Retailers Win—And Lose—In Supreme Court Arbitration Ruling

Written by Mark Rasch
June 24th, 2013

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today is a lawyer in Bethesda, Md., specializing in privacy and security law.

When the U.S. Supreme Court Thursday (June 20) ruled in favor of American Express and against a retailer in a dispute about interchange rates, it put retailers in an awkward bind????. The ruling was really about whether the retailer could be forced to submit to arbitration. That awkwardness is because retailers hate arbitration when they are the ones being forced to do it (by perhaps a card brand or a QSA or a manufacturer) but they are positively giddy and in love with it when they’re forcing it on their shoppers.

As far as Amex is concerned, here’s the deal. If you want to accept American Express corporate cards, then, according to the terms of the agreement with Amex, you have to also accept all other Amex cards as well. And you have to agree to all of Amex’s terms. It’s all or nothing—or as antitrust lawyers might argue, an unlawful tying arrangement in violation of the Clayton Antitrust Act. Antitrust lawyers talk like that.

What the Supreme Court ruled was that, even if Amex was engaged in a violation of the antitrust laws, and even if the all-or-nothing agreement was an unlawful tying arrangement, there was, as a practical matter, nothing the retailer could do about it. You see, part of the merchant’s agreement with Amex provided that the merchant could not sue Amex, and could not join with others either to sue or to arbitrate.

As a practical matter, Amex could (and did) thumb its nose at the antitrust laws—with the blessing of the Supreme Court. What this means is that we will see more lawyers using more arbitration agreements not as a means of resolving disputes in a fair and reasonable manner, but as a way of ensuring that, no matter what their client does, they can’t be held responsible. Whether that is good or bad depends on whose side of the arbitration agreement you are on.

At issue in the case was a mandatory arbitration agreement in the Amex contract. Retailers and others use such mandatory arbitration agreements to reduce the costs of litigation, to prevent class-action lawsuits, and generally to discourage groups or individuals harmed by their conduct from having an effective legal remedy. For merchants, keeping themselves from being sued is a good thing.

But it’s not such a good thing when the organizations with which they do business try to use arbitration agreements to do the same thing.

As a general rule, if someone does something to you that you believe is wrongful, injurious, unlawful or just plain bad, you go to your lawyer and ask a simple question: “Can I sue?” Dumb question. The answer is always, “Yes, of course.” “Will I win?” Now that’s another question. But in general, particularly in the U.S., people have a right to haul someone else in court and make them answer for what they (allegedly) did. The parties engage in discovery, depositions and an exchange of pleadings, and lawyers get richer. It’s a slow, laborious, time-consuming and expensive process that makes nobody (but lawyers) happy.

So we developed a host of alternative methods to avoid the courts. So called ADR—Alternative Dispute Resolution. This can include arbitration, mediation or fight-to-the-death cage matches. Maybe not the last one. The process is much less formal, there is virtually no discovery, and it is supposedly cheaper and faster. The parties agree on rules, on who will pay the arbitrator, what kinds of disputes are submitted to arbitration, etc. Typically, entities agree to the rules set out by the American Arbitration Association.

To facilitate ADR, Congress passed a law called the Federal Arbitration Act that recognized the validity of agreements to arbitrate as a matter of contract law. Merchants and others slowly went to work putting mandatory arbitration agreements into everything. They typically mandate that consumers can’t sue the merchant or vendor for anything, and that they can’t file either class-action lawsuits or class-action arbitrations. It’s every man for himself.

If a store sells a defective product that causes injury to 10,000 people, a lawyer cannot sue the store on behalf of the 10,000 affected people. In fact, he or she can’t sue the store at all. If the company engages in fraud or deception, even willfully, the consumer cannot sue. Rather, the lawyer has to be retained by every one of the 10,000 people affected and has to file individual arbitration requests on behalf of each client.

Frequently, the consumer has to pay the initial costs for requesting the arbitration (a few hundred dollars) out of pocket. And the lawyer may have to be admitted to practice in every jurisdiction in which the arbitration is sought. So if 10,000 people lose $50 each, the lawyer may have to file 10,000 requests to arbitrate. It’s unlikely to happen – and in fact that is exactly why merchants use arbitration agreements. Effectively, the consumer has no real remedy.

And the Supreme Court liked it that way.


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