By: Brian J. Meli
If there’s one thing to take away from the Supreme Court’s opinion last month in American Express v. Italian Colors Restaurant, it’s the renewed importance for small businesses to read their service contracts–particularly the dispute resolution sections–very carefully.
Italian Colors restaurant was a participating Amex merchant that didn’t particularly care for the company’s ‘honor all cards’ policy, which mandates that when a merchant chooses to accept Amex cards from its customers, it must accept them all. Italian Colors and others wanted the option of accepting Amex’s premium and corporate cards, but not the personal cards that subject them to significantly higher fees than competing cards (roughly 30% higher, as the complaint states). And so they joined with others to bring a class-action lawsuit against American Express, alleging the company was using its monopoly power to keep fees artificially high, in violation of federal unfair competition laws.
The problem was that Italian Colors and its fellow class members, like all merchants who participate with Amex, signed service agreements containing both class-action waivers and mandatory arbitration clauses. So if they wanted to sue, according to their contracts, they had to do so individually, and through arbitration, not the courts.
The only question for the Supreme Court to decide was whether the dispute resolution sections of the contracts were legally enforceable. On their face they should have been, since it’s well settled that the Federal Arbitration Act (FAA) mandates arbitration to be a matter of contract that must be rigorously enforced by the courts; even for claims alleging a violation of a federal statute. Moreover, the primary exception to that rule–that the FAA can be overridden in cases where there is a contrary congressional command–was inapplicable here.
Undeterred though, Italian Colors and its fellow class members resolved to take a more creative approach, arguing that the agreement they’d entered into with Amex prevented the “effective vindication of a federal statutory right” because of the economic limitations that upholding the class action waiver would impose on the parties. In other words, without the class-action option open to them the members of the class claimed they would be foreclosed from bringing suits individually, because even if the maximum (trebled) statutory damages were awarded, the recovery would still be dwarfed by the estimated legal fees of going it alone. The argument relied heavily on policy, raising the specter of big businesses trampling the rights of the little guy by using adhesion contracts to skirt liability, but it was notably light on precedent.
The Court, not surprisingly, found that the waivers in the contracts did not deprive the plaintiffs of their statutory rights to pursue a remedy; only that they limited the type of remedy available, restricting them to one-on-one challenges. Guaranteed availability of a remedy, the Court reasoned, does not mean the same thing as guaranteed affordability of a remedy. And in doing so the Court sent a strong message: that businesses make choices when they enter into service agreements, and that the merchants in this case made a choice to accept Amex’s terms and settle their disputes in a manner consistent with those terms.
The basic argument made by the plaintiffs—that when adhesion contracts made between companies with unequal bargaining power contain burdensome dispute resolution provisions they should be subject to judicial review—was summarily rejected. And so for now, until a better-heeled plaintiff comes along who is able to take on Amex all by itself, the merit of the underlying unfair competition claim will remain the subject of speculation.
For now, if the small business community believes it’s unfair to allow a credit card company with a large share of the market to dictate terms to merchants with no leverage, then change can be pursued via alternative routes. Lobbying the Consumer Financial Protection Bureau, for instance, to limit the ability of credit issuers to force small businesses to enter into mandatory arbitration agreements would be one possibility. And merchants always have the option of voting with their wallets. Small businesses may have limited influence on their own, but in the aggregate they constitute a formidable constituency. And nothing motivates change in corporate policy like a good old-fashioned customer boycott.
In the meantime, if the unfair competition claim has merit, you can be sure the FTC and the DOJ will take up the cause. They have already had an eye on the proceedings, co-authoring an amicus brief in support of the plaintiffs. Should they determine that Amex’s practices constitute actionable anti-competive behavior, an enforcement action won’t be far off.
But regardless of how, when or if the unfair competition argument is made from this point forward, the basic lesson of this decision, whether you’re in the restaurant business or not, is always know what you’re agreeing to (or not agreeing to) before you put pen to paper.
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