Today the Supreme Court put another nail in the coffin of the withering body of consumer rights. In the Italian Colors case, the Court held that a plaintiff cannot bring a class action to a court or arbitration when it has agreed to a boilerplate contract waiving its right to litigation or class arbitration, even where the cost of bringing the case as an individual is so prohibitive as to preclude the vindication of important statutory rights.
The arose when a group of merchants brought a class action against American Express alleging that the credit card company imposed on them an illegal tying arrangement, in violation of the antitrust law.
The merchants’ contracts with Amex contained a clause that required all disputes be subject to arbitration and that all disputes be arbitrated on an individual basis. It also prohibited parties from sharing the costs of any litigation or otherwise consolidating their legal claims. The merchants wanted to void the class action waiver and arbitrate as a group because it would cost many hundreds of thousands of dollars to mount an antitrust action yet the average recovery would be only $5000. Hence, they argued, without the ability to bring a class or collective action, they would lose their substantive rights. The Second Circuit agreed. It held that the class action ban could not be enforced “because to do so would grant Amex de facto immunity from antitrust liability by removing the plaintiffs’ only reasonably feasible means of recovery.”
The Second Circuit decision rested on an established Supreme Court precedent that says that under the Federal Arbitration Act, arbitration is only appropriate when it entails no loss of substantive rights. The Supreme Court first expressed this principle in 1985 in Mitsubishi Motors v. Soler Chrysler-Plymouth, a case in which a party was required to arbitrate a claim arising under the Sherman Antitrust Act. In Mitsubishi, the Court stated that arbitration could be ordered only if the litigant “may vindicate its statutory cause of action in the arbitral forum.” The Court further explained that “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute.”
The effective vindication-of-substantive-rights principle articulated in Mitsubishi is an essential element of arbitration law. It has been interpreted in subsequent cases to preclude arbitration when a litigant can show that the cost of vindicating his or her claim in arbitration is so high that the case cannot proceed if arbitration is required.
Despite the precedent, in today’s case the Supreme Court upheld the class action ban in the face of irrefutable evidence that the cost of bringing an antitrust case was so high that with the ability to proceed as a class action, the case could not be brought at all. Justice Scalia, writing for the majority, also cast doubt on the effective-vindication-of-substantive-rights principle. He called in mere “dicta,” and stated that, at most, it might apply to “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” However, he insisted, it did not apply in the present case. “[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”
Justice Kagan, in an eloquent dissent, argued against Scalia’s sophistry and re-focused on the crucial issue at stake. The overall effect of the opinion, she explained, is that “The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.” She pointed out that the majority’s decision would permit companies to impose arbitration clauses on consumers that not only preclude class actions, but that also shorten statutes of limitations, limit the kinds of evidence consumers offer, or remove the ability of an arbitrator to grant meaningful relief.
She argued that the effective-vindication rule was essential to prevent stronger parties from using these and other kinds of means to eviscerate statutory protections. As she explained, “The effective-vindication rule [ensures that] arbitration remains a real, not a faux, method of dispute resolution. With the rule, companies have good reason to adopt arbitral procedures that facilitate efficient and accurate handling of complaints. Without it, companies have every incentive to draft their agreements to extract backdoor waivers of statutory rights.”
Although the American Express case itself involved a dispute brought by merchants, the opinion will have dire consequences for consumers. By narrowing effective-vindication-of-substantive-rights principle, the Court has opened the door for powerful companies to impose arbitration clauses that prevent consumers from challenging all types of illegal practices.
Without the effective-vindication limitation on the range of enforceable arbitration clauses, consumers will be powerless to vindicate any of their statutory rights.
. American Express v. Italian Colors Restaurant, et. al., (slip op., June 20, 2013), overturning In re Am. Express Merchs.’ Litig, 634 F.3d 187 (2d Cir. 2011), aff’d on reh’g, 667 F.3d 204 (2d Cir. 2012).
. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).
. Id. at 637.
. Id. at 628.
 Slip. Op. at 6-7. (Opinion of the Court).
 Slip Op. at 1 (Kagan dissenting).
 Slip. Op. at 5 (Kagan dissenting).