Court Watch

The Court's ruling was split 5-3, with the five conservative justices ruling in favor of American Express, and the liberal wing of the court filing a dissent (with Justice Sotomayor not participating in the case). In a majority opinion authored by Justice Scalia, the Court concluded that American Express was entitled to enforce its merchant agreement, which mandated the dispute to be settled by individual arbitration.

To reach this conclusion, the Court noted that the Federal Arbitration Act (FAA) requires courts to vigorously enforce arbitration agreements in accordance with their terms, unless overridden by another congressional act. The Court rejected Italian Colors's claims that individual arbitration would be contrary to the policies of antitrust laws, since the antitrust statutes did not address class actions. The court noted that while Congress had taken some steps to make it easier to pursue antitrust claims, such as allowing for treble damages, Congress had not taken any steps to prohibit the waiver of class actions.

Italian Colors's argument largely relied on the “effective vindication” rule, which courts had developed as an exception to the FAA. Under the effective vindication rule, arbitration agreements that prevent the effective vindication of a federal statutory right can be bound to be not enforceable. Italian Colors had argued that the class action waiver, combined with the other restrictions included in the arbitration agreement, effectively prohibited the merchants from mounting an antitrust claim as individuals.

The Court stated that the effective vindication rule would prohibit agreements that forbid the assertion of certain claims or required filing fees that were so high as to make the forum impracticable. However, the court distinguished, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Because Italian Colors could still pursue a remedy through individual arbitration, the Court reasoned that the waiver of the class action did not prevent them from pursuing the effective vindication of their rights.

The Court contended that its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ (2011) “all but resolves this case.” In AT&T Mobility , the Court invalidated a state law that required a class action procedure to be offered in order for the arbitration provision to be enforced. In that case, the Court rejected the assertion that class arbitration was necessary to prosecute claims that otherwise would not be prosecuted, noting that class arbitration would undermine the fundamental attributes of arbitration ' its speed and efficiency. The Court expressed concern that the Second Circuit's ruling in American Express would have the same effect, requiring the parties essentially to first prove their case in federal court in order to determine whether or not the parties would be required to arbitrate. As a result, the majority concluded that the “FAA does not sanction such a judicially created superstructure.”

Dissent

Writing on behalf of the dissenters, Justice Kagan summarized the case by saying “the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victim of all legal recourse.” Kagan followed that “the nutshell version of today's opinion admirably flaunted rather than camouflaged: Too darn bad.” In a strongly worded opinion, the dissenters argued that the opinion was a betrayal of the Court's precedents, which had established as a central tenet: “An arbitration clause may not thwart federal law, irrespective of exactly how it does so.”

To support their argument, the dissenters laid out an uncontroversial position ' that a clause preventing a party from asserting any antitrust claims would not be enforced, because it would prevent the enforcement of antitrust laws. The dissenters asserted that it would not make sense to allow a monopolist to employ other provisions in the arbitration agreement, which would have the same effect. For example, if not restrained, an agreement could set high filing fees, a one-day statute of limitations, remove the arbitrator's ability to give meaningful relief, block the plaintiff from presenting economic testimony that would be required to prove a claim, or appoint a biased arbitrator. Kagan reasoned that the rule against waiving federal rights would only work if it blocked both clauses explicitly barring a claim as well as those that effectively do so; she noted that this is the reason that the effective vindication rule was developed.

In the course of highlighting cases that employed the effective vindication rule, the dissenters emphasized that the Court had empirically placed limits on the rule to ensure that it did not reduce the benefits of arbitration. Namely, the Court placed the burden on the plaintiff to show that the agreement operates as a prospective waiver that forecloses, rather than only diminishes, its right to seek relief. Thus, in a case where a plaintiff argued that the filing fees were too high, the Court required the plaintiff to show that the fees were prohibitively expensive, rather than only excessive. In this case, the dissenters contended that by showing that the expense required to prove its case would be 10 times the best-case recovery, Italian Colors had shown it was cost-prohibitive for any rational actor to assert a claim.

The dissenters criticized the majority for being so determined to eliminate class actions that it failed to consider Italian Colors's argument that the arbitration agreement as a whole barred them from pursuing a claim. Kagan noted that the agreement also cut out other avenues that Italian Colors could have pursued to vindicate its claim, effectively prohibiting Italian Colors from sharing, shifting or shrinking necessary costs. Specifically, the agreement prevented Italian Colors from joining or consolidating claims, informally arranging with other merchants to produce a joint expense report or recovering its costs if it prevailed. The dissenters implied that had these avenues been available, the class action waiver may have been acceptable. However, without any of these options, Italian Colors had no realistic way to pursue a claim.

