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U.S. Supreme Court to Hear Closely Watched Arbitration Case

Feb. 25, 2013

U.S. Supreme Court to Hear Closely Watched Arbitration Case

WASHINGTON, D.C. – A pivotal case concerning the anti-consumer practice of forced arbitration will be argued before the U.S. Supreme Court on Feb. 27. In American Express v. Italian Colors Restaurant, the court will decide whether the financial services giant American Express (Amex) can force merchants who accept its charge cards to pursue any claims against it in one-on-one arbitration – even when the arbitration will prevent merchants from pursuing their rights under the law.

The case is a potential landmark because a ruling for Amex would allow it to use arbitration to evade the antitrust laws. It also would let other companies unilaterally repeal state and federal consumer protection and employment laws. No matter which way the court leans, the ruling in this case will have far-reaching implications for consumers, employees and small businesses nationwide.

Public Citizen has long opposed forced arbitration and first asked Congress to ban the practice from consumer contracts in 2000. In 2011, following the Supreme Court’s ruling in AT&T Mobility v. Concepcion, a forced arbitration case that Public Citizen argued on behalf of consumers, the organization again appealed to Congress to get mandatory arbitration clauses out of consumer contracts.

To run their businesses, merchants consume goods and services from a wide range of suppliers ¬– including charge card and credit card companies who agree to provide merchants with payments on behalf of their customers in return for the merchants’ agreement to accept their cards and to pay fees for each transaction. Merchants must also accept the forced arbitration agreements routinely included in business contracts, meaning that they have to forfeit the fundamental right to have their day in court as a condition of doing business with a supplier.

The case before the Supreme Court was brought by Italian Colors Restaurant in Oakland, Calif., and other small businesses that accept American Express (Amex) charge cards as payment. Charge cards, unlike credit cards, require customers to pay balances in full each month, and thus are generally the choice of corporations and higher-income consumers. Merchants benefit by accepting charge cards if they want to attract the relatively well-heeled customers who use them.

Amex, the leading issuer of charge cards, requires merchants who accept its charge cards to accept its credit cards as well. Those credit cards are much less popular with consumers than competing credit cards, such as Visa and MasterCard, and accepting them is less attractive to merchants because Amex’s transaction fees are higher than those of its competitors. But Amex’s power in the charge card market allows it to force merchants to accept its credit cards and pay the higher fees associated with them. In addition, Amex requires merchants to agree to arbitrate any claims they may have against it, and forbids them from participating in class actions.

A group of merchants sued American Express, asserting that the practice of “tying” one of its products (credit cards) to another (charge cards) violates federal antitrust laws. Such an antitrust claim is very expensive to prove because it requires market studies and expert economic testimony. In this case, a single market study necessary to pursue a case against Amex would cost more than $1 million, while an individual merchant’s maximum potential damages would be no more than a few thousand dollars. Because Amex’s arbitration agreement requires all claims to be pursued individually and provides no way to share costs among a number of claimants, pursuing the merchants’ antitrust case in arbitration would be impossible: It would cost many times as much as the maximum recovery a successful claimant could obtain.

The merchants therefore attempted to bring their claim as a class action in court. Amex objected that its arbitration agreement prohibits class actions, but the lower courts held that because this claim could not be pursued in individual arbitration, enforcing the arbitration agreement would effectively deprive the merchants of their rights under the antitrust laws. Now, in the U.S. Supreme Court, Amex will argue that its right to insist on arbitration overrides the rights of others to enforce the antitrust laws. In effect, Amex seeks to use arbitration as a means not of resolving claims, but of preventing them from being pursued.

Public Citizen filed an amicus brief in support of the merchants. Written by Scott Nelson, senior attorney with Public Citizen, the brief argues that, because the arbitration agreement American Express requires merchants to sign interferes with exercising their rights under federal law, it is unenforceable under the Federal Arbitration Act.

To read Public Citizen’s amicus brief in American Express v. Italian Colors Restaurant, visit https://www.citizen.org/sites/default/files/american-express-v-italian-colors-restaurant-amicus.pdf.

To schedule an interview with Scott Nelson to discuss this landmark case, please contact one of the people listed above.