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The Future of FTC Equitable Monetary Relief after AMG Capital Management

Alden Abbott —  22 April 2021

The U.S. Supreme Court’s just-published unanimous decision in AMG Capital Management LLC v. FTC—holding that Section 13(b) of the Federal Trade Commission Act does not authorize the commission to obtain court-ordered equitable monetary relief (such as restitution or disgorgement)—is not surprising. Moreover, by dissipating the cloud of litigation uncertainty that has surrounded the FTC’s recent efforts to seek such relief, the court cleared the way for consideration of targeted congressional legislation to address the issue.

But what should such legislation provide? After briefly summarizing the court’s holding, I will turn to the appropriate standards for optimal FTC consumer redress actions, which inform a welfare-enhancing legislative fix.

The Court’s Opinion

Justice Stephen Breyer’s opinion for the court is straightforward, centering on the structure and history of the FTC Act. Section 13(b) makes no direct reference to monetary relief. Its plain language merely authorizes the FTC to seek a “permanent injunction” in federal court against “any person, partnership, or corporation” that it believes “is violating, or is about to violate, any provision of law” that the commission enforces. In addition, by its terms, Section 13(b) is forward-looking, focusing on relief that is prospective, not retrospective (this cuts against the argument that payments for prior harm may be recouped from wrongdoers).

Furthermore, the FTC Act provisions that specifically authorize conditioned and limited forms of monetary relief (Section 5(l) and Section 19) are in the context of commission cease and desist orders, involving FTC administrative proceedings, unlike Section 13(b) actions that avoid the administrative route. In sum, the court concludes that:

[T]o read §13(b) to mean what it says, as authorizing injunctive but not monetary relief, produces a coherent enforcement scheme: The Commission may obtain monetary relief by first invoking its administrative procedures and then §19’s redress provisions (which include limitations). And the Commission may use §13(b) to obtain injunctive relief while administrative proceedings are foreseen or in progress, or when it seeks only injunctive relief. By contrast, the Commission’s broad reading would allow it to use §13(b) as a substitute for §5 and §19. For the reasons we have just stated, that could not have been Congress’ intent.

The court’s opinion concludes by succinctly rejecting the FTC’s arguments to the contrary.

What Comes Next

The Supreme Court’s decision has been anticipated by informed observers. All four sitting FTC Commissioners have already called for a Section 13(b) “legislative fix,” and in an April 20 hearing of Senate Commerce Committee, Chairwoman Maria Cantwell (D-Wash.) emphasized that, “[w]e have to do everything we can to protect this authority and, if necessary, pass new legislation to do so.”

What, however, should be the contours of such legislation? In considering alternative statutory rules, legislators should keep in mind not only the possible consumer benefits of monetary relief, but the costs of error, as well. Error costs are a ubiquitous element of public law enforcement, and this is particularly true in the case of FTC actions. Ideally, enforcers should seek to minimize the sum of the costs attributable to false positives (type I error), false negatives (type II error), administrative costs, and disincentive costs imposed on third parties, which may also be viewed as a subset of false positives. (See my 2014 piece “A Cost-Benefit Framework for Antitrust Enforcement Policy.”

Monetary relief is most appropriate in cases where error costs are minimal, and the quantum of harm is relatively easy to measure. This suggests a spectrum of FTC enforcement actions that may be candidates for monetary relief. Ideally, selection of targets for FTC consumer redress actions should be calibrated to yield the highest return to scarce enforcement resources, with an eye to optimal enforcement criteria.

Consider consumer protection enforcement. The strongest cases involve hardcore consumer fraud (where fraudulent purpose is clear and error is almost nil); they best satisfy accuracy in measurement and error-cost criteria. Next along the spectrum are cases of non-fraudulent but unfair or deceptive acts or practices that potentially involve some degree of error. In this category, situations involving easily measurable consumer losses (e.g., systematic failure to deliver particular goods requested or poor quality control yielding shipments of ruined goods) would appear to be the best candidates for monetary relief.

Moving along the spectrum, matters involving a higher likelihood of error and severe measurement problems should be the weakest candidates for consumer redress in the consumer protection sphere. For example, cases involve allegedly misleading advertising regarding the nature of goods, or allegedly insufficient advertising substantiation, may generate high false positives and intractable difficulties in estimating consumer harm. As a matter of judgment, given resource constraints, seeking financial recoveries solely in cases of fraud or clear deception where consumer losses are apparent and readily measurable makes the most sense from a cost-benefit perspective.

