This Time AmEx Can’t Send an Antitrust Claim to Arbitration
Thirteen years ago, the Supreme Court compelled arbitration in American Express Co. v. Italian Colors Restaurants, a case in which a small restaurant sought to bring an antitrust class action suit. We covered the case here and in a guest post by David Horton here. Justice Kagan’s dissent provides a handy thumbnail of the case:
The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability—even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.
And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.
In Pizza Hazel v. American Express Co., Pizza Hazel brought an action on behalf of a putative class of approximately 8 million merchants who accept American Express (AmEx) cards under its Opt Blue program and subject to the April 2024 version of the American Express Merchant Operating Guide (MOG). AmEx charges 3% on every transaction, which makes it the most expensive card in the industry. Merchants engage in “steering” when they offer discounts to customers for using modes of payment that cost the merchants less. While Visa and Master Card rescinded anti-steering provisions in their contracts with merchants in response to litigation, the AmEx MOG retains its anti-steering provision, which prevents merchants from engaging in any steering if they accept AmEx. The Court does not go into the nature of the claims, but I infer from these facts that plaintiffs are alleging that AmEx’s anti-steering provision violates antitrust laws now that Visa and MasterCard have rescinded their anti-steering provisions. Responding to Italian Colors, plaintiffs also contend that the arbitration clause itself is an antitrust violation to the extent that it prevents antitrust challenges to the anti-steering and non-discrimination provisions.
The MOG permits AmEx to make changes on a scheduled or unscheduled basis. On August 13, 2023, AmEx published changes to its arbitration agreement that purported to be immediately effective. These changes, as relevant here, changed the allocation of arbitration fees, restricted appeals, and limited discovery.
AmEx responded to the complaint with a motion to compel arbitration. The magistrate judge denied the motion on the ground that, because AmEx can change the terms of the MOG at any time, its agreement with the merchants is illusory. The magistrate rejected plaintiffs’ other arguments, and both sides appealed. The District Court rejected all objections to the Magistrate’s Report and Recommendation, but all that really matters is the District Court’s affirmation of the Magistrate’s finding that the agreement was illusory.
The Court first rejected AmEx’s argument that it gave effective notice when it informed merchants that its changes were “effective immediately.” If they did not like the changes, they could cease to accept AmEx cards. The Court, following First Circuit precedent, rejected that argument. The relevant inquiry is whether the drafter “unilaterally retained the right to alter the terms of the contract ‘at any time.’” AmEx did retain that right and attempted to exercise it. The Court also rejected the notion that merchants could get out of the agreement by ceasing to accept AmEx cards. The MOG provides that its arbitration provision survives such action and so the merchants would be bound by the MOG’s arbitration agreement even if they stopped accepting AmEx cards.
AmEx next argues that the Magistrate erred in finding that the MOG can have retroactive effects. The Court found that the MOG can and did have such effects in this case. The MOG requires that AmEx be provided notice of any claim prior to litigation. It then has the opportunity to amend its arbitration provisions before such a claim is actually brought, and the MOG provides that the parties will be bound by the amended arbitration provisions. In this case, AmEx amended its arbitration provisions after receiving notice of plaintiffs’ claims.
AmEx’s other arguments were not raised before the Magistrate and thus were deemed waived. There is one curiosity here. Plaintiffs challenge the April 2024 version of the MOG but the conduct at issue occurred in 2023. The Court finds the discrepancy irrelevant. Because the entire agreement was illusory, it does not matter which version of the MOG is at issue.
Finally, AmEx notes a provision in the MOG that allowed for severance of unenforceable provisions. AmEx thus asks that the provision of the MOG that allowed it to amend the agreement without notice be severed and that the Court should enforce the rest of the arbitration agreement. Again citing First Circuit precedent, the Court rejects this argument as absurd: the Court cannot revive a contract that was never formed by setting aside one or more of its provisions.
The bulk of the opinion is taken up with plaintiffs’ objections to the Magistrate’s findings. Plaintiffs raised these objections “out of an abundance of caution.” I take that to mean that they are indifferent to their losses on those issues so long as the magistrate’s finding that the contract is illusory survives AmEx’s objections. Their arguments are preserved in case they need them on appeal to the First Circuit, and that appeal should be fully briefed by now.
We reported on AmEx’s shenanigans in a similar case, 5-Star General Store v. American Express Company, here. The First Circuit just affirmed that decision, which involved shutting down AmEx’s attempt to avoid mass arbitration by refusing to pay arbitration fees. Now they are stuck in court. Look for a follow-up soon.