American Express Loses Appeal Seeking Arbitration of Merchants’ Antitrust Claims

The dispute stems from claims brought by 5-Star General Store, also known as Bento LLC, and thousands of other small merchants across the United States. The businesses allege that American Express’ anti-steering and non-discrimination provisions violate federal antitrust law by restricting merchants’ ability to encourage customers to use cards that may carry lower acceptance costs.

The First Circuit’s ruling does not decide whether those restrictions violate antitrust law. Instead, it resolves an important procedural fight over whether the merchants can pursue their claims in federal court or must return to arbitration.

That question arose after the merchants initially did what American Express’ agreements required: they pursued arbitration.

Thousands of merchants filed demands with the American Arbitration Association. The resulting proceedings generated millions of dollars in arbitration fees for American Express. After the company disputed the fees and did not pay the amount required by the arbitration administrator, the proceedings were terminated.

The merchants subsequently turned to federal court.

American Express then sought to stay the lawsuit and compel the merchants to arbitrate their claims, despite the earlier termination of the arbitration proceedings. A federal district court in Rhode Island rejected that request, finding that American Express’ failure to pay the required arbitration fees placed the company in default under the Federal Arbitration Act.

American Express appealed.

The First Circuit has now left that decision in place, allowing the merchants’ federal litigation to continue. The appellate court also rejected American Express’ argument that the district court improperly declined to apply the equitable doctrine of “unclean hands” against the merchants.

The decision could have implications extending beyond the underlying payment-card antitrust dispute.

Companies across a range of industries have increasingly relied on mandatory arbitration provisions to keep disputes out of court and, frequently, to prevent claims from proceeding as class actions. At the same time, plaintiffs’ lawyers have responded with so-called mass arbitration campaigns in which hundreds or thousands of claimants file individual arbitration demands simultaneously.

Those campaigns can create substantial administrative and filing costs for companies that drafted agreements requiring individual arbitration.

The American Express dispute illustrates the potential consequences when a company seeks to enforce an arbitration requirement but later disputes the fees imposed after large numbers of claimants invoke that process.

The case also comes against a significant history of litigation over American Express’ merchant rules.

In American Express Co. v. Italian Colors Restaurant, the U.S. Supreme Court in 2013 upheld enforcement of an American Express arbitration agreement even though merchants argued that the cost of individually proving their antitrust claims could exceed their potential recoveries.

The latest dispute presents a markedly different question. Rather than attempting to avoid arbitration at the outset, the merchants initiated arbitration and argue that American Express lost its ability to insist on that forum after failing to pay the required fees.

The underlying antitrust allegations remain unresolved. The merchants still must establish that American Express’ challenged merchant restrictions violate federal competition law.

For now, however, the First Circuit’s decision clears a significant procedural obstacle and permits their case against the credit card company to remain in federal court.

Source: MLex