The Supreme Court yesterday ruled 5-3 that contracts that require customers to go through arbitration and waive their class-action rights are permitted under the Federal Arbitration Act, and that courts may not invalidate arbitration agreements even if the cost of arbitration exceeds what a plaintiff may eventually recover.
Writing for the majority in American Express vs. Italian Colors Restaurant, Justice Antonin Scalia rejected the appellate court’s decision to allow waivers to be challenged on the basis of cost. He said that would impose a “preliminary litigating hurdle” that “would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure.”
In this case, a restaurant that accepted American Express cards had objected to AmEx’s merchant fee. The restaurant had sued American Express for antitrust violations but was not allowed to seek class action status under its arbitration agreement, which the restaurant said would make it too expensive to pursue the case on its own.
However, the Supreme Court's ruling does not indicate a final victory for financial institutions. The industry must now focus on the Consumer Financial Protection Bureau (CFPB). As part of the Dodd-Frank Act, the CFPB is required to study the impact and use of mandatory arbitration agreements in consumer financial service contracts.
The CFPB has proposed conducting a nationwide telephone survey of 1,000 credit card consumers in order to learn more about consumers' knowledge and perceptions of arbitration agreements. Industry insiders are concerned that the findings of that survey could lead the CFPB to prohibit mandatory arbitration agreements.
Learn more from the CFPB.
Read the opinion.
Read ABA’s amicus brief in the case.