AmEx Tries to Pull a Samsung to Avoid Mass Arbitration, but It Ain’t Got the Rizz
We have been following moves in mass arbitration for a few years. Nearly fifteen years ago now, SCOTUS told merchants that the Federal Arbitration Act (FAA) pre-empted state laws banning class-action waivers in consumer contacts. In another case involved American Express (AmEx), SCOTUS stuck to its guns, even when a class action waiver made it impossible for parties to vindicate their federal statutory rights. Justice Kagan summarized the Court’s attitude towards frustrated litigants: “Too darn bad.”
Plaintiffs lawyers innovated, creating a new strategy called “mass arbitration” about which we have blogged, for example, here and here. Companies responded with “batch arbitration.” and Richard Frankel provided a typography of batch arbitration. We summarized his findings here. Samsung took a different approach. In response to a mass arbitration, it simply refused to pay its share of the arbitration fees, and the American Arbitration Association (AAA) accommodated it by dismissing the claims. A District Court ordered Samsung to pay the fees and proceed in arbitration, but the Seventh Circuit reversed, in part because of an oversight by the plaintiffs’ attorneys.
AmEx tried to take a page out of the Samsung playbook, but a Rhode Island District Court did not buy it. In 5-Star General Store v. American Express Company, AmEX, like Samsung, had refused to pay fees in a mass arbitration brought by over 5000 claimants. As in Samsung, the AAA administratively closed the case. Fine, said the plaintiffs. They filed a class-action suit in federal court. AmEx moved to dismiss the case and to compel arbitration on an individual basis. In the alternative, AmEx asked the court to strike the class allegations.
5-Star General Store (5-Star) and thousands of other businesses tried to arbitrate claims against AmEx. They alleged that a non-discrimination provision in AmEx’s standard terms, which prevented the businesses from showing a preference for a particular payment mechanism or for disclosing the fees they paid for taking AmEx, violated antitrust laws. The AAA determined that AmEx should pay 90% of the fees associated with those arbitrations. AmEx disagreed, saying it was willing to pay less than one-third of what the AAA demanded. Unable to resolve the fee dispute, the AAA administratively closed the cases. 5-Star then sued, claiming that AmEx had waived its right to demand arbitration. AmEx moved to dismiss the case and compel arbitration or, in the alternative, to strike the class claims.
The first issue the court set out to decide was whether AmEx was in default under § 3 of the FAA, but it first had to address whether the issue of default was for the court or the arbiter to decide. It concluded that the issue was one of statutory interpretation and thus to be decided by the court. As the court presents it, AmEx’s position is a bit hard to fathom. The AAA closed the case; doing so is almost certainly a finding that a party is in default. AmEx was the party that refused to pay, so it is clearly in default. Sending the issue to the arbiter would be, in the court’s view, “redundant.”
Proceeding to the substance of the default issue under § 3, Congress having not defined the term, the court consulted a dictionary and quickly concluded that AmEx was in default. AmEx responded that it’s conduct was better construed as a waiver, but the court found that doing so would yield the same result.
In the alternative, AmEx proposed that it is and always has been ready and willing to proceed with arbitration, so long as it only has to pay its fair share. The court’s response was appropriately scathing, reminding AmEx that if it pulled these shenanigans in court, it would have judgment rendered against it. If the court were to grant AmEx’s wishes and remand for arbitration, nothing would prevent AmEx from once again refusing to pay the fees and starting the process over again. The court concluded that AmEx was in default under the FAA’s § 3.
AmEx next argued that 5-Star had amended its complaint in dramatic ways, rendering AmEx’s wavier irrelevant. and allowed the case to proceed as a class action. Long story short: Changes in pleadings will release a party from its waiver of its right to arbitrate only if “it is shown that the amended complaint unexpectedly changes the scope of theory of the plaintiff’s claims.” While there were changes, that standard was not met here.
The remainder of the opinion relates to AmEx’s motion to strike the class allegations. That discussion is beyond the subject matter of this blog. Suffice to say, the court declined to strike the class allegations at this stage of the litigation.