U.S. Supreme Court Issues Ruling Devastating to Small Businesses

With most Americans celebrating long-overdue rulings on the gay rights cases, the U.S. Supreme Court recently issued a quieter ruling in a lesser-celebrated case, setting back consumers and small-businesses forced into arbitration.

Handing down the opinion in a case entitled American Express v. Italian Colors Restaurant, the decision is one of several over the last few years that have had the effect of functionally eroding the civil rights of U.S. individuals, families, and small businesses, while broadening the powers of large corporate interests.

The U.S. Supreme Court’s 5-3 decision essentially ruled that large corporations can force parties with less bargaining power into arbitration via mandatory arbitration clauses in “take it or leave it” agreements, even if it means that the extraordinary high costs of arbitration would make it financially impossible for the litigant to even bring their claims at all. Arbitration, widely detested by many U.S. small businesses and consumers, generally deprives litigants of civil rights by operating outside the judicial process. The rules of civil procedure and evidence are generally disregarded, appeals do not exist, opportunities for the investigation of claims through the discovery process are extremely curtailed, and decisionmaking is put into the hands of usually a single individual who is accountable to no one. Arbitrations can be dramatically more expensive than lawsuits, and the fees paid to the arbitrator often depend on the size of the case — meaning that a large case can be unbelievably expensive to prosecute through an arbitration.

The small business at issue in the case was Italian Colors, a California Italian restaurant, accompanied by a group of other small businesses, which attempted to sue American Express for violating antitrust laws. They alleged that American Express unlawfully forced them to accept Amex credit cards at rates 30 percent higher than what they were charged by competing credit cards, which they asserted constituted a violation of federal antitrust laws. Each small businesses’ claim was approximately $5,000 in value, and so their claims were brought as a class action. Like most class actions, the small businesses’ claims were too small monetarily to be brought individually, which made the class action vehicle a practical method litigating the identical injuries suffered by the multitude of small business owners together, as one, so as to reduce the time and expense associated with the lawsuit.

When the class action was brought, American Express moved to dismiss the case and attempted to force the small businesses into arbitrating their claims, as set out in the merchant terms and conditions that the small businesses apparently unknowingly agreed to. American Express argued that the agreement, which the small businesses had no opportunity to negotiate, was binding against them, and could be used to force them into arbitration, regardless of whether it was fair to the small business owners or not.

The small businesses, on the other hand, challenged American Expresses’ forced-arbitration clause, arguing that it was inherently unfair to force them to arbitrate their claims given how expensive arbitration would be, in light of the low amount of their damages. They presented evidence that it would cost hundreds of thousands of dollars and perhaps over $1 million to litigate their claims through an arbitration, only to collect a maximum of $12,850 each, meaning that it was financially foolish for them to bring their claims through arbitration. They only way they could afford bringing claims against American Express, they argued, was through a class action.

In a surprisingly short and unceremonious decision, the U.S. Supreme Court rejected the small business owners’ arguments completely. Ruling that the arbitration agreement was to be strictly interpreted, regardless of its financial impact on the parties, the Court apparently found inconsequential the small-business owners’ concerns about the forced-arbitration clause. “Arbitration is a matter of contract,” the Court’s opinion stated, adding that courts were to “rigorously enforce arbitration agreements according to their terms,” unless other laws stated otherwise.

In a strongly-worded dissent, U.S. Supreme Court Justices Kagan, Ginsburg, and Breyer offered heavy criticism of the Court’s opinion, calling the “too darn bad” approach taken by the majority an outright “betrayal of our precedents” and violation of federal antitrust laws. The costs of arbitration for the small businesses, the dissent wrote, were so high that it was effectively impossible for them to exercise their rights, which left them functionally powerless and at the mercy of large corporate interests, such as American Express. “No rational actor,” the dissent wrote, “would bring a claim worth tens of thousands of dollars if doing so meant incurring costs in the hundreds of thousands.” According to the dissent, “Amex has put Italian Colors to this choice: Spend way, way, way more money than your claim is worth, or relinquish your [claims].”

The Supreme Court’s decision is one of a series of decisions that have undercut small business and consumer decisions over the last few years, that have tended to favor large corporate interests. In April, 2011, the Supreme Court, led by Chief Justice Roberts, handed down a landmark decision dismantling consumer rights by ruling that corporations like AT&T could force their consumers into arbitration based on arbitration clauses in “take it or leave it” forms that waived the consumer’s right to a lawsuit and class action status. In other decisions, one involving Wal-Mart and another involving Comcast, the Supreme Court significantly curtailed consumer rights to class action status. Some scholars have remarked that the current U.S. Supreme Court’s opinions are more friendly to big business since before World War II.

For now, however, decisions like Italian Colors appear to have resulted in a slow but steady erosion of the civil rights of individuals and small businesses. This has not been accomplished openly – through the revocation of standing, rights, or remedies – but in a quieter and far more troubling manner: by making it so unaffordable or impracticable to pursue the legal right that it might as well not even exist. Although the Supreme Courts’ notable cases expanding gay rights are admirable, so too must the economic civil rights of Americans be preserved.

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Axis Legal Counsel is a general practice law firm based out of Los Angeles, California, focusing on the aggressive representation of individuals and business clients in a variety of legal matters in a client-focused, results-driven and no-nonsense approach. Axis’s practice areas span individual/business litigation, privacy litigation, corporate/start-ups, entertainment, employment & wage/hour, non-profits, risk management, class actions, insurance/bad faith, estate/trust/probate disputes, technology, and civil rights/constitutional law. 

2013-07-08T10:35:01+00:00 All Firm News|0 Comments
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