Utter Lunacy: Supreme Court strips individuals of their right to vindicate their claims in court, and Congress is in no hurry to un-do the damage

June 25, 2013

Building upon the absurd precedent created in AT&T Mobility v. Concepcion, this past Thursday, the Supreme Court issued an opinion which held that mandatory, binding arbitration clauses and class action waivers are enforceable, even if the cost of arbitrating an individual claim is so high that it effectively prevents individuals from pursuing valid claims—at all.

The American Express v. Italian Colorscase (or “AmEx III” to individuals following the case on its third trip to the Supreme Court) was a class action brought on behalf of small business owners who alleged that American Express abused its monopoly power by forcing merchants to accept a form contract, which also happened to violate federal antitrust law.  American Express moved to compel individual arbitration of the antitrust claims, pursuant to a clause in the contracts it had with the merchants. The arbitration clause provided that all disputes were subject to arbitration and had to be arbitrated on an individual basis.  Further, the parties could not share the costs of the arbitration with other claimants, and could not otherwise try to consolidate their legal claims.

The importance of the facts here cannot be understated: the plaintiffs alleged that American Express violated federal antitrust law.  Further, the plaintiffs argued that, like in all antitrust cases, they would have to hire an expert witness at great expense to make their case (an expense which would completely eat up any recovery the plaintiffs could hope to get, and then some).  The plaintiffs argued that a class action (or even some other mechanism to divvy-up costs with other potential claimants) would provide for a way to share these costs among many individuals, so that the potential for recovery—and vindication of their statutory rights—would not be impossible.

Justice Scalia, writing for the majority, reasoned that “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.”[1]  Thus, even though it would cost an individual plaintiff in the AmEx case “at least several hundred thousand dollars,” and potentially “exceed[ing] $1 million,” to prosecute a claim that would be worth, at most, $38,549,[2] because the plaintiffs weren’t prevented from pursuing those remedies, the arbitration clause was not invalid.

This reasoning seems to fly in the face of logic: if pursuing your statutory rights meant that you would have to pay $1 million to recover $38,549, neither you, nor any other sane person, would pursue them.  You would effectively be prevented from pursuing them.

I was reminded of the Seventh Circuit’s Carnegie v. Household International, Inc. case while reading the majority’s opinion.  While that case did not concern arbitration, Judge Posner’s reasoning is certainly applicable, here:

The more claimants there are, the more likely a class action is to yield substantial economies in litigation.  It would hardly be an improvement to have in lieu of this single class action 17 million suits each seeking damages of $ 15 to $ 30. . . .  [W]hile the amounts may be [] low they are indicative of the modest stakes of the individual class members.  The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $ 30.[3]

Just like here, the realistic alternative to a class action?  No arbitrations.  Justice Kagan hit the nail on the head in her dissent:

What American Express has essentially drafted, here, is an exculpatory clause which effectively prevents any individual from pursuing any claims—even in arbitration.[4]

What the FAA prefers to litigation is arbitration, not de facto immunity.  The effective-vindication rule furthers the statute’s goals by ensuring that arbitration remains a real, not faux, method of dispute resolution.  With the rule, companies have good reason to adopt arbitral procedures that facilitate efficient and accurate handling of complaints.  Without it, companies have every incentive to draft their agreements to extract backdoor waivers of statutory rights, making arbitration unavailable or pointless.  So, down one road: More arbitration, better enforcement of federal statutes.  And down the other: Less arbitration, poorer enforcement of federal statutes.  Which would you prefer?  Or still more aptly: Which do you think Congress would?[5]

Justice Kagan seems to imply that Congress would want better enforcement of federal statutes.  Logically, one would think that when a legislative body passes laws it would want them enforced.  It’s worth noting that on several occasions in recent history, Congress has flat-out rejected or punted on Arbitration Fairness Acts,[6] which would address most of the issues raised in Kagan’s dissent.  However, despite their previous ineffectiveness, Congress has an opportunity to address this issue, once again, with the Arbitration Fairness Act of 2013: H.R. 1844 and S. 878.

With a decision and precedent that clearly supports large businesses and corporations, and with the Supreme Court’s Citizens United v. Federal Election Commission decision and the U.S. Court of Appeals for the District of Columbia’s Speechnow.org v. Federal Election Commissiondecision allowing for large businesses and corporations to make unlimited campaign contributions to Super PACs that may very well influence the elections of the individuals voting on the Arbitration Fairness Act, it will be interesting to see if our elected officials share Justice Kagan’s perspective.

 

Sources:

[1] Slip. Op. at 7 (emphasis is original).

[2] Slip. Op. at 2.

[3] 376 F.3d 656, 660 (7th Cir. 2004) (emphasis added).

[4] AmEx III, Slip. Op. at 2-3.

[5] Dissenting Slip. Op. at 5-6.

[6] The Arbitration Fairness Act of 2007, S. 1782 and H.R. 3010, died in committee.  Other attempts were similarly unsuccessful.  See, e.g., H.R. 1020, 111th Cong. (2009); S. 931, 111th Cong. (2009); H.R. 1873, 112th Cong. (2011); S. 987, 112th Cong. (2011).

 


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