Consumer redress actions are problematic for a large proportion of FTC antitrust enforcement (“unfair methods of competition”) initiatives. Many of these antitrust cases are “cutting edge” matters involving novel theories and complex fact patterns that pose a significant threat of type I error. (In comparison, type I error is low in hardcore collusion cases brought by the U.S. Justice Department where the existence, nature, and effects of cartel activity are plain). What’s more, they generally raise extremely difficult if not impossible problems in estimating the degree of consumer harm. (Even DOJ price-fixing cases raise non-trivial measurement difficulties.)

For example, consider assigning a consumer welfare loss number to a patent antitrust settlement that may or may not have delayed entry of a generic drug by some length of time (depending upon the strength of the patent) or to a decision by a drug company to modify a drug slightly just before patent expiration in order to obtain a new patent period (raising questions of valuing potential product improvements). These and other examples suggest that only rarely should the FTC pursue requests for disgorgement or restitution in antitrust cases, if error-cost-centric enforcement criteria are to be honored.

Unfortunately, the FTC currently has nothing to say about when it will seek monetary relief in antitrust matters. Commendably, in 2003, the commission issued a Policy Statement on Monetary Equitable Remedies in Competition Cases specifying that it would only seek monetary relief in “exceptional cases” involving a “[c]lear [v]iolation” of the antitrust laws. Regrettably, in 2012, a majority of the FTC (with Commissioner Maureen Ohlhausen dissenting) withdrew that policy statement and the limitations it imposed. As I concluded in a 2012 article:

This action, which was taken without the benefit of advance notice and public comment, raises troubling questions. By increasing business uncertainty, the withdrawal may substantially chill efficient business practices that are not well understood by enforcers. In addition, it raises the specter of substantial error costs in the FTC’s pursuit of monetary sanctions. In short, it appears to represent a move away from, rather than towards, an economically enlightened antitrust enforcement policy.

In a 2013 speech, then-FTC Commissioner Josh Wright also lamented the withdrawal of the 2003 Statement, and stated that he would limit:

… the FTC’s ability to pursue disgorgement only against naked price fixing agreements among competitors or, in the case of single firm conduct, only if the monopolist’s conduct has no plausible efficiency justification. This latter category would include fraudulent or deceptive conduct, or tortious activity such as burning down a competitor’s plant.

As a practical matter, the FTC does not bring cases of this sort. The DOJ brings naked price-fixing cases and the unilateral conduct cases noted are as scarce as unicorns. Given that fact, Wright’s recommendation may rightly be seen as a rejection of monetary relief in FTC antitrust cases. Based on the previously discussed serious error-cost and measurement problems associated with monetary remedies in FTC antitrust cases, one may also conclude that the Wright approach is right on the money.

Finally, a recent article by former FTC Chairman Tim Muris, Howard Beales, and Benjamin Mundel opined that Section 13(b) should be construed to “limit[] the FTC’s ability to obtain monetary relief to conduct that a reasonable person would know was dishonest or fraudulent.” Although such a statutory reading is now precluded by the Supreme Court’s decision, its incorporation in a new statutory “fix” would appear ideal. It would allow for consumer redress in appropriate cases, while avoiding the likely net welfare losses arising from a more expansive approach to monetary remedies.

 Conclusion

The AMG Capital decision is sure to generate legislative proposals to restore the FTC’s ability to secure monetary relief in federal court. If Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices. Giving the FTC carte blanche to obtain financial recoveries in the full spectrum of antitrust and consumer protection cases would spawn uncertainty and could chill a great deal of innovative business behavior, to the ultimate detriment of consumer welfare.


