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What the Supreme Court AmEx ruling means for you

Posted by Rob Jenner on Jul 01, 2013 in Legal

The Supreme Court made a decision last week on behalf of American Express (in American Express v. Italian Colors) that will have long-range implications for businesses and people who enter into agreements that contain arbitration clauses.

Arbitration is the process of resolving a dispute or a grievance outside a court system by presenting it for decision to a (hypothetically) impartial third party. In binding arbitration, the decision of the arbitrator is final; there is no avenue to appeal to a court if you are unhappy with the arbitrator’s decision. This can be a big problem, particularly when one party gets to choose and pays for the arbitrator.

What happened in the AmEx case? Here are the highlights:

  • A California restaurant, Italian Colors, had a business dispute with AmEx. In the contract between the two (based upon contract terms drafted by AmEx), AmEx required all business disputes to be resolved through binding arbitration, rather than through a lawsuit filed in court.
  • The restaurant determined that, on its own, it could not afford the cost of gathering the necessary evidence to challenge the mega-company. In fact, it would cost more for the restaurant to dispute this part of its contract on its own, than the amount it stood to recover should it win its challenge.
  • To make it possible to pursue its claim, the restaurant decided to band together with other similarly affected AmEx business customers and form a “class” to pursue their similar claims. Unfortunately, they soon discovered that the arbitration clause states that all disputes must be handled through individual arbitration.

The matter made its way through the courts and, ultimately, to the Supreme Court, which ruled 5 to 3 in favor of AmEx. The Court concluded that the plaintiff retailers had to pursue individual arbitration as a means of relief, even if joining together in a class action made it more affordable to pursue their claims.

According to the Justices who disagreed with the majority’s ruling, the decision chills a plaintiff’s ability to pursue an action on one’s own anytime it is cost prohibitive. In essence, these justices noted that a creatively drafted arbitration clause could effectively block almost any means to pursue relief for damages sustained in a wide range of circumstances.

How The Ruling Affects You

Arbitration clauses regularly appear in documents such as business agreements, doctors’ surgical consent forms, pharmaceutical package inserts, consumer products warranty agreements, cell phone contracts, use of software agreements and apps, mortgage loan documents, apartment leases, and more. Therefore, this landmark decision has the potential to not only affect the businesses directly involved in this case, but also a much broader spectrum of consumers and potential litigants.

Although the majority in the case said that a right to sue still exists, even if the right is economically unfeasible to obtain, the ruling makes it much harder for consumers to seek justice in the courts if they can’t financially afford to do so. The majority of the Supreme Court failed to recognize the practical reality that, if pursuing a case is not economically feasible, then the right to seek relief does not exist at all. As it stands right now, it will be much more difficult for regular folks to pursue a case against big business. At the same time, large corporations will have even more incentives to draft arbitration agreements that will protect them from financial exposure in class-action lawsuits. Unless the complexion of the Supreme Court changes soon, we can expect a flood of more anti-consumer rulings. There’s simply no limit on how much damage can be done, and I shudder every time another consumer issue presents itself to the Court.

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