AmEx v. Italian Colors: What Will it Mean for Arbitration?

At the end of February, the Supreme Court will hear arguments in American Express v. Italian Colors Restaurant.

The decision, when it’s finally released, will probably be overlooked by most media outlets, but the outcome will affect businesses nationwide. If you deal with arbitration agreements, you should care about this case.

The Second Circuit Court of Appeals has mulled the American Express litigation for years. The appellate court has reviewed the case three times, so far. Justice Sonia Sotomayor will be recused when the Supreme Court hears the matter because she was on one of the Second Circuit panels that considered the case. She was elevated to the Supreme Court in 2009, which gives you an idea of how long this litigation has been going.

In Amex I, the issue was enforcement of a mandatory arbitration clause in a commercial contract also containing a "class action waiver." The appellate court found the waiver unenforceable, "because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs." SCOTUS vacated and remanded the case in 2010 based on its ruling in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp.

In Amex II, the Second Circuit placed a hold on the mandate while Amex petitioned for a writ of certiorari. During that time, the Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, holding that the Federal Arbitration Act (FAA) preempted a California law barring the enforcement of class action waivers in consumer contracts. Concepcion didn't change the appellate court's stance.

The Second Circuit went for the three-peat with Amex III. Finding that neither Stolt-Nielsen nor Concepcion altered their original analysis, the Second Circuit again conclude that (1) the question of the enforceability of the class action waiver provision was properly decided, and (2) the class action waiver provision was unenforceable under the FAA.

Still, the litigants weren't satisfied. Largely because the cost of arbitration is greater than the potential arbitration award.

As Italian Colors' lawyers Paul Clement and Michael McGinley explain in their brief, the terms of AmEx's arbitration clause don't allow cost sharing or shifting. The small businesses in the litigation presented undisputed evidence that those costs would exceed each individual business's expected recovery by several hundred thousand dollars, thus preventing the litigants from "effectively vindicating their federal antitrust rights."

If allowed to proceed as a class, the small businesses would be in a better position to bring their case.

The issue before the Supreme Court this month is whether the Federal Arbitration Act permits courts, invoking the "federal substantive law of arbitrability," to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.

If you work for a small business, the outcome could give you a fighting shot at challenging big-business vendors. If you work for a big business, this decision could cause your litigation costs to multiply. Either way, corporate counsel should pay attention to the proceedings.

Related Resources:

• In Re: American Express Merchants' Litigation (FindLaw's CaseLaw)
• What Does the Recess Appointment Ruling Mean for Your Company? (FindLaw's In House)
• It's Called 'Binding Arbitration' for a Reason (FindLaw's Tenth Circuit Blog)