The Role of Arbitration Agreements in Antitrust Class Action Cases - ABA YLD 101 Practice Series

By Eric S. Hochstadt

Many plaintiffs (individuals and businesses) bring antitrust cases as putative class actions on behalf of themselves and other similarly situated plaintiffs for treble damages under Rule 23(b)(3) of the Federal Rules of Civil Procedure. Arbitration agreements can affect how these cases are litigated. Due to the cost and length of time typically associated with the judicial resolution of disputes, businesses are relying upon other methods of dispute resolution, such as arbitration. Commercial contracts between businesses often contain arbitration clauses that provide for, inter alia, the type of disputes that can be resolved in arbitration and the arbitral forum where any such disputes will be heard. 1 Everyday consumer contracts between businesses and individuals, such as cable subscriber and cellular telephone agreements, routinely contain clauses that provide for arbitration as the means for resolving disputes. 2 In general, these clauses contain an express waiver of a consumer's ability to proceed in arbitration on a class-wide basis.

What does this all mean for the new antitrust practitioner? Whether you represent a plaintiff seeking to avoid arbitration or a defendant seeking to compel arbitration, the role of arbitration agreements may be a part of your case analysis and litigation strategy. This article discusses some key arbitration issues that arise in antitrust class action lawsuits, such as:

  • the arbitrability of antitrust disputes;
  • the enforceability of an arbitration clause by a non-signatory to the contract; and
  • defenses to express class action waivers in arbitration clauses. 3
  1. Arbitrability of Antitrust Disputes
    1. The Pre- Mitsubishi World -- The American Safety Doctrine
      Historically, there was judicial hostility against the arbitration of antitrust claims. The Courts of Appeals uniformly followed the " American Safety doctrine", which generally held that rights conferred by the federal antitrust laws were inappropriate for resolution in an arbitral forum. See American Safety Equip. Corp. v. J.P. Maguire & Co., 391 F.2d 821 (2d Cir. 1968). In fact, "all of the federal courts that ha[d] considered the question ha[d] uniformly and unhesitatingly concluded that agreements to arbitrate federal antitrust issues [were] not enforceable." 4 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 655-65 (1985) (Stevens, J. dissenting) (citing, inter alia, American Safety, 391 F.2d at 826-27).
    2. Supreme Court's Mitsubishi Decision -- Arbitrability of Antitrust Claims
      In Mitsubishi Motors Corporation v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 629-40 (1985) (" Mitsubishi"), a five-Justice majority of the Supreme Court concluded that antitrust claims are arbitrable. Two important aspects of the Supreme Court's reasoning were
      (i) that the litigation involved a transaction that was international in nature, and (ii) that the party compelled to arbitrate its claims could effectively vindicate its statutory rights in arbitration.
      1. International Transaction Rationale
        In reaching its determination, the Supreme Court expressly took account of the fact that the underlying dispute between the parties was international in nature. A Japanese automobile manufacturer and a Puerto Rican automobile distributor had entered into an agreement which contained an arbitration clause providing for the resolution of disputes in a Japanese arbitral forum. Id. at 616-17. The Supreme Court "conclude[d] that concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes require that [it] enforce the parties' agreement . . . ." Id. at 629. Notably, the Supreme Court"[found] it unnecessary to assess the legitimacy of the American Safety doctrine as applied to agreements to arbitrate arising from domestic transactions." Id.
      2. Vindication of Statutory Claims in Arbitration
        Despite declining "to assess the legitimacy of the American Safety doctrine as applied to agreements to arbitrate arising from domestic transactions," the Supreme Court" confess[ed] . . . some skepticism of certain aspects of the American Safety doctrine." Id. at 629, 632. Noting that "the core of the American Safety doctrine [is] the fundamental importance to American democratic capitalism of the regime of the antitrust laws," the Supreme Court stated that "[t]here is no reason to assume at the outset of the dispute that international arbitration will not provide an adequate mechanism" for the enforcement of the antitrust laws where the parties' intent is for those laws to decide their dispute. Id. at 634, 636. The Supreme Court stated further that "so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute [ i.e., the Sherman Act] will continue to serve both its remedial and deterrent function." Id. at 637.
    3. Mitsubishi Decision Extended to Arbitrability of Domestic Antitrust Claims
