At one time, arbitrating antitrust claims was disfavored by courts. In fact, from the late sixties until the U.S. Supreme Court’s decision in Mitsubishi Motors Corp. v. Soler Chrysler Plymouth Inc. in 1985, the American Safety doctrine stood for the general rule that arbitration was ill-equipped to address complex antitrust claims. The reasoning behind this line of thought was that antitrust violations caused an injury to the public at large and therefore, arbitrations, which focus on individual disputes, failed to adequately address this public harm.
Today, the American Safety doctrine is no longer the prevailing viewpoint and arbitrating antitrust disputes has become a completely acceptable practice. In fact, in the last two years the Supreme Court has issued two opinions clarifying when courts should enforce arbitration clauses in antitrust disputes. Both the increased use of arbitration in antitrust and the ever evolving debate surrounding the appropriate use of antitrust arbitration requires that attorneys and their clients develop a strategy for using arbitration in antitrust disputes. This article provides a short discussion of recent developments involving antirust arbitrations and then suggests a number of factors attorneys should consider when discussing advantages and disadvantages to antitrust arbitration with clients.
Stolt-Nielsen and Concepcion
The Supreme Court decided two cases involving antitrust arbitration in the last two years. In Stolt-Nielsen SA v. Animalfeeds International Corp. , the Supreme Court ruled that the FAA forbids arbitrators from imposing class arbitration on parties that have not agreed to it. The focal point of Justice Samuel Alito’s majority opinion reinforced the notion that “arbitration is simply a matter of contract between the parties.” At the same time, the court’s opinion also acknowledged that an arbitrator could, in certain situations, infer party consent notwithstanding contractual silence on the issue. While not entirely novel, this case directs arbitrators to the language of the contract, which should limit unpredictable arbitrator rulings and business exposure to class arbitrations.
In a Supreme Court decision from last April, AT&T v. Concepcion , the Supreme Court held that the FAA pre-empted a California law making class arbitration waivers in consumer contracts of adhesion unconscionable where disputes involved only small damage claims. The spirit of California’s law was consumer protection, and it clearly was an attempt to prevent consumers from unwittingly leaving themselves with only one option when seeking to address small financial disagreements with businesses — disproportionately expensive individual arbitration. The Concepcion plaintiffs alleged that they were defrauded when AT&T advertised a free cellphone, but, after getting the phone, plaintiffs were responsible for paying tax on it. AT&T moved to compel arbitration, arguing that the arbitration clauses in each customer’s contract should be enforced. The plaintiffs argued that the class arbitration waivers were unconscionable under California law. In finding for AT&T, Justice Antonin Scalia’s majority opinion made it clear that the FAA generally favors arbitration, and that where parties have contracted for it, arbitration should be enforced.
Is A Circuit Split Looming?
While the Stolt-Nielsen and Concepcion decisions appear relatively straightforward, the relationship between arbitration and antitrust disputes has become more clouded over the last three months. For example, last week a 2nd U.S. Circuit Court of Appeals decision, In re American Express Merchants’ Litigation , found that an arbitration agreement containing a class action waiver was unconscionable and therefore could not be enforced. The plaintiffs in the case alleged that the cardholder acceptance agreements used by American Express, as well as other conduct, were illegal tying arrangements under Section 1 of the Sherman Act. American Express moved to compel arbitration because each cardholder acceptance agreement contained an explicit arbitration provision, and cited to the Supreme Court’s decision in Concepcion .
Interestingly, the 2nd Circuit did not except American Express’ argument. Instead, the court reasoned that because the plaintiffs established that the cost of individually arbitrating their dispute would be prohibitive, and therefore would effectively deprive them of protection under the federal antitrust laws, the waiver was unenforceable, even considering Concepcion .
As the court explained, “It is tempting to find that [ Concepcion and Stolt-Nielsen ] render class action arbitration waivers per se enforceable. But a careful reading of the cases demonstrates that neither one addresses the issue presented here: whether a class-action arbitration waiver clause is enforceable even if the plaintiffs are able to demonstrate that the practical effect of enforcement would be to preclude their ability to vindicate their federal statutory rights.”
In framing the issue in this way, the 2nd Circuit made the pre-emption question at the center of Concepcion irrelevant. Instead, the court focused on “a vindication of statutory rights analysis, which is part of the federal substantive law of arbitrability.” In so finding, the 2nd Circuit ostensibly adopts the consumer protection rationale that existed in the California law, which the Supreme Court dubbed pre-empted in Concepcion . In making the issue of unconscionability a matter of federal substantive law, the 2nd Circuit may have developed a new roadmap for consumers to bring class action antitrust cases.