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In Antitrust & Competition, Antitrust Division, Error Costs, Federal Trade Commission, Intellectual Property, Justice Department, Patent, Section 5, Supreme Court, Truth on the Market , , , , , , , , , , , , , , ,
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Judge Gorsuch’s Distinguished Antitrust Record

Alden Abbott —  10 March 2017
  1. Overview

A‌merica’s antitrust laws have long held a special status in the ‌federal statutory hierarchy.  The Supreme Court of the United States, for example, famously stated that the “[a]ntitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise.”  Thus, when considering the qualifications of a nominee to the U.S. Supreme Court, the nominee’s views (if any) on antitrust are unquestionably of interest.  Such an assessment is particularly significant today, given the fact that the Court has had only one remaining antitrust expert (Justice Breyer, who taught antitrust at Harvard), since the sad demise of Justice Scalia (author of the landmark Trinko opinion on the limits of monopolization law).

Fortunately, we know a great deal about the antitrust perspective of Judge Neil Gorsuch, President Trump’s first nominee to the Supreme Court.  Judge Gorsuch authored several well-reasoned and highly persuasive antitrust opinions as a Tenth Circuit judge, which show him to be respectful of Supreme Court precedent and fully aware of the nuances of modern antitrust analysis.  This is not surprising, since Judge Gorsuch in recent years has taught antitrust law at the University of Colorado Law School.  In addition, he had exposure to antitrust matters as Principal Deputy Associate Attorney General during the George W. Bush Administration.  What’s more, he worked on major antitrust cases as an associate and then a partner at the Kellogg Huber law firm (see here).  Recent commentaries by highly respected antitrust lawyers on Judge Gorsuch’s antitrust jurisprudence manifest great respect for his mastery of the field (see, for example, here and here) – and put to shame a non-antitrust lawyer’s jejeune and misleading “hit piece” on Judge Gorsuch’s antitrust record (see here) that displays a woeful ignorance of the nature of antitrust analysis (see, for example, Ed Whelan’s devastating critique of that screed, here).

In short, Judge Gorsuch is extremely well-versed in antitrust and thus ideally positioned to make important contributions to the Supreme Court’s antitrust jurisprudence, should he be confirmed.  A quick evaluation of Judge Gorsuch’s decisions in antitrust cases confirms this conclusion.

  1. Judge Gorsuch’s Antitrust Opinions

Let’s take a look at three antitrust opinions authored by Judge Gorsuch, two of which deal with refusals to deal, and one of which concerns municipal antitrust immunity.  All three decisions show an appreciation for the underlying economic efficiency rationale that undergirds modern mainstream antitrust analysis, consistent with Supreme Court case law pronouncements.

a.  Four Corners Nephrology, Associates, PC v. Mercy Medical Center of Durango, 582 F.3d 1216 (10th 2009). To provide Durango, Colorado, residents and Southern Ute Indian tribe members with greater access to kidney dialysis and other nephrology services, Mercy Medical Center, a non-profit hospital, together with the tribe, sought to entice Dr. Mark Bevan to join the hospital’s active staff.  When Dr. Bevan declined, the hospital hired somebody else.  To convince that physician and others to settle in Durango, and aware that starting a nephrology practice was likely to prove unprofitable for the foreseeable future, the hospital and tribe agreed to underwrite up to $2.5 million in losses they expected the practice to incur.  To protect its investment, Mercy made its new practice the exclusive provider of nephrology services at the hospital.

Dr. Bevan sued, contending that Mercy’s refusal to deal with other nephrologists, including himself, amounted to the monopolization, or attempted monopolization, of the market for physician nephrology services in the Durango area.  The district court granted summary judgment to the hospital.

Judge Gorsuch’s Sixth Circuit panel opinion affirmed, for two reasons.  First, he held that the hospital had no antitrust duty to share its facilities with Dr. Bevan at the expense of its own nephrology practice.  It stressed that in demanding access to Mercy’s facilities, Dr. Bevan sought to share, not to undo, the hospital’s putative monopoly.  According to Judge Gorsuch, that is not what the antitrust laws are about:  they seek to advance competition, not advantage competitors.  Judge Gorsuch deftly distinguished the Supreme Court’s 1985 Aspen Skiing decision, which upheld a Sherman Act Section 2 refusal to deal claim based on a monopolist ski resort’s discontinuation of a joint ticketing arrangement with a smaller resort (a decision deemed “at or near the outer boundary of §2 liability” in Justice Scalia’s Trinko opinion).  He noted that defendant terminated a profitable long-term contractual relationship in Aspen Skiing, in order to achieve long-term anticompetitive goals.  In the instant case, however, the hospital was seeking to avoid an unprofitable short-term relationship with the plaintiff doctor – an action consistent with legal competition on the merits, as in Trinko.  Second, Judge Gorsuch held that plaintiff had suffered no antitrust injury, because it was seeking to share in monopoly profits, not to undo a monopoly and thereby benefit consumers.