      While "the Supreme Court has yet to directly consider the arbitrability of domestic antitrust claims," many courts have enforced arbitration clauses in relation to these claims. In re Cotton Yarn Antitrust Litig., 505 F.3d 274, 282 (4th Cir. 2007). Numerous circuit and district courts, based in whole or in part on the reasoning in Mitsubishi and subsequent Supreme Court decisions that have cited Mitsubishi without limiting its reach to the international context, have expressly held that antitrust claims arising out of an agreement embodying a domestic transaction are arbitrable. See id. ("We . . . have no difficulty concluding that domestic antitrust claims, as a class, are suitable for arbitration.") (citing, inter alia, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991) ("[C]laims under [the Sherman Act] are appropriate for arbitration.")); see also Kotam Elec., Inc. v. JBL Consumer Prods., 93 F.3d 724, 728 (11th Cir. 1996) (en banc) ("In light of Mitsubishi and its progeny . . . , we hold that . . . arbitration agreements concerning domestic antitrust claims are enforceable."). 5
  2. Enforceability of Arbitration Clauses by Non-Signatories
    1. Arbitration as a Matter of Contract and Certain Exceptions
      As a general rule arbitration is a "matter of contract." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995). Accordingly, "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960)."Although arbitration is a contractual right that is generally predicated on an express decision to waive the right to trial in a judicial forum," under certain circumstances "the lack of a written arbitration agreement [between a signatory and a non-signatory] is not an impediment to arbitration." Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 756-57 (11th Cir. 1993) (citing McBro Planning and Dev. Co. v. Triangle Elec. Constr. Co., Inc., 741 F.2d 342, 344 (11th Cir. 1984)). One of the doctrines that courts have used frequently in antitrust cases to allow the enforcement of an arbitration agreement by and/or against a non-signatory to the agreement is equitable estoppel. 6
    2. Equitable Estoppel
      Courts have applied a doctrine often referred to as equitable estoppel to permit a non-signatory to enforce an arbitration agreement against a signatory who is attempting to "have it both ways." Hughes Masonry Co., Inc. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 839 (7th Cir. 1981)."[A signatory] cannot rely on the contract when it works to its advantage, and repudiate it when it works to (its) disadvantage." Id.(quoting Tepper Realty Co. v. Mosaic Tile Co., 259 F. Supp. 688, 692 (S.D.N.Y. 1966))."'[T]he lynchpin for equitable estoppel is equity' and the point of applying it to compel arbitration is to prevent a situation that 'would fly in the face of fairness.'" Hill v. GE Power Sys., Inc., 282 F.3d 343, 349 (5th Cir. 2002) (quoting Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 528 (5th Cir. 2000)). 7
      In JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 177-78 (2d Cir. 2004), the Second Circuit applied the equitable estoppel doctrine to compel plaintiffs, who chartered ships, to arbitrate their price-fixing claims under Section 1 of the Sherman Act, 15 U.S.C. §1, against certain ship owners who were not signatories to the charter contracts containing the arbitration clause. Some of the charter contracts were signed by subsidiaries of the ship owners, rather than by the ship owners themselves. Id. at 177. The Second Circuit stated that equitable estoppel applies where: (i) a close relationship is alleged between the signatory-plaintiff and the non-signatory-defendant; and (ii) the signatory-plaintiff's claims against the non-signatory-defendant are "'intertwined with the agreement that the estopped party has signed.'" Id. (quoting Choctaw Generation Ltd. P'ship v. Am. Home Assurance Co., 271 F.3d 403, 406 (2d Cir. 2001)). The first prong was satisfied because, inter alia, "the amended complaint 'repeatedly allege[d] that, whatever corporate entities happened to sign the [charter contracts], [JLM] was purchasing shipping services directly from the parents and was harmed by the allegedly inflated prices charged by those parents . . . .'" Id. at 178. The second prong was met because "the questions the [non-signatory-defendants] [sought] to arbitrate [were] undeniably intertwined with the charters, since . . . it [was] the fact of JLM's entry into the charters containing allegedly inflated price terms that [gave] rise to the claimed injury." Id.
      In addition to applying the equitable estoppel doctrine to plaintiffs' allegations, the Second Circuit outlined the scope of the doctrine in its JLM decision. The Second Circuit stated that"[t]he principles of estoppel . . . are not limited to relations among corporate parents and their signatory subsidiaries." Id. at 178 n. 7 (citing Choctaw Generation Ltd., 271 F.3d at 406 (estopping building owner from avoiding arbitration of claim against signatory builder's surety); MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999) (estopping car buyer from avoiding arbitration with service company that allegedly conspired with signatory car dealership). Based on its broader view of the equitable estoppel doctrine, the Second Circuit rejected plaintiff's attempt to avoid "arbitration of any claim that a given [non-signatory defendant] [was] jointly and severally liable for the Sherman Act violations of another [non-signatory defendant]." Id. Finally, the Second Circuit emphasized that "this estoppel inquiry is fact-specific" and that it had not had in JLM "occasion to specify the minimum quantum of 'intertwined-ness' required to support a finding of estoppel." Id. at 178.
  3. Defenses to Express Class Action Waivers in Arbitration Clauses
