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Faculty Commentary

Arbitration uber alles in the Supreme Court

By Carolyn Shapiro

This week’s opinion in American Express Co. v. Italian Colors Restaurant is a particularly bad decision for consumers, employees, and small businesses—basically anyone who does business with large and powerful entities. The issue in American Express, on first glance, might seem rather esoteric and technical. So before I delve into this particular case, I’m going to provide some background.

(1)   Back in the 1920s, Congress passed a statute called the Federal Arbitration Act (FAA), prompted by courts’ reluctance to enforce arbitration clauses in contracts. Arbitration clauses are contractual provisions that obligate the parties to take any contractual disputes to arbitration instead of to court.

(2)   The FAA provides, in relevant part:

A written provision in any maritime transaction or contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter aris­ing out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2.

In the 1920s, when the FAA was enacted, everyone believed that congressional power to regulate commerce was limited (basically) to regulation of the actual movement of goods between states. So, the number of contracts that the FAA was understood to address was relatively small. Beginning with the New Deal era, however, congressional power to regulate interstate commerce is understood to be extremely broad; basically anything that affects interstate commerce is within congressional jurisdiction.

Here is a concrete example: when the FAA was enacted, it would have regulated a contract between a manufacturer in, say, Nebraska, to ship goods to a store in, say, Illinois. But it would not have reached any of the Illinois store’s sales within Illinois. Today, on the other hand, the Illinois store’s local sales would be understood to affect interstate commerce and so if the store incorporated an arbitration clause into its sales agreements, it would almost certainly be enforced.

(3)   The Supreme Court, while reading the FAA to extend to the limits of congressional power, has not read the FAA’s own exceptions to have such reach. In a 2001 case called Circuit City v. Adams, the Court considered employment contracts. The FAA itself exempts “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1.

One possible reading of this language—and the reading embraced by four justices—is that Congress intended to exclude all employment contracts over which it has jurisdiction to regulate. (There is strong evidence in the legislative history to support that view.) That reading would mean that the scope of the FAA labor exemption would grow with the scope of the statute. But in Circuit City, a five-justice majority held otherwise.  The FAA exemption for employment contracts applies essentially to transportation workers only.  Today, employees all over the United States find themselves unable to vindicate their rights in court when, for example, they have signed an arbitration agreement as part of an employment contract or in a pile of papers on the first day of work.

(4)   Large entities have seized on arbitration clauses and a very arbitration-friendly Supreme Court as a way to dramatically limit the expenses and exposure of litigation. All of us are, all the time, parties to arbitration clauses without even realizing it. When you agree to the terms and conditions of a website or web-based service, for example, you are almost certainly agreeing to arbitrate any disputes. This is not always a bad thing: one of the supposed advantages of arbitration is that it is cheaper and faster than traditional litigation. However, there is some reason to believe that arbitrators might, even unconsciously, favor repeat players, like employers and corporations, over one-time claimants, like employees and consumers. (This concern is not nearly so salient in labor arbitration, by the way, where both unions and employers are repeat players.)

(5)   Even more important, large entities have found ways to use arbitration clauses to prevent claimants from pooling their resources. A few years ago in a case called AT&T Mobility LLC v. Concepcion, the Supreme Court, in a 5-4 decision, held that if an arbitration clause—in that case in a consumer contract—prohibited class-based arbitration, then not only must all arbitrations themselves be brought on an individual basis, but potential plaintiffs could not bring class actions in state court to vindicate their claims. AT&T Mobility also read the FAA’s “savings clause” narrowly. The savings clause says that state law doctrines (such as unconscionability) can invalidate an arbitration clause, but in AT&T Mobility, the Court rejected California law that would do just that in the context of class action waivers.

This week’s decision is an extension of this history, but it is also an abdication of much law limiting contracting parties’ ability to use arbitration clauses to preclude claimants from vindicating their rights at all. Even in AT&T Mobility, the Court described in detail the ways in which the particular arbitration system at issue was both accessible and inexpensive, making it realistic for individual consumers to vindicate their claims. American Express makes clear that any such concerns were, at best, window dressing.

In American Express, the plaintiff, a small restaurant, alleged that American Express was misusing its monopoly power in what is called a tying arrangement. (Basically, the allegation is that American Express required its contracting partners to buy things or services that they did not want and that because it has monopoly power, it was able to impose these contract conditions by fiat.) American Express also included an arbitration clause in its contracts—and remember, if the allegations are correct, the plaintiff had no ability to negotiate a change in the terms.

The arbitration clause prohibited class-based arbitration and litigation, and it also imposed other conditions, such as confidentiality requirements, that making it impossible for would-be claimants to pool their resources even informally. This restriction is particularly devastating in the context of the antitrust claim at issue in the case. To prove an antitrust claim, plaintiffs must produce substantial expert testimony and analysis. In this particular case, if successful, the plaintiff stood to recover about $38,000. But the cost of hiring the expert would be hundreds of thousands of dollars. In other words, the only economically rational way for the plaintiff to vindicate its antitrust claim would be to work with other plaintiffs. The arbitration clause prohibited this. And the 5-justice majority’s reaction, as summarized by Justice Kagan in yet another biting dissent: “Too darn bad.” (The decision in American Express was 5-3. Justice Sotomayor was recused.)

To summarize: American Express gives monopolists a road map to insulate themselves from liability under the antitrust laws. And it makes clear to all kinds of powerful interests that they can construct arbitration agreements so restrictive that no one in their right mind would take advantage of them, even if, as in American Express, this effectively nullifies a whole host of other important federal rights. When people talk about the Roberts Court as one of the most pro-business Supreme Courts in history, this is the type of decision they are talking about. Seemingly technical, difficult to explain, but with tremendously far-reaching implications.

Congress can amend the FAA; it can make clear that its reach is limited to certain types of contracts or that arbitration agreements can be enforced only under certain conditions or that class-based arbitration or litigation must be allowed to proceed. But until then, all other federal rights are subservient.

Arbitration uber alles.

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