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Updated! 6/20/13: Kagan's Dissent--Defending Arbitration, Backing Litigation

Arbitration proponents need to read Associate Justice Elena Kagan’s dissent in this morning’s Amex case. 

She backs the respondents’ fight for bringing their Sherman Act antitrust claims in court, but also explains that doing so “furthers the purposes” of the Federal Arbitration Act and supports the goal of more arbitration use.

She places her dissent position as strongly in favor of arbitration processes, and the majority’s arbitration support as a weapon that ultimately will dilute the use of the ADR process.

Moreover, there are hints in Kagan's dissent about issues the Court may be seeing as soon as next term.

Kagan--joined by Associate Justices Ruth Bader Ginsburg and Stephen Breyer in a 15-page dissent that is five pages longer than the majority Amex opinion (American Express Co. v. Italian Colors Restaurant, No. 12–133 (June 20, 2012)(available here))--says that respondent Italian Colors proved its claim that arbitration was too costly via testimony it provided at trial. 

The respondent is a class of restaurants seeking to vindicate its antitrust claims in a court suit, not arbitration.

The Kagan dissent says that the “effective vindication” rule in Mitsubishi Motors Corp. v. Soler-Chrysler-Plymouth Inc., 473 U. S. 614, 628 (1985)—“to prevent arbitration clauses from choking off a plaintiff’s ability to enforce congressionally created rights”—is a core principle of that case.
In the majority Amex opinion, Associate Justice Antonin Scalia writes that the rule is dicta, but, more significantly, the American Express contract and arbitration provision doesn’t cut off rights.

(See our article posted earlier today here.) "(T)he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy,”  wrote Scalia. (Emphasis in the opinion.)

That interpretation, Kagan writes, hurts arbitration.  

Applied as our precedents direct, the effective vindication rule furthers the purposes not just of laws like the Sherman Act, but of the FAA itself. That statute reflects a federal policy favoring actual arbitration—that is, arbitration as a streamlined “method of resolving disputes,” not as a foolproof way of killing off valid claims. [Citation omitted.] Put otherwise: What the FAA prefers to litigation is arbitration, not de facto immunity.

Kagan continues:
The effective-vindication rule furthers the statute’s goals by ensuring that arbitration remains a real, not faux, method of dispute resolution. With the rule, companies have good reason to adopt arbitral procedures that facilitate efficient and accurate handling of complaints. Without it, companies have every incentive to draft their agreements to extract backdoor waivers of statutory rights, making arbitration unavailable or pointless. So down one road: More arbitration, better enforcement of federal statutes. And down the other: Less arbitration, poorer enforcement of federal statutes. Which would you prefer? Or still more aptly: Which do you think Congress would?
The real problem, Kagan concludes, is the Court’s focus on diminishing class procedures.  The dissent concludes:

The Court today mistakes what this case is about. To a hammer, everything looks like a nail. And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled. So the Court does not consider that Amex’s agreement bars not just class actions, but “other forms of cost-sharing . . . that could provide effective vindication.” [Citation omitted.] In short, the Court does not consider—and does not decide—Italian Colors’s [sic] (and similarly situated litigants’) actual  argument about why the effective-vindication rule precludes this agreement’s enforcement.

As a result, Amex’s contract will succeed in depriving Italian Colors of any effective opportunity to challenge monopolistic conduct allegedly in violation of the Sherman Act. The FAA, the majority says, so requires. Do not be fooled. Only the Court so requires; the FAA was never meant to produce this outcome. The FAA conceived of arbitration as a “method of resolving disputes”—a way of using tailored and streamlined procedures to facilitate redress of injuries. [Citation omitted.][Emphasis added by Kagan.] . . . In the hands of today’s majority, arbitration threatens to become more nearly the opposite—a mechanism easily made to block the vindication of meritorious federal claims and insulate wrongdoers from liability. The Court thus undermines the FAA no less than it does the Sherman Act and other federal statutes providing rights of action. I respectfully dissent.

The dissent likely will be seen as the basis for legislative proposals, and possible attempts to reverse the majority opinion's effects on future Sherman Act litigation.

But Kagan's dissent also addresses an issue that is at the core of a case the Court is likely to hear. 

Kagan writes that Amex "is just the kind of case" the effective vindication rule was meant to address.  She notes that arbitration agreements can "manage" the "mismatch" inherent in Italian Colors' claim, which would be far exceeded by the expert report costs that would be needed to sustain the claim, at least individually. 

"But," write the Court's newest justice, "that is only part of the problem.  The agreement also disallows any kind of joinder or consolidation of claims or parties.  And more:  Its confidentiality provision prevents Italian Colors from informally arranging with other merchants to produce a common expert report."

In fact, American Express's attorney had conceded at the Supreme Court oral argument on Feb. 27 that the parties could share the costs--but outside the class process.  Kagan appears to be responding to that concession by noting that the majority opinion focuses solely on individual action.

Moreover, cost-sharing arguments were a key to the defense in D.R. Horton v. NLRB, No. 12-60031, an arbitration waiver case awaiting decision in the Fifth U.S. Circuit Court of Appeals. 

The case is an attempt to overturn a National Labor Relations Board decision that a mandatory predispute waiver of class arbitration in an employment contract is illegal unless the employee has access to a litigation class process under the National Labor Relations Act. In other words, class processes in either arbitration or litigation must be preserved.

Similar to the Amex arguments, in the Feb. 5 D.R. Horton arguments, the Fifth Circuit panel discussed with D.R. Horton's lawyer the ability of employees to share their costs among their individual arbitrations--preserving both the class waiver and the ability, under the NLRA, for "concerted action."  The D.R. Horton lawyer said that joint actions among plaintiff employees were possible even without class arbitration.

The difference in the cases is that in Amex, the Supreme Court was reviewing an arbitration clause used by sophisticated business parties; D.R Horton covers a mandatory predispute arbitration clauses which was installed by the employer for new and existing employees.

Most observers believe that, regardless of the outcome, D.R. Horton will be the subject of a cert petition to the Supreme Court, and the Court, at least eventually, will need to rule on class arbitration in an employment context.

CPR's most recent web story on D.R Horton can be found here; see also "Update:  Details on the D.R. Horton Fifth Circuit Argument," 31 Alternatives 44 (March 2013)(available here with subscription or CPR membership).
--Russ Bleemer, Editor, Alternatives