Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Justice Department offers testimony on Supreme Court precedents on mandatory arbitration requirements, (Dec 18, 2013)

By Linda O’Brien, J.D., LL.M.

The Senate Judiciary Committee held a hearing on December 17 regarding the impact of recent U.S. Supreme Court decisions involving the Federal Arbitration Act on the rights of consumers, workers, and small businesses.

Leslie Overton, Deputy Assistant Attorney General for Civil Enforcement at the Department of Justice Antitrust Division, delivered testimony on the Justice Department’s position in its amicus curiae brief filed in the Supreme Court in American Express Company v. Italian Colors Restaurant, et al., No. 12-133 (January 2013). The testimony suggested that the enforcement of certain arbitration agreements could effectively deny litigants their day in court.

Overton began the Justice Department’s prepared remarks at the hearing on “Mandatory Arbitration Requirements,” by stating that the Justice Department filed its brief due to concerns that the effect of the mandatory arbitration agreement in the case would prevent the merchants from being able to effectively vindicate their rights under the antitrust laws.

The testimony described the suit as a consolidated set of class actions by merchants who accept American Express cards. The merchants alleged that American Express used its market power in corporate and personal charge cards to compel merchants to accept American Express credit and debit cards at increased merchant-fee rates.

The contractual relationship between American Express and the merchants was governed by a card acceptance agreement. The agreement required all disputes between the parties to be resolved by arbitration. The agreement also prohibited any claims to be arbitrated on a class action basis or claims consolidated with claims brought by other merchants. The agreement did not permit the prevailing party to shift costs to the other party and contained a confidentiality provision that prohibited the disclosure of information obtained in an arbitration proceeding.

The class action complaints were consolidated in federal district court, and American Express moved to compel arbitration under the agreement’s mandatory arbitration clause, Overton stated. The district court held the parties’ dispute was within the scope of the agreement’s arbitration clause, granted American Express’ motion to compel arbitration, and dismissed the suits.

The appellate court reversed and remanded the case, noting that a party seeking to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive bore the burden of showing the likelihood of incurring such costs. The merchants had presented expert evidence demonstrating that they would bear expert fees and expenses of possibly more than $1 million. The estimated damages for the merchant with the largest volume of American Express transactions amounted to only $38,549 when trebled under the antitrust laws. The court of appeals concluded that the class action waiver in the card acceptance agreement could not be enforced because to do so would grant American Express de facto immunity from antitrust liability by removing the merchants’ only reasonably feasible means of recovery. The Supreme Court granted certiorari.

In its brief, the Justice Department observed that, under recent Supreme Court precedents, agreements to arbitrate federal statutory claims are enforceable if the prospect litigant effectively may vindicate its statutory cause of action in an arbitration forum. While the Federal Arbitration Act establishes a general federal policy favoring the creation and enforcement of agreements to arbitrate, the “effective-vindication” rule reconciles this policy with other federal statutes that confer substantive rights and authorize private suits by aggrieved persons. The rule allows contracting parties to agree that disputes will be resolved by an alternative adjudicator, while denying enforcement of an arbitration agreement in circumstances where its function would be a prospective waiver of substantive rights.

The Justice Department’s position in the brief was that the arbitration agreement effectively precluded the merchants from asserting their antitrust claims since it was prohibitively expensive for them to do so. Because the costs of proving their claims would have greatly exceeded the potential recovery for any individual merchant, some mechanism for shifting costs would have been necessary to permit the merchants to effectively vindicate their claims in arbitration. However, the agreement prohibited all such methods, leaving the merchants with no practical means of establishing American Express’ alleged antitrust violations. Under the circumstances of the case, an order compelling arbitration would preclude the merchants from effectively vindicating their federal claims.

The Department of Justice argued that, similar to American Express, companies could use a combination of class action and joinder prohibitions, confidentiality requirements, and other procedural restrictions to increase the likelihood that a plaintiff’s cost of arbitration would exceed its projected recovery. Companies could then require the acceptance of such procedures as a condition of doing business, employment, or purchasing products. This result would deprive a range of federal statutes of their intended deterrent and compensatory effect, without promoting the actual use of arbitration as an alternative means of dispute resolution, according to the testimony.

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