Another Term, Another Arbitration Dispute

Why it seems like only yesterday that many lawyers were just trying to figure out how to pronounce Concepcion.

Alas, that was 2011, and the Supreme Court is moving on to another arbitration dispute: American Express v. Italian Colors Restaurant.

The AmEx arbitration litigation has been going on for years. As in, Justice Sonia Sotomayor sat on one of the Second Circuit panels that heard the case when she was but a federal appellate judge. Again, nostalgia ...

Sotomayor, elevated to the Supreme Court in 2009, has recused herself from the case. That leaves eight justices to decide the issue at hand: Whether the Federal Arbitration Act (FAA) permits courts, invoking the "federal substantive law of arbitrability," to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.

The storied history of the litigation has three stages. In Amex I, the issue before the Second Circuit Court of Appeals was enforcement of a mandatory arbitration clause in a commercial contract also containing a "class action waiver." The appellate court found the waiver unenforceable, "because enforcement of the clause would effectively preclude any action seeking to vindicate the statutory rights asserted by the plaintiffs."

The Supreme Court vacated and remanded the case in 2010 based on its ruling in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp.

The Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion while AmEx II was pending, holding that the Federal Arbitration Act (FAA) preempted a California law barring the enforcement of class action waivers in consumer contracts. Concepcion didn't change the appellate court's stance.

In Amex III, the appellate court found that neither Stolt-Nielsen nor Concepcion altered their original analysis: The class action waiver provision was unenforceable under the FAA.

For small businesses, that decision creates a big problem because the cost of arbitration can be greater than individual arbitration awards.

Bancroft bigshots Paul Clement and Michael McGinley explain in their brief for Italian Colors and company that the terms of AmEx's arbitration clause don't allow cost sharing or shifting. The small businesses in the litigation presented undisputed evidence that those costs would exceed each individual business's expected recovery by several hundred thousand dollars, thus preventing the litigants from "effectively vindicating their federal antitrust rights."

If allowed to proceed as a class, the small businesses would be in a better position to bring their case.

Will this be the year for another Federal Arbitration Act shakeup? We'll get first impressions of what is to come when the Court hears oral arguments on February 27.

Related Resources:

• In Re: American Express Merchants' Litigation (FindLaw's CaseLaw)
• Hell Hath No Fury Like an NLRB Loser Scorned (FindLaw's Supreme Court Blog)
• Planting the Seed for Patent Exhaustion: Will Monsanto Win Again? (FindLaw's Supreme Court Blog)