The Beginning of the End for Class Action Litigation? Why Justice Scalia and the Current Supreme Court Are Good for Business

In American Express Co. v. Italian Colors Restaurant, the Supreme Court confirmed what it had only hinted at two years earlier in AT&T Mobility, LLC v. Concepcion. In a holding authored by Justice Scalia, the Court made plain that because "arbitration is a matter of contract," its terms must be "rigorously enforced by courts." Therefore, arbitration agreements containing class action waivers are valid under the Federal Arbitration Act ("FAA"). The Court's expanded view of the FAA, joined with a clear disfavor of class actions means that businesses can now better manage their legal risk, and the high costs associated with it, through well-drafted arbitration agreements that prohibit any form of class action.

The Four Corners of the Dispute

The Italian Colors plaintiffs objected to the rate American Express charged merchants for accepting its cards, allegedly 30% higher than other card companies. Plaintiffs filed suit, arguing that the excessive fees violated the Sherman Act. Under the merchant agreement signed by the plaintiffs, all claims had to be arbitrated and collective arbitration was prohibited.

Plaintiffs sought to void the arbitration agreement and the collective action waiver on the basis that the agreement as written would subject individual claimants to prohibitive costs associated with expert testimony. In fact, plaintiffs demonstrated that the most any individual plaintiff would receive was between $12,850 and $38,549 – with treble damages. Expert testimony on the other hand, would cost between several hundreds of thousands of dollars to almost $1 million. As a result of this imbalance, plaintiffs argued that enforcement of the collective action waiver would deprive them of federal rights under the Sherman Act.

The Ruling: No and Never

To resolve this case, the Italian Colors court asked two questions:

• Does the FAA permit courts to invalidate arbitration agreements on the grounds that they do not permit class arbitration of a federal law claim?
• Can courts refuse to enforce arbitration waivers when individual prosecution of claims is just too expensive?

In response, the Court said no and never. Regarding the efforts to invalidate the arbitration agreement, the Court observed that nothing in the Sherman Act exempted itself from class actions and correspondingly, class arbitration waivers. And regarding the costs associated with prosecuting a Sherman Act claim, the Court held that "[t]he antitrust laws do not guarantee an affordable procedural path to the vindication of every claim." A vigorous dissent, authored by Justice Kagan, summarized the majority holding like this: "To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action ready to be dismantled."

Summary and Takeaways

Italian Colors places businesses in a strong position to manage their legal risk both through internal and external means. A well-drafted arbitration agreement prohibiting class arbitration means less discovery, less time and less risk.