Court: AmEx Can’t Use Arbitration To Thwart Merchant Class Actions

A three-judge panel for the federal appellate court in New York reversed a lower court by ruling Friday that the arbitration provision in American Express Co. merchant agreements that requires merchants to give up their right to participate in class-action lawsuits against AmEx, or even to challenge the company as a group in arbitration, is unenforceable. The implications for the broader merchant-acquiring community were not immediately clear. The Second U.S. Circuit Court of Appeals panel sent the case back to U.S. District Court in Manhattan for further proceedings. But, at least in the acquiring industry, the case puts some constraints on the practice of businesses, especially large ones, to divert disputes out of courts and into mandatory arbitration, where costs are lower and the possibility of huge punitive-damage awards is eliminated. Had the appellate panel upheld AmEx's class-action ban, “that would mean American Express has immunity from antitrust liability, and that's something the court couldn't swallow,” says Southfield, Mich., attorney Holli Hart Targan, president-elect of the Electronic Transactions Association and former chairperson of the merchant-acquiring trade group's government-relations committee. “We are somewhat disappointed with the decision but encouraged that the court found the arbitration clause may be enforceable in other circumstances,” New York City-based AmEx said in a statement. “We will continue to review the decision and consider our options.” The case began in 2003 with lawsuits filed by a San Francisco art gallery and an Oakland, Calif., restaurant that eventually were combined with several similar federal suits in New York. The merchants challenged the “honor all cards” provision in AmEx merchant contracts as an illegal tying arrangement that forced them to accept all AmEx-branded cards. The merchants objected to having to pay the same acceptance costs for taking AmEx credit cards as for the AmEx charge cards used by big-spending business people and affluent consumers. The credit cards used by young adults, college students, and others produced lower-value transactions than the charge cards at a higher cost than comparable Visa, MasterCard, and Discover transactions, the merchants claimed. The case slowly wound through the district court, which in March 2006 granted AmEx's motion to dismiss the actions after finding the plaintiffs' claims to be subject to arbitration. The court denied the merchants' request to reconsider the dismissal, but several merchants and the National Supermarkets Association Inc. pressed on with an appeal challenging the arbitration provision, found in standard acceptance contracts for merchants with less than $10 million in annual AmEx volume. Lawyers argued the case before the Second Circuit in December 2007, but it took the panel more than a year to hand down a decision. AmEx's merchant agreements have had arbitration provisions since 1999. Writing for the panel, Judge Rosemary S. Pooler said the “agreement not only precludes a merchant from bringing a class-action lawsuit, it also precludes the signatory from having any claim arbitrated on anything other than an individual basis.” Pooler cited figures in an affidavit from an economist hired by the merchants as an expert witness who said proving an antitrust tying allegation would be prohibitive for a small merchant acting alone. Discovery costs, including an economic study, would start at several hundred thousand dollars and could easily exceed more than $1 million, while average claims per merchant, based on the plaintiffs' AmEx volumes, would be around $5,300, and that's after damages were trebled under the Clayton Act. The lower court “did not deal head on” with the economist's affidavit, Pooler said. “Instead of addressing this figure, the district court misinterpreted and misapplied the statutory protections available to the plaintiffs,” she said. The lower court also did not consider an even more important issue, that of the legal options available to merchants for shifting the responsibility for payment of legal fees, she said. “The class-action waiver in the card-acceptance agreement cannot be enforced in this case because to do so would grant AmEx de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery,” her decision says. “It's clear the small merchants will benefit,” says one of their attorneys, Mark Reinhardt of Reinhardt Wendorf & Blanchfield in St. Paul, Minn. He says he and the merchant plaintiffs are planning their legal strategy in the wake of the appellate decision. Meanwhile, a separate but parallel case challenging AmEx's tying requirements is proceeding in U.S. District Court in Manhattan. The plaintiff is Marcus Corp., a Milwaukee-based movie-theater, hotel, and resort operator. The court heard arguments for summary judgment last week. Reinhardt says it's possible some of his small-merchant clients may join the action, but no decisions have yet been made.