Judge Gorsuch’s careful reasoning in Four Corners adroitly cabined Aspen Skiing’s problematic reasoning.  Future courts could benefit from his approach to help rein in inappropriate antitrust attacks on refusals to deal that manifest competition on the merits.

b.  Novell, Inc. v. Microsoft Corporation, 731 F.3d 1064 (10th 2013).  Novell produced office software, including WordPerfect, Microsoft Word’s leading rival in word processing applications.  Microsoft initially gave independent software vendors, including Novell, pre-release access to design information which would enable them to produce applications for Windows 95.  Microsoft subsequently changed its policy, however, denying such access prior to the release of Windows 95.  This decision significantly delayed, but did not preclude, third party companies from developing Windows 95 applications.  Novell sued Microsoft, alleging that Microsoft’s actions helped it maintain its monopoly in the market for Intel-compatible personal computer operating systems.  The district court granted judgment for Microsoft as a matter of law, and the Tenth Circuit affirmed.

In his opinion, Judge Gorsuch framed the standard of liability for illegal monopolization under Section 2 of the Sherman Act in a decision-theoretic manner that would gladden the hearts of law and economics mavens:  “the question . . . is whether, based on the evidence and experience derived from past cases, the conduct at issue before us has little or no value beyond the capacity to protect the monopolist’s market power—bearing in mind the risk of false positives (and negatives) any determination on the question of liability might invite, and the limits on the administrative capacities of courts to police market terms and transactions.”

Applying this set of general principles in light of the case law and the facts presented, Judge Gorsuch ably dissected and rejected Novell’s theories of antitrust harm, explaining that Novell’s claims did not squeeze “through the narrow needle of [antitrust] refusal to deal doctrine.”  Specifically, Microsoft’s actions failed to pass Aspen Skiing muster.  Even though “[a] voluntary and profitable relationship clearly existed between Microsoft and Novell[,]. . . Novell . . .  presented no evidence from which a reasonable jury could infer that Microsoft’s discontinuation of this arrangement suggested a willingness to sacrifice short-term profits, let alone in a manner that was irrational but for its tendency to harm competition.”  The court also rejected Novell’s alternative claim of an antitrust violation based on an “affirmative” act of interference with a rival rather than on a refusal to deal.  As Judge Gorsuch explained, “neither Trinko nor Aspen Skiing suggested this is enough to evade their profit sacrifice test, and we refuse to do so either.  Whether one chooses to call a monopolist’s refusal to deal with a rival an act or omission, interference or withdrawal of assistance, the substance is the same”.  Finally, Novell’s third theory, that Microsoft acted deceptively when it gave pretextual reasons for withdrawing key compatibility information from Novell, similarly proved unavailing.  According to Judge Gorsuch, “[deception] . . . wasn’t the cause of Novell’s injury or any possible harm to consumers—Microsoft’s refusal to deal was. . . .  Even if Microsoft had behaved [non-deceptively,] just as Novell sa[id] it should have, it would have helped Novell not at all.”

Novell, like Kay Electric, reflects Judge Gorsuch’s understanding of the importance of curtailing inappropriate antitrust attacks on the right not to deal with competitors.  It also manifests his keen appreciation for protecting a successful firm’s market-driven economic incentives from being undermined by antitrust attacks.  Finally, and most significantly, this decision highlights Judge Gorsuch’s understanding that decision theory is of central importance in administering a rules-based antitrust legal system (see here for a discussion of the role of decision theory in Roberts Court antitrust decisions).

c.  Kay Electric Cooperative v. City of Newkirk, Oklahoma, 647 F.3d 1039 (10th 2011). In this case, the Tenth Circuit, per Judge Gorsuch, reversed and remanded a district court’s dismissal of an antitrust suit filed against a municipal electricity provider.  Kay, an Oklahoma rural electric cooperative, offered to provide electricity to a new jail being built in an area just outside the city boundaries of Newkirk.  The City of Newkirk responded by annexing the area and issuing its own service offer.  As Judge Gorsuch pithily explained, “Kay’s offer was much the better but the jail still elected to buy electricity from Newkirk.  Why?  Because Newkirk is the only provider of sewage services in the area and it refused to provide any sewage services to the jail – that is, unless the jail also bought the city’s electricity.  Finding themselves stuck between a rock and a pile of sewage, the operators of the jail reluctantly went with the city’s package deal.”  Kay responded by suing Newkirk for unlawful tying and attempted monopolization in violation of the Sherman Antitrust Act.  The district court found Newkirk “immune” from liability as a matter of law, and Kay appealed.

