Evan Schuman's StorefrontBacktalk

Class-action waivers are even better for defendants. Many perceived harms may impact each person only a little but overall have a huge effect. It’s not only unlikely but wholly uneconomical for tens of thousands of AT&T customer to file individual claims (either in small claims court or for arbitration) to recover $30 to $60. By eliminating the possibility of class action, a merchant can substantially reduce the likelihood that it will ever have to pay for something objectionable—whether the company is guilty of wrongdoing or not. The transactional costs of proceeding are too high and the rewards too low.

So mandatory arbitration agreements and class-action waivers are awesome for merchants, right? Not so fast. What if the merchant itself is subject to such a waiver?

Merchants love certain American Express cards and hate others. The ones with low fees to merchants and high-income business users who have a high propensity to spend and a low propensity to default, are awesome for merchants. The ones with high fees, lower income customers and high defaults, not so much. But American Express requires a merchant that wants to take one card (whether it is a debit, charge, stored value or credit card) to take all cards. This, according to a bunch of merchants, is an unlawful “tying” arrangement in violation of federal antitrust law—specifically, the Clayton antitrust act. So the merchants got together as a class and sued American Express.

You guessed what was next. Of course, the agreement with American Express had a mandatory arbitration provision. You can’t sue, the card issuer argued. The Supreme Court had just ruled in the AT&T free phone case that state laws impacting a valid arbitration agreement are unenforceable and that federal law presumes arbitration agreements are good and enforceable.

The litigation bounced back and forth. Finally, this week, the United States Court of Appeals for the Second Circuit agreed to let stand an earlier ruling that essentially said the merchants could proceed with their federal antitrust class-action lawsuit despite agreeing to a binding contractual arbitration agreement saying that they wouldn’t file such a suit. The contract was unenforceable, according to the federal appeals court, because it prevented the merchants from effectively enforcing a right granted by federal antitrust law. The Court noted that it was impractical to have each individual merchant file an individual arbitration, hire expert witnesses, gather evidence, do the needed antitrust economic analysis necessary to prove anticompetitive practices, and then recover only a nominal amount for all of this work. So the merchants won! Woohoo!

I suppose there could be a rule that arbitration agreements are enforceable when I want them to be but unenforceable when I don’t want them to be. If I were making the rules, that’s what I would write. But the American Express litigation again puts the enforceability of arbitration agreements in a state of flux, particularly where the litigation is intended to vindicate a right created by federal law. The Court giveth, and the Court taketh away. For now, merchants should assume that arbitration agreements are enforceable, but recognize that this may not continue to be the case. Ultimately, either the Supreme Court or Congress or both may have to step in to resolve this issue. And what could go wrong then?

If you disagree with me, I’ll see you in court, buddy. If you agree with me, however, I would love to hear from you.