    Arbitration provisions in everyday consumer contracts or contracts of adhesion, typically contain a class action waiver. In general, this provision expressly precludes a consumer from proceeding with a claim on a class-wide or consolidated basis in arbitration. 8 While there are several defenses that can be raised by plaintiffs seeking to avoid arbitration altogether, 9 two common defenses are used by plaintiffs to avoid enforcement of express class action waivers in arbitrations clauses. They are (i) that the express class action waiver is unconscionable, and (ii) that the express class action waiver prevents the vindication of statutory rights.
    1. Unconscionability
      In consumer class action cases, which may only involve common law claims like unjust enrichment, the primary defense asserted by plaintiffs to preclude the application of an express class action waiver is that the term is unconscionable under the forum's state law. Under the FAA, written agreements to arbitrate "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §2. In Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996), the Supreme Court stated that "generally applicable contract defenses, such as . . . unconscionability, may be applied to invalidate arbitration agreements without contravening §2. 10 Most states have some form of an unconscionability doctrine that renders unenforceable contracts which are procedurally and/or substantively unconscionable. For example, the Pennsylvania Supreme Court stated that procedural unconscionability refers to a "lack of meaningful choice in the acceptance of the challenged provision" and substantive unconscionability refers to a "provision [that] unreasonably favors the party asserting it." Salley v. Option One Mortgage Corp., 925 A.2d 115, 119 (2007).
      State and federal courts are split on the issue of whether express class action waivers are unconscionable. 11 Choice of law determinations, including an analysis of any choice of law clause in the contract containing the arbitration provision with the express class action waiver, are important to these decisions because some states have strong public policies in favor of or against class action lawsuits. 12 Cost determinations for a claim to be pursued in arbitration on an individual basis are also important to these cases. The Supreme Court's decision in Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 90-91 (2000), set forth standards for making this determination, including that the party seeking to avoid arbitration bears the burden of proof on the issue of "prohibitive costs" and that mere speculation here is insufficient. 13
    2. Prevention of the Vindication of Statutory Rights
      In antitrust class action cases, which involve statutory claims, the defense asserted recently by plaintiffs to avoid express class action waivers is that they prevent the vindication of statutory rights in violation of Mitsubishi, 473 U.S. at 637. In Kristian v. Comcast Corporation, 446 F.3d 25, 53-62 (1st Cir. 2006), several provisions in the arbitration clause in Comcast's cable subscriber agreements were held unenforceable on this basis, including the express class action waiver. The First Circuit concluded that it would prevent the named plaintiff cable subscribers from vindicating their statutory rights under Section 1 of the Sherman Act. 14
      In reaching its determination, the First Circuit relied on the evidentiary record consisting of "unopposed expert declarations" to the effect that "each putative class member's estimated recovery" would be overwhelmed by the costs of expert and attorneys' fees necessary to the prosecution of a complex antitrust lawsuit. Id. at 54. In addition, the First Circuit distinguished Johnson v. West Suburban Bank, 225 F.3d 366 (3d Cir. 2000), a leading case that rejected a similar defense to an express class action waiver in a case involving alleged violations of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq. Id. at 55-60. According to the First Circuit, a TILA violation is easier to prove on an individual basis than an antitrust violation. Id. at 57 ("[P]rosecuting a typical TILA claim [which hinges on whether the facts about a specific transaction do or do not establish a violation of the TILA] is vastly different from prosecuting an antitrust claim because of the sheer complexity of the latter."). For the same reason, the First Circuit rejected the rationale in Johnson that the ability for a prevailing plaintiff's attorney to recover statutory attorneys' fees is sufficient to ensure that an attorney will represent a plaintiff in an individual arbitration. Id. at 59 n. 21 (stating that "this would be, at best, a dubious investment for any rational attorney"). Ultimately, the First Circuit compelled arbitration on a class-wide basis because Comcast's subscriber agreement contained a severability clause that saved the remainder of its arbitration clause.
  4. Conclusion
    Litigating an antitrust class action case can be complicated. Now that it is widely recognized that international and domestic antitrust claims are arbitrable, arbitration agreements may be a part of the analysis. Case law on the issues of non-signatory enforcement and the validity of express class action waivers continues to develop. Even if arbitration agreements do not result in the dismissal of a case, they can substantially narrow a proposed class or result in a stay against some defendants pending resolution of claims in arbitration against other defendants.