Judge Gorsuch surveyed the Supreme Court’s confusing case law on state action antitrust immunity, which shields state-sanctioned restraints of trade from Sherman Act scrutiny.  He noted that “though it’s hard to see a way to reconcile all of the [Supreme] Court’s competing statements in this area, we can say with certainty this much – a municipality surely lacks antitrust ‘immunity’ unless it can bear the burden of showing that its challenged conduct was at least a foreseeable (if not explicit) result of state legislation [emphasis in the original].”  The judge brilliantly parsed the “muddled” jurisprudence and found three “bright lines” that were “enough to allow us to dispose of this appeal with confidence.”  First, “a state’s grant of a traditional corporate chapter to a municipality isn’t enough to make the municipality’s subsequent anticompetitive conduct foreseeable.”  Second, “the fact that a state may have authorized some forms of municipal anticompetitive conduct isn’t enough to make all forms of anticompetitive conduct foreseeable [emphasis in the original].”  Third, “when asking whether the state has authorized the municipality’s anticompetitive conduct we look to and preference the most specific direction issued by the state legislature on the subject.”  Applying these rules to the facts at hand (including relevant Oklahoma statutes), the judge concluded “that it quickly becomes clear that Newkirk enjoys no immunity.”

Judge Gorsuch’s Kay Electric opinion displays great facility in reconciling respect for antitrust federalism with the Sherman Act’s goal of rooting out unreasonable constraints on free market competition.  His concise ruling ably cuts through the complexities of the opaque (to be generous) antitrust state action doctrine decisions to identify clear administrable principles that, if broadly adopted, would reduce uncertainty regarding the legal status of anticompetitive municipal conduct.  In short, if Kay Electric is any indication, Judge Gorsuch may be just the jurist needed to bring greater (and badly needed) clarity to the Supreme Court’s treatment of state action controversies.

  1. Conclusion

In sum, Judge Gorsuch’s antitrust opinions reflect a sound grounding in law and economics and decision theory, combined with a respect for Supreme Court precedent, careful attention to traditional judicial craftsmanship, and a respect for the appropriate contours of antitrust federalism.  Accordingly, the Supreme Court’s antitrust jurisprudence would unquestionably benefit by having Judge Gorsuch join the Court.  For this and for so many other reasons (see, for example, here), Judge Gorsuch merits swift confirmation by the Senate.

In Antitrust & Competition, Economic Theory, Federalism, Truth on the Market, Tying , , ,
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Will the Supreme Court’s Halo Electronics Decision Have a Desirable Halo Effect, Reducing Incentives to Infringe Patents?

Alden Abbott —  15 June 2016

The U.S. Supreme Court’s unanimous June 13 decision (per Chief Justice John Roberts) in Halo Electronics v. Pulse Electronics, overturning the Federal Circuit’s convoluted Seagate test for enhanced damages, is good news for patent holders.  By reducing the incentives for intentional patent infringement (due to the near impossibility of obtaining punitive damages relief under Seagate), Halo Electronics helps enhance the effectiveness of patent enforcement, thereby promoting a more robust patent system.

The complexity and unwieldiness of the Seagate test is readily apparent from this description:

35 U.S.C. § 284 provides simply that “the court may increase the damages up to three times the amount found or assessed.” Nevertheless, in In re Seagate Technology, LLC, 497 F.3d 1360 (2007) (en banc) the Federal Circuit erected a two-part barrier for patentees to clear before a district court could exercise its enhancement discretion under the statute. First, a patent owner must “show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted an infringement of a valid patent.” This first part of the test is not met if the infringer, during infringement proceedings, raises a substantial question as to the validity or non-infringement of the patent, regardless of whether the infringer’s prior conduct was egregious. Second, the patentee must demonstrate that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” On appeal, the Federal Circuit would review the first step of the test—objective recklessness—de novo; the second part—subjective knowledge—for substantial evidence; and the ultimate decision—whether to award enhanced damages—for abuse of discretion.

