The First Circuit Court of Appeals has ruled against American Express Company (Amex) in a significant case involving small merchants. The court upheld a lower court's decision that denied Amex's request to compel arbitration regarding swipe fees charged to merchants. This ruling affects thousands of small businesses across the United States that have raised concerns about Amex's fee policies.
The case, 5-Star General Store v. American Express Company (Docket No. 25-1023), centers on a dispute between a small store in Pawtucket, Rhode Island, known as 5-Star General Store & Deli, and Amex. The store, along with other small merchants, filed demands for arbitration against Amex, challenging the company's swipe-fee policies. These fees, which can exceed three percent of each credit card transaction, have been a financial burden for many small businesses.
The conflict began in August 2023 when 5-Star filed arbitration demands with the American Arbitration Association (AAA) against Amex, citing the company's non-discrimination provisions that prevent merchants from incentivizing customers to use cheaper payment methods. As the arbitration process unfolded, a dispute arose regarding the filing fees owed to AAA for 5,155 arbitration cases. While 5-Star paid its share of the fees, Amex refused to pay its portion, leading to the administrative closure of the cases.
In March 2024, 5-Star filed a class action complaint in the District Court for the District of Rhode Island, alleging that Amex waived its right to compel arbitration by failing to pay the necessary fees. Amex responded by seeking to stay the litigation and compel arbitration, but the district court denied this motion, leading to Amex's appeal.
The First Circuit Court's ruling focused on whether the district court had the authority to determine if Amex had defaulted on its obligation to arbitrate. The court found that the district court did indeed have this authority, as Amex's failure to pay fees constituted a litigation-related activity. The court stated, "The claims before us are the same claims that 5-Star attempted to bring before AAA, and in each one of those claims, Amex refused to pay the fees to open the arbitration."
Furthermore, the court ruled that Amex had waived its right to compel arbitration by choosing not to pay the fees, despite repeated warnings from AAA that the cases would be closed without payment. The court noted, "Amex's refusal to pay the filing fees set by the arbitrator resulted in the foreseeable (and forewarned) outcome of closure of those arbitrations."
This ruling has significant implications for small merchants who have long argued that Amex's swipe fees are excessively high and detrimental to their businesses. By affirming the lower court's decision, the First Circuit has upheld the rights of these merchants to challenge Amex's practices in court rather than being forced into arbitration.
The ruling also highlights the importance of arbitration agreements and the responsibilities of companies to adhere to the terms outlined in those agreements. The court's decision reinforces that failure to comply with arbitration procedures can lead to a loss of the right to compel arbitration.
Looking ahead, this ruling may set a precedent for similar cases involving arbitration agreements and the enforcement of fee structures within those agreements. Small businesses across the country may feel empowered to challenge large corporations like Amex on similar grounds, potentially leading to more litigation over arbitration practices.
As for Amex, the company may consider its options for appeal, although details about any potential next steps were not available in the court filing. The outcome of this case could influence how companies approach arbitration agreements and fee structures in the future, particularly in industries where small businesses are heavily impacted by corporate policies.