We posted last week about Pizza Hazel v. American Express Co. That case involves antitrust allegations relating to AmEx’s insistence on anti-steering provisions, which prevent merchants from using discounts to encourage their customers to use means of payment that do not charge high fees for their use, as AmEx rather notoriously does.

We posted last year about the decision of the Rhode Island District Court in 5-Star General Store v. American Express Company, which addressed AmEx’s attempts to evade both mass arbitration and class litigation and to compel arbitration on an individual basis. The District Court rejected AmEx’s arguments, and AmEx has now appealed. Last month, in 5-Star General Store v. American Express Company, the First Circuit found that the District Court did not err in finding that AmEx had waived its right to compel arbitration.

5-Star General Store (5-Star) sought to arbitrate a claim in August 2023, challenging AmEx’s swipe-fee policies, which charge a 3% fee on every purchase and do not permit what the Pizza Hazel court calls steering. But 5-Star was just one of 5,155 arbitration claims filed against AmEx pertaining to its swipe-fee policies. After months of negotiations with the American Arbitration Association (AAA), the AAA determined that 5-Star should pay a $350 fee and AmEx should pay $3150. AmEx refused to pay, and the AAA administrator closed the case, notifying the parties that it would not be re-opened. 5-Star then filed its class action complaint.

AmEx then moved to compel arbitration. The District Court decided that AmEx had defaulted under § 3 of the Federal Arbitration Act and also that it had waived its right to arbitrate. On appeal, AmEx argued that the District Court had exceeded its authority by determining that AmEx had waived its right to arbitrate and defaulted in the arbitration. The District Court should have stayed the proceedings and allowed the arbiter to determine whether AmEX had defaulted.

Under First Circuit precedent, a court can only decide waiver issues if they are “litigation related.” AmEx contended that its failure to pay arbitration fees was not litigation-related. The First Circuit disagreed. The activity at issue arises out of conduct within the very same litigation in which AmEx is trying to compel arbitration and efficiency concerns weigh in favor of allowing the District Court to decide the waiver issue. That seems clearly the right result. I find the language of the First Circuit test unhelpful. On its face, conduct relating to an arbitration does not seem litigation related. The efficiency arguments and something like estoppel reasoning get you to the same result without getting into how many arbitration angels have to dance on the head of a pin before we call it “litigation-related.” In a significant aside, the Court noted that it may not even be possible to send the question of default to the arbiter when no arbiter had been appointed and none was likely to be appointed, as the AAA permanently closed the case.

Having established that the District Court could decide the waiver issue, the First Circuit then had to determine whether it decided it correctly. It did. Waiver is the voluntary relinquishment of a known right. AmEx knew that it had the right to arbitrate. The AAA repeatedly warned AmEx that failure to pay fees would result in the permanent closure of the arbitration. AmEx’s conduct in refusing to pay the fee notwithstanding the AAA’s warnings was a waiver by conduct.

Finally, AmEx argued that 5-Star should be denied relief based on unclean hands. The details are sparse, but a footnote suggests that 5-Star’s alleged misconduct had to do with its tardy payment of the arbitration fees that it owed. It is not clear that the claim at issue is the kind to which the unclean hands doctrine would apply. In any case, 5-Star did timely pay its arbitration fees.

It’s a bit rich for AmEx to assert equitable defenses in this case, when it has spent three years trying to deprive its counterparties of a forum in which they can vindicate their claims. In this case, AmEx strategically refused to engage in arbitration and then, once hauled into court, attempted to return to an arbitral forum. In Pizza Hazel, AmEx attempted to use its contractual means to evade the court’s jurisdiction, but the court found the contract illusory. AmEx’s litigation strategy tells a great story of a company exploiting its market power to evade accountability and stretching out legal proceedings for years.