On February 27, 2013, the Supreme Court will hold oral arguments in American Express Co. v. Italian Colors Restaurant. Like the Court's 2011 decision in AT&T Mobility v. Concepcion, Italian Colors involves the intersection of two mechanisms for resolving legal disputes not easily handled by high-cost individually filed lawsuits: arbitration and class action litigation.
In class action litigation, similarly situated legal claims are aggregated under a single lawsuit. Given the cost of litigation, class action suits can be efficient mechanisms for resolving large numbers of relatively low-dollar claims, but they also can enrich lawyers at legitimate claimants' expense because such lawsuits' low value to individual plaintiffs reduces the incentive for any plaintiff to monitor the lawyers handling the claim.
Arbitration, a form of dispute resolution outside the courts, involves imposing as legally binding and enforceable the decision of a third party, typically specified in advance in contracts. Arbitration is generally favored and enforceable under federal law, through the 1925 Federal Arbitration Act (FAA). Potential corporate defendants have sought to use mandatory arbitration clauses to avoid the expense of class actions. The trial bar and allies in the legal academy criticized such clauses as "anticonsumer" and, for years, had success, particularly in California state court, in obtaining judicial rulings finding the clauses unenforceable, notwithstanding the language of the FAA.
Concepcion concerned AT&T's cell phone contracts, which included a mandatory arbitration clause that prohibited customers from bringing class action lawsuits against the carrier. Applying California law, the Ninth Circuit ruled that these clauses were "unconscionable" and thus unenforceable under state law—even though the court acknowledged that the arbitration clauses provided an adequate remedy to individual consumers. The Supreme Court reversed, determining that California's unconscionability rule as applied to AT&T's contract conflicted with the FAA, which preempted the conflicting state law. In reaching its holding, the Court determined that the California rule frustrated the FAA's objective of making arbitration agreements enforceable in national commerce and that AT&T's mandatory arbitration clause was "fundamentally fair" under the FAA.
Italian Colors concerns an arbitration provision in the card-acceptance agreement that American Express enters into with retail businesses that agree to offer customers the option of using the company's charge or credit cards. The Italian Colors plaintiffs allege that AmEx's requirement that vendors accept both its charge and credit cards to do business with the company is a "tying arrangement" in violation of federal antitrust law. In February 2012, the Second Circuit held that the arbitration provision in AmEx's card-acceptance agreement was unenforceable against plaintiffs' claim, given that the high costs associated with pursuing an antitrust claim would preclude the "effective vindication of rights" absent a classwide treatment. On November 9, the Supreme Court granted certiorari.
Some commentators have argued that the Court's decision in Concepcion is likely to erode consumer rights—or even lead to the death of all class action lawsuits against businesses. These critics claim that mandatory arbitration agreements bar consumers from enjoying protections that only class actions can guarantee. These concerns are overwrought.
I. As a general matter, consumers are likely to benefit from the ability to opt for individual arbitration in lieu of class actions.
Class action lawsuits are a means of consumer protection—not the ends.
A. Class actions suffer from several structural deficiencies that can prevent class members from having their rights vindicated. Class actions often take years to reach a settlement, and even when they do, the parties have the incentive to structure settlement terms to make it difficult for class members to obtain substantive relief. Moreover, the large expense of class action defense means that, in the absence of procedural protections against self-dealing settlements, trial lawyers have the incentive to bring class actions of low merit. Thus, the deterrent effect of class actions is small because the innocent are treated by the judicial system little better than the guilty.
B. Compared with class actions, individual arbitration is notably efficient and effective at protecting consumer rights. Instead of taking years, the average consumer arbitration lasts just short of seven months. Also, despite claims to the contrary, consumers achieve equal or greater recoveries in arbitration compared with class actions. Consumers, unsurprisingly, prefer arbitration over litigation.
C. Companies' savings from arbitration are passed on to the consumer in the form of lower prices. Although consumers who prefer committing to mandatory arbitration to avoid paying higher prices can do so under Concepcion; those who do not are effectively protected by market mechanisms. Companies have an incentive to offer effective complaint-resolution processes to foster brand image and loyalty, which result in increased demand for goods and services.
II. Though the Second Circuit's decision in Italian Colors is incorrect and should be reversed, class action lawsuits against businesses will not cease in the wake of Concepcion or a reversal in Italian Colors.
In particular, class actions will continue largely unabated in the areas of contractual employment disputes and securities litigation. Many consumer class actions can be expected to continue as well, given the significant transaction costs that companies face in developing arbitration clauses that are enforceable under Concepcion.
Overall, the Supreme Court's decision in Concepcion has not led, and should not be expected to lead, to a broad erosion of consumer rights, as some alarmists have predicted. Unless the Court broadens its Concepcion holding in Italian Colors, beyond what the petitioners have asked for, many forms of class action lawsuits will continue, and those that are replaced by individual arbitration will generally lead to greater consumer protection, not less. Concepcion is appropriately viewed as an endorsement of a consumer's right to choose, not as a death knell for class action lawsuits and consumer rights.