First Circuit Rules That Antitrust Treble Damage Class Arbitration May Proceed, But Strikes Contractual Restrictions

Tuesday, August 1, 2006 - 01:00

In the latest of a number of decisions examining the allowable restrictions that may be placed upon private agreements to arbitrate antitrust disputes, the First Circuit has allowed claims on behalf of a class to be arbitrated - but has disallowed certain restrictions placed on the plaintiffs' class. In Kristian v. Comcast Corp.,1 decided on April 20, 2006, the court held that a treble-damage waiver, fee-shifting prohibition, and class-action waiver within the arbitration agreement would not be enforced pursuant to a pair of "savings clauses." These savings clauses allowed the court to sever that which it determined to be illegal or unenforceable, while enforcing the remainder of the provisions.

Accordingly, the case could go to arbitration, but without three of the clauses that likely had made arbitration attractive to the defendant in the first place. If the First Circuit's opinion is followed in other jurisdictions, potential defendants may hesitate to include arbitration in a contract as a method by which to settle antitrust disputes.

Factual Background

Plaintiffs Kristian, Masterman, Pinella, and Rogers are cable subscribers who filed class action complaints in late 2003, alleging that the prices they were paying for cable services were inflated as a result of anticompetitive practices on the part of defendants Comcast and AT&T Broadband.2 The complaints allege that Comcast's exclusionary conduct was highlighted by its refusal to provide programming access to competitors both before and after its merger with AT&T Broadband.3

Comcast began in 2001 to include an arbitration provision within its "Policies & Practices" distributed to subscribers. All four plaintiffs already were subscribers at that time.4 Comcast sent new versions of its "Policies & Practices" to subscribers in 2002 and 2003, which contained a new arbitration provision, and moved to compel arbitration in this case pursuant to the arbitration provision contained in the 2003 "Policies & Practices."5 That provision included the following restrictions: (1) a warning as to the possibility of limited discovery in arbitration; (2) a shortened statute of limitations; (3) a bar on treble damages; (4) a bar on recovery of attorneys' fees; and (5) a bar on class arbitration.6 Plaintiffs alleged that each of these restrictions was unenforceable because it precluded them from vindicating statutory rights under the antitrust laws.7

The Court's Analysis

Based upon a number of Supreme Court precedents, most recently PacifiCare Health Systems, Inc. v. Book8 and Green Tree Financial Corp. v. Bazzle,9 the First Circuit identified the threshold issue as whether an arbitrator or the court should determine whether Plaintiffs' statutory rights were infringed by the five challenged restrictions in the arbitration provision.10

Limited Discovery

The arbitration provision informed subscribers that arbitration "may result in limited discovery," and Plaintiffs argued tautologically that this language prevented them from obtaining the amount of discovery they could obtain in a court.11 Noting that the Supreme Court has explicitly held that a limitation on discovery is not grounds to bar enforcement of an arbitration provision,12 the First Circuit held that this issue was for the arbitrator to decide in the first instance.13

Limitations Period

The arbitration provision required subscribers to provide Comcast with notice of a claim within one year of the event(s) which gave rise to it, and Plaintiffs argued that this language conflicted with the four-year statute of limitations for federal antitrust claims.14 The First Circuit looked to its previous precedent, and stated that this issue is "the sort of procedural prerequisite that is presumed to be for the arbitrator," and that its review "may entangle the court in issues that go properly to the merits of the dispute, which are for the arbitrator to decide.15 In addition, Plaintiffs' claims could be characterized as alleging "ongoing injury" which may toll the statute of limitations under certain circumstances.16 The First Circuit held that this was another merits issue requiring factual examination, and therefore was for the arbitrator to decide in the first instance.17

Treble Damages

The arbitration provision at issue eliminated liability for "punitive, treble, exemplary, special, indirect, incidental, or consequential damages."18 Plaintiffs argued that this provision, if enforced, would prevent them from obtaining treble damages if they were successful in court.19

