For many years, the United States Supreme Court has recognized that an agreement to arbitrate will not be enforced if it prevents the effective vindication of federal statutory rights. This rule, called the “effective vindication rule,” has its origins in a case from 1985 called Mitsubishi Motors v. Soler, 473 U.S. 614. Its purpose is simple: to prevent corporations (and others) from crafting arbitration agreements that will for all practical purposes deprive ordinary people of their day in court.
Significantly, from 1985 until now, the effective vindication rule has been repeated and reiterated over and over again. As Justice Kagan’s forceful dissent in American Express v. Italian Colors explains:
[I]n the decades since Mitsubishi, we have repeated its admonition time and again, instructing courts not to enforce an arbitration agreement that effectively (even if not explicitly) forecloses a plaintiff from remedying the violation of a federal statutory right. Slip Op. at 4.
Unfortunately, on June 20, 2013, five justices on the Supreme Court decided that almost 30 years of the effective vindication rule had come to an end. In Italian Colors, those five justices compelled a small company to arbitrate its claims against the gigantic American Express Corporation (“Amex”). They did so even where the cost of such arbitration would render it a “fool’s errand” because:
- In order to prevail on its claims, the small company would have to pay an expert hundreds of thousands of dollars to analyze the monopolistic nature of Amex’s actions;
- The arbitration clause at issue prevented any kind of joinder or consolidation of claims or parties;
- The arbitration clause had a confidentiality provision that prevented the small company from joining with other small companies to create a common expert report; and
- The arbitration clause prohibited shifting the costs of the arbitration to Amex.
The most money that the small company could have recovered from Amex was about $38,000. The cost of the expert report alone was in the hundreds of thousands of dollars. No rational person would go forward in such a situation. Amex had therefore effectively prevented the small company from remedying a violation of the federal law barring monopolies (the Sherman Act).
And yet, five justices on the Supreme Court concluded that the small company should be forced into arbitration, subject to the terms set forth above.
Why is this important to workers, and why should you care? Because what it may mean is that a company can force employees to sign an arbitration agreement if they want to work for that company. If an employee later brings a claim to enforce her rights in the workplace, and that arbitration agreement effectively prevented her from doing so, Italian Colors seems to stand for the proposition that that agreement would be enforced. This is so even if it means that the employee is effectively deprived of her federal rights under the Fair Labor Standards Act. Those rights include, for example, the right to be paid for all hours worked and the right to overtime pay.
In other words, companies can use arbitration agreements to do an end run around rights that workers have enjoyed for 75 years. That seems incredibly wrong and unjust.
Here is an example of how Italian Colors could play out for you: Imagine that when you apply to work for a company you have sign (as one of the many forms given to you to sign) an agreement to arbitrate your claims that prevents you from bringing a class action or any type of collective action. Several years go by. Now imagine that you discover that the company has shortchanged you and all of your fellow employees by not paying you all of the money you are owed. You talk with your co-workers and determine that each of you is owed a few thousand dollars.
Are you really going to find a lawyer and file a lawsuit to recover a few thousand dollars if that is the most you will recover even if you win? Probably not. Life is too short. And what if the company retaliated against you for doing so? But if you could join with your fellow coworkers, you might. And, if successful you might recover a lot of money (perhaps even millions of dollars) for a large group of people who had been similarly ripped off.
While its scope has yet to be determined, Italian Colors might mean that you are unable to join together with other employees, and that if you want to move forward you will have to do so on your own.
As discussed in earlier posts on this blog and elsewhere, many people are calling for an amendment to the Federal Arbitration Act that allows regular people to avoid unfair arbitration agreements and have their day in court. Perhaps Italian Colors will be the straw that compels Democrats in Congress to move forward in that direction.