovery, depositions and an exchange of pleadings, and lawyers get richer. It’s a slow, laborious, time-consuming and expensive process that makes nobody (but lawyers) happy.

So we developed a host of alternative methods to avoid the courts. So called ADR—Alternative Dispute Resolution. This can include arbitration, mediation or fight-to-the-death cage matches. Maybe not the last one. The process is much less formal, there is virtually no discovery, and it is supposedly cheaper and faster. The parties agree on rules, on who will pay the arbitrator, what kinds of disputes are submitted to arbitration, etc. Typically, entities agree to the rules set out by the American Arbitration Association.

To facilitate ADR, Congress passed a law called the Federal Arbitration Act that recognized the validity of agreements to arbitrate as a matter of contract law. Merchants and others slowly went to work putting mandatory arbitration agreements into everything. They typically mandate that consumers can’t sue the merchant or vendor for anything, and that they can’t file either class-action lawsuits or class-action arbitrations. It’s every man for himself.

If a store sells a defective product that causes injury to 10,000 people, a lawyer cannot sue the store on behalf of the 10,000 affected people. In fact, he or she can’t sue the store at all. If the company engages in fraud or deception, even willfully, the consumer cannot sue. Rather, the lawyer has to be retained by every one of the 10,000 people affected and has to file individual arbitration requests on behalf of each client.

Frequently, the consumer has to pay the initial costs for requesting the arbitration (a few hundred dollars) out of pocket. And the lawyer may have to be admitted to practice in every jurisdiction in which the arbitration is sought. So if 10,000 people lose $50 each, the lawyer may have to file 10,000 requests to arbitrate. It’s unlikely to happen – and in fact that is exactly why merchants use arbitration agreements. Effectively, the consumer has no real remedy.

And the Supreme Court liked it that way.A couple of years ago, the Supreme Court stated that a person who was charged $30 for a "free" cellphone had to file an individual arbitration request to get their 30 bucks back, and could not file a class-action lawsuit or arbitration (even though California state law permitted it) because the Federal Arbitration Act superseded the state law and made the arbitration agreement binding.

So Justice Scalia argued in the Amex decision that allowing an antitrust lawsuit might further the goals of dissuading agreements in restraint of trade, but it would undermine Congress’ intent in the FAA to promote arbitration. Right?

Sure. But that’s not really what the FAA does—especially in cases like the Amex case. As applied, the FAA does not promote arbitration—it merely discourages any remedy. The choice is not between arbitration and litigation. It is between a single antitrust lawsuit by all merchants against Amex and, well, nothing.

As Justice Breyer noted in the lawsuit against AT&T: "What rational lawyer would have signed on to represent the (clients) in litigation for the possibility of fees stemming from a $30.22 claim? The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30."

In the Amex decision, the Supreme Court essentially doubled down on the AT&T decision.

The merchants pointed out that the "tying" arrangement affected all merchants that wanted to accept American Express Cards, that the harm of damage to any one of them may not have been significant, but the impact on the marketplace was significant. That even though Congress expressly created a right to class action for antitrust violations, and created a right to treble (triple) damages for antitrust violations, merchants could waive those rights and remedies by contract under the FAA. Congress giveth (antitrust law) and Congress taketh away (the Federal Arbitration Act).

Justice Kagan disagreed. She wrote: "The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability—even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse. And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad."

I would not have used the word "darn."

That’s the nature of unequal bargaining power. If you get unequal power by antitrust or violation of the law, you can use the unequal power to force those damaged by the violation to agree not to sue you for the antitrust violation. Got it? It’s a perfect plan.

Justice Kagan points out that not all terms in an arbitration agreement are binding. She says: "We would refuse to enforce an exculpatory clause insulating a company from antitrust liability—say, 'Merchants may bring no Sherman Act claims'—even if that clause were contained in an arbitration agreement. Congress created the Sherman Act’s private cause of action not solely to compensate individuals, but to promote 'the public interest in vigilant enforcement of the antitrust laws.' Accordingly, courts will not enforce a prospective waiver of the right to gain redress for an antitrust injury, whether in an arbitration agreement or any other contract."

What does it all mean? Effectively, it means that arbitration agreements—even those coerced by undue bargaining power—will likely be enforced. It means that they will likely be enforced even when that means that other provisions of federal law will be gutted. It means that merchants and others will be putting more arbitration agreements into place as a matter of routine to keep pesky customers from ever suing them. It means that your lawyers will be very busy either writing and defending these agreements when they benefit the company, or challenging or renegotiating them when they are not. But effectively don’t look to the courts for help, because you probably have waived that right.

If you disagree with me, I'll see you in court, buddy. If you agree with me, however, I would love to hear from you.