In another case from last week, In re Apple and AT&T Antitrust Litigation , a federal judge in California granted a request from a recently decertified class of iPhone users to appeal what originally appeared to be a simple application of Concepcion . The plaintiffs’ claim, which was originally filed in 2007, alleges that Apple and AT&T violated federal antitrust laws by monopolizing the aftermarket for iPhone data and voice services. The court stayed the case twice while waiting on relevant opinions from the Supreme Court. After Concepcion was decided, the plaintiffs argued that the arbitration clauses in their respective contracts with AT&T were unenforceable under federal law because compelling individual arbitration would prevent them from maintaining their statutory rights under the Sherman Act. Moreover, plaintiffs argued that the class action waiver in AT&T’s agreement gave AT&T “de facto immunity from liability for federal statutory violations.” Notably, this is the same argument made by the successful plaintiffs in In re American Express .
Unlike the 2nd Circuit, which seems to favor this rationale, the California district court enforced AT&T’s arbitration clause based on Concepcion and decertified the class. The plaintiffs filed for reconsideration and certification for immediate interlocutory appeal. Last week, the court granted the plaintiffs’ interlocutory appeal to consider the question of whether the case could go on as a class action because Apple, unlike AT&T, did not have an arbitration agreement in its user contracts. Apple had argued, to no avail, that the doctrine of equitable estoppel required arbitration. Thus, after four years and five iPhone generations, the Northern District of California is still working to resolve whether this case should be in arbitration or standard litigation. What is clear, however, is that there is a tension between the 2nd Circuit decision in In re American Express and the district court’s rejection in the 9th Circuit of similar arguments from plaintiffs in In re Apple .
Antitrust Arbitration: What You Should Consider
As In re Apple demonstrates, it is important to consider the benefits of having an arbitration agreement in potential antitrust matters. At the same time, In re American Express demonstrates that companies must consider the language and scope of their arbitration agreements. While a broad, catch-all arbitration agreement might seem like a safe proposition, it can also lead to trouble down the road. For example, in 2011, AT&T announced a $39 million takeover of T-Mobile. One enterprising law firm began a “fight the merger” campaign and filed more than 2,000 separate arbitration demands on behalf of AT&T customers alleging that the merger would increase prices. Hot on the heels of Concepcion , AT&T found itself in a tough position. On the one hand, arbitration was an efficient, cost-effective way to resolve price and contract disputes with consumers. On the other, AT&T did not need 2,000 separate arbitration cases impacting its $39 million deal. Thus, while lawyers and businesses generally view arbitration as a way to lower litigation cost and avoid large, defensive settlements in class actions, drafting arbitration agreements that are overly broad can also expose a company to risks.
Considering the various developments regarding antitrust arbitration over the last year, it is clear that arbitration will be compelled where parties have agreed and the terms are fair. Arbitration provides a number of potential benefits for businesses seeking to limit exposure to antitrust lawsuits.
First, parties can choose arbitrators who are comfortable and familiar with complex antitrust issues. Second, arbitrating antitrust disputes can often lead to a more efficient resolution than traditional litigation because discovery, dispositive motion and other procedures are truncated during arbitration. This efficiency is valuable to businesses that seek predictable, cost-efficient outcomes. Third, antitrust arbitration can protect against “the bad decision,” as arbitrators are generally not bound or limited by stare decisis or collateral estoppel. At the same time, arbitrating antitrust claims may not result in a big, precedential win that discourages similar claims in the future. Fourth, it is often easier to protect confidential information during arbitrations because documents are not necessarily public and there are no electronic filing requirements. Fifth, damages may be limited because there are no passive class members. Sixth, there are limited appeal rights. Finally, remember that arbitration agreements will not protect a client from conspiracy claims from third parties.
As In re American Express and In re Apple demonstrate, antitrust arbitration is still evolving, and additional courts will surely weigh in as to whether arbitration agreements preclude a plaintiff’s ability to vindicate his or her rights under federal statutory law over the next year. Stay tuned. •
Tery Smith is an associate in the firm’s Philadelphia office, where he concentrates his practice on complex commercial litigation. He can be reached at 215-656-2477 or firstname.lastname@example.org.