Along the same line of argument, the dissenters attacked the majority's reliance on the AT&T Mobility decision, pointing out that Italian Colors was not claiming that a class action was necessary, but that it was asserting that it needed to have some means of pursuing a meritous claim. Notably, the AT&T Mobility case did not consider, nor cite any cases related to, the effective vindication rule, since it was about the enforceability of a state law.

Kagan concluded her dissent with a warning that, due to the majority decision, arbitration threatens to become a “mechanism easily made to block the vindication of meritous federal claims and insulate wrongdoers from liability.” As a result, she argued that the majority had actually undermined the goal of the FAA of providing a streamlined procedure to resolve disputes.

Impact

For franchisors and franchisees, the American Express decision could have a significant impact on how franchise agreements are drafted and how disputes are resolved. For starters, the decision continues a trend of cases in which the Supreme Court has supported efforts to curtail class actions. Unless the composition of the Court changes or Congress acts (either broadly or in specific statutes), class action waivers will be enforced.

Perhaps more importantly, both the majority and dissent identified ways that arbitration clauses could be drafted to favor the drafter, making it difficult or impossible for franchisees to assert claims against a franchisor. By upholding the waiver of class action suits and weakening the effective vindication rule, the Court may make arbitration provisions more attractive to franchisors that are seeking to establish procedural rules that favor them. While prospective franchisees could arguably simply choose to invest in other concepts with better contract terms, renewing franchisees required to sign then-current forms of franchise agreements could face the unenviable choice of agreeing to unfavorable arbitration provisions or shutting down their businesses. Thus, while the American Express decision may lead to an increase in the number of arbitration provisions included in agreements, it may actually result in fewer cases being arbitrated.

Alexander Tuneski is a counsel at Kilpatrick Townsend and Stockton LLP and can be reached at 202-508-5814 and atuneski@kilpatrick townsend.com.

Supreme Court Ruling'Makes It More Difficult'To Arbitrate Claims

In American Express Co. v. Italian Colors Restaurant, 570 U.S. ___ (2013), the Supreme Court of the United States considered a case that, while not involving franchisors or franchisees as parties, could have a significant impact on the franchise community. In the case, a group of merchants brought a class action suit against American Express asserting that the company had violated antitrust laws by using its monopoly power to force merchants to accept credit cards at rates that were 30% higher than the rates charged by other credit card companies. Italian Colors (the class of merchants) asserted that this constituted an illegal restraint of trade in violation of the Sherman Act, and they sought treble damages. American Express, in turn, sought to enforce the terms of its merchant agreement, which required the merchants to waive the right to bring class actions and to settle all disputes through individual arbitration. Italian Colors argued that the class action waiver was not enforceable because they would incur prohibitive costs if forced to arbitrate individually, rather than as a class. To support their position, they provided evidence that it would cost between several hundred thousand dollars to over a million dollars to obtain the expert analysis necessary to prove their antitrust case, though the maximum recovery that each plaintiff could obtain would be only $38,549.

The case bounced back and forth between courts for several years, with the district court ruling in favor of American Express and dismissing Italian Colors's claims, and the Second Circuit then overruling the decision, holding that the class waiver was unenforceable. After the Supreme Court vacated and remanded that decision, the Second Circuit reaffirmed its decision two more times, leading to the case again being considered by the Supreme Court.

The Court's ruling was split 5-3, with the five conservative justices ruling in favor of American Express, and the liberal wing of the court filing a dissent (with Justice Sotomayor not participating in the case). In a majority opinion authored by Justice Scalia, the Court concluded that American Express was entitled to enforce its merchant agreement, which mandated the dispute to be settled by individual arbitration.

To reach this conclusion, the Court noted that the Federal Arbitration Act (FAA) requires courts to vigorously enforce arbitration agreements in accordance with their terms, unless overridden by another congressional act. The Court rejected Italian Colors's claims that individual arbitration would be contrary to the policies of antitrust laws, since the antitrust statutes did not address class actions. The court noted that while Congress had taken some steps to make it easier to pursue antitrust claims, such as allowing for treble damages, Congress had not taken any steps to prohibit the waiver of class actions.

Italian Colors's argument largely relied on the “effective vindication” rule, which courts had developed as an exception to the FAA. Under the effective vindication rule, arbitration agreements that prevent the effective vindication of a federal statutory right can be bound to be not enforceable. Italian Colors had argued that the class action waiver, combined with the other restrictions included in the arbitration agreement, effectively prohibited the merchants from mounting an antitrust claim as individuals.

The Court stated that the effective vindication rule would prohibit agreements that forbid the assertion of certain claims or required filing fees that were so high as to make the forum impracticable. However, the court distinguished, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Because Italian Colors could still pursue a remedy through individual arbitration, the Court reasoned that the waiver of the class action did not prevent them from pursuing the effective vindication of their rights.

