The U.S. Supreme Court today, in American Express v. Italian Colors Restaurant, issued another stinging blow to consumers, employees and small businesses injured by corporate wrongdoing. The decision increases the ability of companies to use arbitration to suppress claims based on illegal conduct that harms many people. Specifically, the Court held that companies can enforce arbitration clauses that ban class actions even when class actions are the only economically feasible way of pursuing claims because the costs of arbitrating individually exceed the possible recovery for any one person.
The decision will allow companies to get off scot-free in many cases where their actions have inflicted small – or even not-so-small – amounts of damages on large numbers of people. As Justice Elena Kagan stated in her dissent, the decision allows defendants in such cases to insulate themselves from liability even if they have in fact violated the law.
The case that gave rise to the ruling is a good example. The claim is that American Express violated antitrust laws by requiring small businesses that accept its charge cards also to accept its credit cards. The high swipe fees the merchants had to pay for the credit cards cost them and consumers money — lots of it. But each individual merchant lost only a few thousand dollars. Proving an antitrust claim, which requires sophisticated expert testimony and market studies, costs hundreds of thousands of dollars. So a class action was the only way to go. But American Express's arbitration clauses banned class actions and required each merchant to arbitrate individually. Now that the Supreme Court has ruled that those clauses are enforceable, there appears to be no way for the claims to go forward, and the merchants will have no chance to obtain compensation for the millions of dollars in damages that they say American Express inflicted on them as a group.
Justice Kagan's dissent carefully explains that the Federal Arbitration Act (FAA) was never intended to permit this result: The Act is supposed to be about resolving disputes by arbitration, not preventing them from being resolved. But her dissent is, unfortunately, just that — a dissent.
Today's result, in which a well-established five-Justice majority on the Court carries the project of placing arbitration ahead of people's rights one step further, underscores the need for Congress to pass the Arbitration Fairness Act (AFA), S. 878 and H.R. 1844. The AFA would reform the FAA to prevent companies from opting out of the civil justice system and forcing customers and employees into an alternative system that is rigged against them.