[JURIST] The US Supreme Court [official website] ruled [opinion, PDF] 5-3 Thursday in American Express Co. v. Italian Colors Restaurant [SCOTSblog backgrounder] that the Federal Arbitration Act (FAA) [text] does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery. The plaintiffs in the case are several retail businesses that have accepted American Express charge cards. They argue that American Express’s arbitration clause, which forbids plaintiffs from filing as a class, violates the FAA because the cost of individual arbitration would exceed potential recovery for any individual plaintiff. Nevertheless, the court reversed the decision of the US Court of Appeals for the Second Circuit, which had ruled [opinion, PDF] that the arbitration clause was unenforceable:

The regime established by the Court of Appeals’ decision would require—before a plaintiff can be held to contractually agreed bilateral arbitration—that a federal court determine (and the parties litigate) the legal requirements for success on the merits claim-by-claim and theory-by-theory, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success. Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure. The FAA does not sanction such a judicially created superstructure.

The majority opinion was authored by Justice Antonin Scalia. Justice Clarence Thomas filed a concurring opinion. Justice Elena Kagan filed a dissenting opinion, joined by Justices Ruth Bader Ginsburg and Stephen Breyer. Kagan argues that the majority opinion, “prevents the effective vindication of federal statutory rights.” Justice Sonia Sotomayor was recused from the case.

The court heard oral arguments [JURIST report] in the case in February. American Express argued that the enforceability of an arbitration agreement cannot be conditioned upon the availability of class certification. American Express further argued that “[t]he whole point of arbitration … is to expand the scope of claims, small consumer claims, that can be brought in an efficient and cost-effective manner” and that consumers could even share in the costs of experts. Kagan questioned whether preventing class action suits effectively foreclosed potential claimants from pursuing their claims because the amount of their individual damages was so small compared to the costs of bring even an arbitration suit that no one would actually bring a claim. However, Breyer questioned whether the expert reports required for arbitration really needed to be very expensive. The plaintiffs argued that American Express was using its market power to impose contractual terms that effectively made the arbitration of an antitrust claim impossible.