In short, under Seagate, even if (1) the patentee presented substantial evidence that the infringer intentionally infringed its patent (under the second part of the test), and (2) the infringer’s prior conduct was egregious, the infringer could avoid enhanced damages merely by raising a “substantial question” as to the validity or non-infringement of the patent.  Because in most cases mere “questions” as to validity or non-infringement could readily be ginned up ex post, intentional infringers, including truly “bad actors,” could largely ignore the risk of being assessed anything more than actual damages.

Moreover, the Seagate test should be viewed in light of other major policy changes that have diminished the value of patents, such as the near impossibility of obtaining permanent injunctive relief for patent infringement following the Supreme Court’s 2006 eBay decision (see, for example, here), plus the recent downward trend in patent damage awards (see, for example, here) and increasingly common administrative patent invalidations (see, for example, here).  All told, these developments have incentivized parties to “go ahead and produce,” without regard to the patents they might be infringing, in the knowledge that, at worst, they might at some future time be held liable for something akin to the reasonable royalties they should have agreed to pay in the first place.

Chief Justice Roberts’ opinion for the Court in Halo Electronics in effect reinstates the longstanding historical understandings that in patent infringement cases:  (1) district court judges enjoy broad discretion to assess enhanced damages “for egregious infringement behavior”; and (2) the standard “preponderance of the evidence” standard of civil litigation (rather than the far more exacting “clear and convincing evidence” standard of proof) applies to enhanced damages determinations.  In so doing, it puts potential infringers on notice that exemplary damages for egregious infringing actions cannot be avoided after the fact by manufactured theories (“questions”) of possible patent invalidity or non-applicability of a patent’s claims to the conduct in question.  This in turn should raise the expected costs of intentional patent infringement, thereby increasing the incentive for technology implementers to negotiate ex ante with patent holders over license terms.  To the extent this incentive change results in a higher incidence of licensing ex ante, a lower incidence of costly infringement litigation, and higher returns to patentees, economic welfare should tend to rise.

Halo Electronics’ “halo effect” should not, of course, be oversold.  The meaning of “egregious infringement behavior” will have to be hashed out in federal litigation, and it is unclear to what extent federal district courts may show a greater inclination to assess enhanced damages.   Furthermore, recent legislative and regulatory policy changes and uncertainties (including rising “anti-patent” sentiments in the Executive Branch, see, for example, here) continue to constrain incentives to patent, to the detriment of economic welfare.  Nevertheless, while perhaps less than “heavenly” in its impact, the Halo Electronics decision should have some effect in summoning up “the better angels of technology implementers’ nature” (paraphrasing Abraham Lincoln, a firm believer in a robust patent system) and causing them to better respect the property rights imbedded in the patented innovations on which they rely.

In Intellectual Property, Patent, Supreme Court, Truth on the Market , ,
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The Supreme Court upholds freedom of contract in American Express v Italian Colors Restaurant

Thomas McCarthy —  25 June 2013

[The following is a guest post by Thomas McCarthy on the Supreme Court’s recent Amex v. Italian Colors Restaurant decision. Tom is a partner at Wiley Rein, LLP and a George Mason Law grad. He is/was also counsel for, among others,

So he’s had a busy week….]

The Supreme Court’s recent opinion in American Express Co. v. Italian Colors Restaurant (June 20, 2013) (“Amex”) is a resounding victory for freedom-of-contract principles.  As it has done repeatedly in recent terms (see AT&T Mobility LLC v. Concepcion (2011); Marmet Health Care Center, Inc. v. Brown (2012)), the Supreme Court reaffirmed that the Federal Arbitration Act (FAA) makes arbitration “a matter of contract,” requiring courts to “rigorously enforce arbitration agreements according to their terms.”  Amex at 3.  In so doing, it rejected the theory that class procedures must remain available to claimants in order to ensure that they have sufficient financial incentive to prosecute federal statutory claims of relatively low value.  Consistent with the freedom-of-contract principles enshrined in the FAA, an arbitration agreement must be enforced—even if the manner in which the parties agreed to arbitrate leaves would-be claimants with low-value claims that are not worth pursuing.

