Italian Colors Decision Shows Supreme Court’s True Colors On Arbitration Agreements

Originally posted to the California Employment Lawyer Association’s blog.

Many people don’t realize that when they start working at a new company the papers they sign often contain agreements to give up their right to go to court if their rights are violated. Too often, it is only when a company has fired that worker, refused to pay her overtime, or subjected her to harassment that a person turns to a lawyer and discovers that the employment dispute will be decided by an arbitrator, not a judge or a jury.

Even if the prospective employee reads and understands that what they are signing requires them to arbitrate, their “agreement” is hardly a voluntary one – most employees are powerless to alter the terms of an employment agreement. For many, the need to pay bills outweighs the concern that someday that employee may have a dispute with the employer.

The downsides of arbitration to employees and consumers are many. Employers and large corporations are more likely to be “repeat players” in arbitration, and it is well known that arbitrators tend over time to become partial to those that employ them regularly. In addition, an arbitrator who does provide a large judgment to an employee is subject to being blackballed by the employers who may refuse to agree to use that arbitrator in the future. According to a 2007 survey conducted by the non-profit Public Citizen, consumers had lost more than 94 percent of cases handled by the debt collection arbitrator National Arbitration Forum. The Supreme Court’s June 20 decision in American Express Co. v. Italian Colors Restaurant continues an aggressive run of cases by this Court that take the side of big business against the little guy. In Italian Colors, owners of a small restaurant tried to challenge an arbitration agreement that was forced upon them by American Express. The restaurant owners claimed that American Express violated federal antitrust laws that affected small businesses as a class, but the arbitration agreement prohibited any class action claims.

Unfortunately, the restaurant’s individual claim was only worth $38,549. The cost of arbitrating the case was estimated to be between $100,000 and $1,000,000. Unless the restaurant could bring a class action, there was no way it could recover its loss. The restaurants argued that the class action prohibition in the arbitration agreement prevented the enforcement of federal antitrust laws.

Justice Scalia, writing for the majority, upheld the class action prohibition in the arbitration agreement. In her sharply worded dissent, Justice Kagan called the decision a ” betrayal of our precedents,” wherein “the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”

Employee arbitration agreements may still be challenged on grounds that they are unconscionable if the employee was forced to accept the agreement and the terms of the agreement are overly harsh or one-sided in some respect, then the arbitration agreement will not be upheld.

But the Italian Colors case demonstrates that the Federal Arbitration Act, which was passed in 1925, needs to be amended. Congress must respond to the Supreme Court’s extreme interpretation, which threatens to undermine important legislation protecting consumers, employees and other vulnerable citizens.

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