1See, e.g., Paramedics Electromedicina Comercial, Ltda. v. GE Med. Sys. Info. Tech., Inc. , 369 F.3d 645, 648-49 (2d Cir. 2004) (discussing the arbitration provision in a contract between a U.S. manufacturer of medical equipment and a Brazilian distributor of said equipment).

2See, e.g., Kristian v. Comcast Corp., 446 F.3d 25, 30-32 (1st Cir. 2006) (discussing the arbitration provisions in Comcast's cable subscriber agreements); Kinkel v. Cingular Wireless LLC, 857 N.E.2d 250, 254-57 (Ill. 2006) (discussing the arbitration provisions in Cingular's cellular telephone agreements).

3 This article does not attempt to cover other arbitration issues, including: (i) the applicable law governing an arbitration clause; (ii) the ability to appeal as of right from a decision refusing to enforce an arbitration clause; (iii) theextent of the application of the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 et seq.,in state courts; and (iv) whether a court or an arbitrator should decide certain threshold challenges to the enforcement of an arbitration clause. These arbitration issues are important, but are not common to antitrust class action cases.

4 Justice Lewis F. Powell did not take part in the Mitsubishi decision.473 U.S. at 640.

5 Although Mitsubishi concerned a vertical price-fixing claim under the Sherman Act, courts have not limited the decision to that type of antitrust claim. See, e.g., JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 179-81 (2d Cir. 2004) (compelling arbitration of horizontal price-fixing claims); Kristian v. Comcast Corp., 446 F.3d 25, 48-50, 64 (1st Cir. 2006) (compelling arbitration of state antitrust claims).

6 In addition to equitable estoppel, courts have recognized five other doctrines that may be applied to allow the enforcement of an arbitration agreement by and/or against a non-signatory to the agreement: (i) incorporation by reference; (ii) assumption; (iii) agency; (iv) veil-piercing or alter ego; and (v) third-party beneficiary. See, e.g., Hellenic Inv. Fund, Inc. v. Det Norske Veritas, 464 F.3d 514, 517 (5th Cir. 2006).

7 Choice of law issues in nonsignatory enforcement based on equitable estoppel can be significant, and sometimes outcome determinative, and courts vary as to whether the doctrine is governed by federal or state law. Compare, e.g., Metalclad Corp. v. Ventana Envtl. Org. P'ship, 109 Cal. App. 4th 1705, 1712-13 (Cal. Ct. App. 2003) (applying the test for equitable estoppel applied by circuit courts because the issue is one of enforcement, not contract interpretation, the latter of which is governed by state law) (citing Int'l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 417 n. 4 (4th Cir. 2000)), with, e.g., In re Merrill Lynch Trust Co., 235 S.W.3d 185, 191-95 (Tex. 2007) (declining to adopt the Fifth Circuit's test for equitable estoppel; affirming denial of motion to compel arbitration by nonsignatory defendants based on Texas law; stating that"[u]ntil the United States Supreme Court clarifies whether concerted-misconduct estoppel correctly reflects federal law, or even whether federal or state law governs the issue, today's decision must remain somewhat tentative.").