In Amex, merchants who accept American Express cards filed a class action against Amex, asserting that Amex violated Section 1 of the Sherman Act by “us[ing] its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit cards.”  Amex at 1-2.  And, of course, the merchants sought treble damages for the class under Section 4 of the Clayton Act.  Under the terms of their agreement with American Express, the merchants had agreed to resolve all disputes via individual arbitration, that is, without the availability of class procedures.  Consistent with that agreement, American Express moved to compel individual arbitration, but the merchants countered that the costs of expert analysis necessary to prove their antitrust claims would greatly exceed the maximum recovery for any individual plaintiff, thereby precluding them from effectively vindicating their federal statutory rights under the Sherman Act.  The Second Circuit sided with the merchants, holding that the prohibitive costs the merchants would face if they had to arbitrate on an individual basis rendered the class-action waiver in the arbitration agreement unenforceable.

In a 5-3 majority (per Justice Scalia), the Supreme Court reversed.  The Court began by highlighting the Federal Arbitration Act’s freedom-of-contract mandate—that “courts must rigorously enforce arbitration agreements according to their terms, including terms that specify with whom [the parties] choose to arbitrate their disputes, and the rules under which that arbitration will be conducted.”  Amex at 2-3 (internal quotations and citations omitted).  It emphasized that this mandate applies even to federal statutory claims, “unless the FAA’s mandate has been overridden by a contrary congressional command.”  Amex at 3 (internal quotations and citations omitted).  The Court then briefly explained that no contrary congressional command exists in either the federal antitrust laws or Rule 23 of the Federal Rules of Civil Procedure (which allows for class actions in certain circumstances).

Next, the Court turned to the merchants’ principal argument—that the arbitration agreement should not be enforced because enforcing it (including its class waiver provision) would preclude plaintiffs from effectively vindicating their federal statutory rights.  The Court noted that this “effective vindication” exception “originated as dictum” in prior cases and that the Court has only “asserted [its] existence” without ever having applied it in any particular case.  Amex at 6.  The Court added that this exception grew out of a desire to prevent a “prospec­tive waiver of a party’s right to pursue statutory reme­dies,” explaining that it “would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights.”  The Court added that this exception might “perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable,” Amex at 6, but emphasized that, whatever the scope of this exception, the fact that the manner of arbitration the parties contracted for might make it “not worth the expense” to pursue a statutory remedy “does not constitute the elimination of the right to pursue that remedy.”  Amex at 7.

The Court closed by noting that its previous decision in AT&T Mobility v. Concepcion “all but resolves this case.”  Amex at 8.  In Concepcion, the Court had invalidated a state law “conditioning enforcement of arbitration on the availability of class procedures because that law ‘interfere[d] with fundamental attributes of arbitration.’”   As the Court explained, Concepcion specifically rejected the argument “that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system’” thus establishing “that the FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low value claims.”  Amex at 9 (quoting Concepcion).  The Court made clear that, under the FAA, courts are to hold parties to the deal they struck—arbitration pursuant to the terms of their arbitration agreements, even if that means that certain claims may go unprosecuted.  Responding to a dissent penned by Justice Kagan, who complained that the Court’s decision would lead to “[l]ess arbitration,” contrary to the pro-arbitration policies of the FAA, Amex dissent at 5, the Court doubled down on this point, emphasizing that the FAA “favor[s] the absence of litigation when that is the consequence of a class-action waiver, since its ‘principal purpose’ is the enforcement of arbitration agreements according to their terms.”  Amex at 9 n.5 (emphasis added).

By holding parties to the deal they struck regarding the resolution of their disputes, the Court properly vindicates the FAA’s freedom-of-contract mandates.  And even assuming the dissenters are correct that there will be less arbitration in individual instances, the opposite is true on a macro level.  For where there is certainty in contract enforcement, parties will enter into contracts.  Amex thus should promote arbitration by eliminating uncertainty in contracting and thereby removing a barrier to swift and efficient resolution of disputes.

In Antitrust & Competition, Credit Cards, Financial Regulation, Regulation, Supreme Court, Telecommunications, Wireless , , , , , , , , , , ,
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