The Court contended that its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ (2011) “all but resolves this case.” In AT&T Mobility , the Court invalidated a state law that required a class action procedure to be offered in order for the arbitration provision to be enforced. In that case, the Court rejected the assertion that class arbitration was necessary to prosecute claims that otherwise would not be prosecuted, noting that class arbitration would undermine the fundamental attributes of arbitration ' its speed and efficiency. The Court expressed concern that the Second Circuit's ruling in American Express would have the same effect, requiring the parties essentially to first prove their case in federal court in order to determine whether or not the parties would be required to arbitrate. As a result, the majority concluded that the “FAA does not sanction such a judicially created superstructure.”

Dissent

Writing on behalf of the dissenters, Justice Kagan summarized the case by saying “the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victim of all legal recourse.” Kagan followed that “the nutshell version of today's opinion admirably flaunted rather than camouflaged: Too darn bad.” In a strongly worded opinion, the dissenters argued that the opinion was a betrayal of the Court's precedents, which had established as a central tenet: “An arbitration clause may not thwart federal law, irrespective of exactly how it does so.”

To support their argument, the dissenters laid out an uncontroversial position ' that a clause preventing a party from asserting any antitrust claims would not be enforced, because it would prevent the enforcement of antitrust laws. The dissenters asserted that it would not make sense to allow a monopolist to employ other provisions in the arbitration agreement, which would have the same effect. For example, if not restrained, an agreement could set high filing fees, a one-day statute of limitations, remove the arbitrator's ability to give meaningful relief, block the plaintiff from presenting economic testimony that would be required to prove a claim, or appoint a biased arbitrator. Kagan reasoned that the rule against waiving federal rights would only work if it blocked both clauses explicitly barring a claim as well as those that effectively do so; she noted that this is the reason that the effective vindication rule was developed.

In the course of highlighting cases that employed the effective vindication rule, the dissenters emphasized that the Court had empirically placed limits on the rule to ensure that it did not reduce the benefits of arbitration. Namely, the Court placed the burden on the plaintiff to show that the agreement operates as a prospective waiver that forecloses, rather than only diminishes, its right to seek relief. Thus, in a case where a plaintiff argued that the filing fees were too high, the Court required the plaintiff to show that the fees were prohibitively expensive, rather than only excessive. In this case, the dissenters contended that by showing that the expense required to prove its case would be 10 times the best-case recovery, Italian Colors had shown it was cost-prohibitive for any rational actor to assert a claim.

The dissenters criticized the majority for being so determined to eliminate class actions that it failed to consider Italian Colors's argument that the arbitration agreement as a whole barred them from pursuing a claim. Kagan noted that the agreement also cut out other avenues that Italian Colors could have pursued to vindicate its claim, effectively prohibiting Italian Colors from sharing, shifting or shrinking necessary costs. Specifically, the agreement prevented Italian Colors from joining or consolidating claims, informally arranging with other merchants to produce a joint expense report or recovering its costs if it prevailed. The dissenters implied that had these avenues been available, the class action waiver may have been acceptable. However, without any of these options, Italian Colors had no realistic way to pursue a claim.

Along the same line of argument, the dissenters attacked the majority's reliance on the AT&T Mobility decision, pointing out that Italian Colors was not claiming that a class action was necessary, but that it was asserting that it needed to have some means of pursuing a meritous claim. Notably, the AT&T Mobility case did not consider, nor cite any cases related to, the effective vindication rule, since it was about the enforceability of a state law.

Kagan concluded her dissent with a warning that, due to the majority decision, arbitration threatens to become a “mechanism easily made to block the vindication of meritous federal claims and insulate wrongdoers from liability.” As a result, she argued that the majority had actually undermined the goal of the FAA of providing a streamlined procedure to resolve disputes.

Impact

For franchisors and franchisees, the American Express decision could have a significant impact on how franchise agreements are drafted and how disputes are resolved. For starters, the decision continues a trend of cases in which the Supreme Court has supported efforts to curtail class actions. Unless the composition of the Court changes or Congress acts (either broadly or in specific statutes), class action waivers will be enforced.

Perhaps more importantly, both the majority and dissent identified ways that arbitration clauses could be drafted to favor the drafter, making it difficult or impossible for franchisees to assert claims against a franchisor. By upholding the waiver of class action suits and weakening the effective vindication rule, the Court may make arbitration provisions more attractive to franchisors that are seeking to establish procedural rules that favor them. While prospective franchisees could arguably simply choose to invest in other concepts with better contract terms, renewing franchisees required to sign then-current forms of franchise agreements could face the unenviable choice of agreeing to unfavorable arbitration provisions or shutting down their businesses. Thus, while the American Express decision may lead to an increase in the number of arbitration provisions included in agreements, it may actually result in fewer cases being arbitrated.

Alexander Tuneski is a counsel at Kilpatrick Townsend and Stockton LLP and can be reached at 202-508-5814 and atuneski@kilpatrick townsend.com.