8 In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 450-53 (2003), a plurality of the Supreme Court interpreted an arbitration clause that was silent on the issue of whether it prohibited class arbitration and held that it was for the arbitrator, not the courts, to decide.

9 Defenses that are not discussed in this article but are often raised by plaintiffs seeking to avoid arbitration altogether or certain arbitration terms include: (i) an agreement (containing an arbitration clause) was never reached; (ii) the dispute falls outside the scope of the arbitration clause; (iii) the party seeking to compel arbitration waived its right to do so; and (iv) the provisions of the arbitration clause waive or modify substantive rights. The separate issue of whether the court or an arbitrator will decide the merits of these defenses is also important here. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).

10 An area of litigation here is whether a"generally applicable contract defense" based on state law, such as unconscionability, is being applied in a manner that places arbitration agreements on an unequal footing with contracts that do not have an arbitration agreement. See, e.g., Kinkel v. Cingular Wireless LLC, 857 N.E.2d 250, 260-63 (Ill. 2006) (rejecting Cingluar's preemption argument under 9 U.S.C. §2:"[T]he FAA neither expressly nor impliedly preempts a state court from holding that an arbitration clause or a specific provision within an arbitration clause is unenforceable . . . . Because our analysis on the question of class action waivers is applicable to all contracts governed by Illinois law, it can be applied to render the class action waiver in an arbitration clause unenforceable without undermining the goals and policies of the FAA.").

11 Compare, e.g., Strand v. U.S. Bank Nat'l Ass'n ND, 693 N.W.2d 918, 926 (N.D. 2005) (express class action waiver was not substantively unconscionable under North Dakota law:"Merely restricting the availability of a class action is not, by itself, a restriction on substantive remedies. The right to bring an action as a class action is purely a procedural right."), with, e.g., Discover Bank v. Superior Court, 36 Cal. 4th 148, 162-63 (Cal. 2005) (express class action waivers are unconscionable under California law under certain circumstances:"[w]hen the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money . . . .").

12 These policies are reflected in state statutes or judicial precedents. See, e.g., Homa v. Am. Express Co., 496 F. Supp. 2d 440, 447-49 (D.N.J. 2007) (applying Utah law and enforcing an express class action waiver in an arbitration provision even if the provision would be unenforceable under New Jersey law because the application of Utah law did not violate any fundamental public policy of New Jersey) (citing Utah Code Ann. §70C-4-105 ("[A] creditor may contract with the debtor of an open-end consumer credit contract for a waiver by the debtor of the right to initiate or participate in a class action related to the open-end consumer credit contract.")).

13 See, e.g., In re Cotton Yarn Antitrust Litig., 505 F.3d 274, 293 (4th Cir. 2007) (vacating denial of motion to compel arbitration of Sherman Act claims: "[W]hile the requirement of proceeding separately perhaps in some case could be prohibitively expensive, the plaintiffs in this case have failed to carry their burden of demonstrating that the costs of separate arbitration proceedings would be so high that they could not proceed with their claims.").

14 The First Circuit noted the similarity with"the unconscionability analysis [because it] always includes an element that is the essence of the vindication of statutory rights analysis -- the frustration of the right to pursue claims granted by statute." Kristian, 446 F.3d at 60 n. 22.

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About the Author

Eric Hochstadt is a fifth-year associate in the Litigation/Regulatory Law Department of Weil, Gotshal & Manges LLP.  From 2006-07, Mr. Hochstadt was a judicial clerk for the Honorable Loretta A. Preska in the United States District Court for the Southern District of New York.  This article is not, and should not be relied upon as, legal advice.  Case citations are illustrative only. The author is grateful for the editorial assistance of Micah Nicole Hildenbrand, a third year associate in the Washington D.C. office of Kirkland & Ellis LLP.

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