U.S. Supreme Court Sides With American Express Against Retailers, Rules That It's OK To Bind Merchants To Arbitration

Despite the fact that arbitration can be more expensive and doesn't have the safeguards of the traditional court system, card brands can force retailers to accept arbitration, the U.S. Supreme Court ruled Thursday (June 20). The case involved a retailer wanting to sue American Express for its high interchange fees, but the card brand insisted that it be dealt with through arbitration.

The case has dual importance for retailers. In the specific case the Supreme Court ruled on, retailers lost, being ordered to submit to a card brand's arbitration procedures. But retailers are also on the other end of the case, as many have default arbitration agreements with shoppers. The same decision that weakens a chain's legal position against a card brand ironically strengthens its position with respect to its customers.

In short, binding arbitration is either good or bad depending on whether you're the one being bound or the one doing the binding. For retailers, they are often both.

The 5-to-3 ruling limits the ability of customers to pursue class-action cases. "The conservative majority held that companies could require individual arbitration even if a class action is the only way to make the claim economically viable," said The New York Times' summary of the decision. "The law, Justice Antonin Scalia wrote, does not 'guarantee an affordable procedural path to the vindication of every claim.'"

In an especially pointed dissent, Justice Elena Kagan, said the decision put consumers in an unfair position.

"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," Kagan wrote. "Here is the nutshell version of today's opinion, admirably flaunted rather than camouflaged: Too darn bad. That answer is a betrayal of our precedents, and of federal statutes like the antitrust laws."

The case, American Express Company v. Italian Colors Restaurant, began when the merchants sued American Express over Amex's substantial interchange fees. The merchants argued that American Express was violating antitrust laws. Their contracts required such claims to be submitted to individual arbitration, but the merchants argued that the potential winnings were too small to justify the cost of mounting individual antitrust cases. They sought judicial approval to pursue the claim as a class action.

Scalia's decision said that the mechanism that the Court of Appeals (which sided with the retailers against Amex) proposed would simply be too time-consuming.

"The regime established by the Court of Appeals' decision would require—before a plaintiff can be held to contractu­ally agreed bilateral arbitration—that a federal court determine (and the parties litigate) the legal requirements for success on the merits claim-by-claim and theory-by-­theory, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success," Scalia wrote. "Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in gen­eral and bilateral arbitration in particular was meant to secure. The (Federal Arbitration Act) does not sanction such a judicially created superstructure."

For more:
- See this New York Times story
- See this Supreme Court opinion

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