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American Express loses an appeal on class-actions

A federal appeals court in Manhattan struck down a clause drafted by American Express Co that barred merchants accepting its cards from bringing class-action antitrust claims against the company.

india Updated: Jan 31, 2009 15:05 IST

A federal appeals court in Manhattan struck down a clause drafted by American Express Co that barred merchants accepting its cards from bringing class-action antitrust claims against the company.

Friday's ruling by a panel of the US Second Circuit Court of Appeals was a victory for smaller merchants who had accused American Express of charging them excessive fees. It means the merchants may band together on litigation that they could not otherwise afford to pursue individually.

In a 36-page ruling for a three-judge panel, Judge Rosemary Pooler reversed a lower court decision upholding a "mandatory arbitration clause" that blocked merchants from bringing claims as a group, either in court or before an arbitrator.

"This decision means you cannot force a merchant into a situation where the cost of litigation would prevent the case from going forward," said Mark Reinhart, a partner at Reinhardt Wendorf & Blanchfield in St Paul, Minnesota and a lawyer for the merchants. "The real thrust of the decision is that it struck down an attempt to prevent class-actions anywhere."

American Express spokeswoman Joanna Lambert said the New York-based company was "somewhat disappointed" with the ruling and would review its options, but encouraged that the arbitration clause may be enforceable in other circumstances.

The case involved an agreement that American Express has used since 1999 with merchants who accept its cards.

Merchants had accused the company of forcing them to process smaller transactions on cards marketed to students, young adults and others, but charging the same fees as on transactions by wealthy and corporate customers.

They said the fees "vastly exceeded" those charged on comparable Visa Inc, MasterCard Inc and Discover Financial Services products and that an "honor all cards" provision amounting to an illegal "tying arrangement" under US antitrust law.

Pooler wrote that, in this case, smaller merchants would have faced "prohibitive costs" by arbitrating individually.

Enforcing the waiver, she wrote, "flatly ensures that no small merchant may challenge American Express' tying arrangements under the federal antitrust laws. (It) would grant Amex de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery."

Pooler said class-action waivers in arbitration agreements are not always unenforceable, including in antitrust actions. She also said the US Supreme Court has not directly addressed the issue in connection with the Federal Arbitration Act.

The appeals court sent the case back to the lower court for further proceedings.

The case is In re American Express Merchants' Litigation, 06-1871, US Court of Appeals for the Second Circuit.