Protect the little guy from “Too Big To Fail”

Tea Party members, elected to protect small business from Wall Street, and Democrats should see this decision as a threat to their mission in Congress.  They should launch a bi-partisan effort to amend the Federal Arbitration Act to prohibit class action waivers where such clauses effectively prohibit small businesses and consumers from vindicating their rights under federal or state law.

Contracts often dictate that disputes are to be resolved through arbitration, rather than through the courts.  Buried in the fine print of many arbitration provisions is the following legalese:  “Any arbitration under this Arbitration Agreement shall be solely between [Party A] and [Party B], shall not be joined with another lawsuit, claim, dispute or arbitration commenced by any other person, and may not be maintained on behalf of any purported class.  Both parties waive the right to participate in any class action against the other, and the arbitrator has no authority to adjudicate any class claims or class arbitration.”  This class action waiver requires each party to go it alone, even if the illegal conduct impacts thousands or millions of small businesses or consumers.

These words effectively strip harmed businesses—such as the victims of a price-fixing conspiracy—of their ability to seek a remedy, because to do so alone would be prohibitively expensive.  For example, private antitrust prosecutions require substantial expenditures to pay for discovery, an economic expert, and trial costs.  The costs can far exceed the expected recovery to any one business, even if the damages run into the hundreds or thousands of dollars.  No rational company or individual would pursue a lawsuit that costs more than you can win.

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Class actions were created to deal with this problem and to ensure that those that have suffered injury have access to the courts.  Class actions allow victims to pool their resources to jointly pursue an aggregate award in a cost-effective manner.  Class action waivers eradicate this cost-effective means of having small businesses fight back against harm caused collectively to them.  Now that they have been found enforceable, they are even more prevalent.

This result is unfair.  It effectively closes the courthouse’s and the arbitrator’s doors to small businesses not willing to engage in an economically irrational dispute resolution to protect its rights.  It also effectively immunizes powerful companies from damages actions that deter dominant players from engaging in bad conduct.  According to Justice Kagan, who dissented in American Express Co. v. Italian Colors Restaurant, the Supreme Court’s response to these concerns is “Too darn bad.”

Consumers and small businesses are not generally in a position to negotiate form agreements that contain these clauses; rather, they merely click or sign in order to obtain necessary goods and services.  With one stroke of a pen, one click of a mouse, small businesses and consumers are effectively stripped of their ability to bring private actions to vindicate their rights provided under federal and state law.  Private actions, such as private antitrust actions, are increasingly important as prosecutorial resources diminish.

The issue has gone as far as it can in the courts.  The Supreme Court ruled that the Federal Arbitration Act renders class action waivers enforceable, even when those provisions effectively strip small companies and consumers of their rights.  The solution lies with Congress, which can amend the Federal Arbitration Act.  Democrats and Republicans who are concerned with protecting their respective constituencies from the overreaching of big business should not let this decision stand.  They should amend the FAA to protect the small entrepreneurs and innovators of America.

Cantor is a partner at Constantine Cannon LLP, who focuses his practice on antitrust matters. Vitelli is an associate at the firm.