The First Circuit agreed, stating that "there is no doubt that the language of the arbitration agreement and the language of [the Clayton Act] directly conflict."20 While the arbitration agreement purported to eliminate treble damage liability, the Clayton Act states that treble damages "shall" be available for successful antitrust claims.21 The court distinguished PacifiCare, in which the Supreme Court deemed that the arbitrator should determine whether a punitive damage waiver precluded federal antitrust remedies.22 In this case, according to the First Circuit, there was no such ambiguity and, therefore, the court could decide the issue.23

Next, the First Circuit addressed the issue of whether an antitrust plaintiff could waive its right to treble damages by contract. Finding no Supreme Court precedent directly on point, the court referred to Supreme Court dicta stating that a "waiver of a party's right to pursue statutory remedies for antitrust violations" would be unenforceable as a matter of public policy.24 Accordingly, the court held that a treble damages award may not be waived as a matter of law, and that such a waiver, including a waiver in an arbitration agreement, was unenforceable.25

Ultimately, the court chose to sever the treble damage waiver pursuant to a "savings clause" within the "Limitations on Liability" section of the Comcast Policy and Practices, which stated that the remedies provided in the agreement were exclusive "unless applicable law provides that certain remedies, damages and/or warranties cannot be waived, limited or otherwise modified."26 The court thus ordered arbitration of the antitrust claims without a prohibition of treble damages.27

Attorney's Fees

The arbitration provision stated that each side was responsible for all costs incurred in the arbitration, exclusive of filing fees and arbitrator costs, but inclusive of attorney's fees.28 Plaintiffs again argued that this provision prevented them from vindicating statutory rights under both federal and state antitrust law that entitled them to recover attorney's fees and costs for a successful claim.29

The First Circuit first focused on Green Tree Financial Corp.-Alabama v. Randolph ,30 in which the Supreme Court recognized situations where prohibitive arbitration costs might impermissibly "force" a plaintiff to "forgo any claims she may have."31 In Randolph , however, the Supreme Court did not reserve this question for the arbitrator, instead holding that the plaintiff did not meet her burden of showing prohibitive costs.32 The Kristian court declared that Randolph enabled a court to tackle the prohibitive costs issue; and that, unlike Randolph, here the Plaintiffs had "made a strong showing that costs and attorney's fees would be prohibitively expensive."33

The court thus held that the ban on recovery of attorney's fees would in fact preclude Plaintiffs from vindicating their statutory rights in arbitration.34 But the court sidestepped this issue as well by severing the fee shifting prohibition pursuant to another savings clause contained within the "Policies & Practices," a general clause which stated that "[i]f any portion of these Policies & Practices is determined to be illegal or unenforceable, then the remainder of such Policies & Practices shall be given full force and effect."35 As a result, "the arbitral forum remained viable" without the fee shifting prohibition.36

Class Arbitration

Finally, the Comcast arbitration provision prevented class action arbitration and, because the Comcast "Policies & Practices" required arbitration of all disputes, the First Circuit stated that Comcast's true intention was to prevent the use of all class-based mechanisms.37 Plaintiffs argued that they could not vindicate their statutory rights without a class mechanism due to the high costs of arbitration.38

The court began with a lengthy analysis of the wealth of federal law on class action waivers within arbitration agreements, but distinguished the cases that enforced such waivers largely because those cases did not involve antitrust claims.39 The court then stressed that due to the "complexity" and "great expense" associated with antitrust claims, "there will be no incentive for the private enforcement of antitrust claims by consumers" if class action waivers were to be enforced.40

Accordingly, the court concluded that Plaintiffs could not be compelled to arbitrate an antitrust claim if the class action waiver remained in place.41 Comcast argued that the class action waiver should not be severable from arbitration, and that it should not be required to arbitrate a class action.42 The First Circuit rejected this argument as "in stark contrast to the plain language of the arbitration agreements," and again invoked the general savings clause, severing the class action waiver from the arbitration provision.43

Conclusion

In Kristian, the First Circuit fashioned a glum scenario for antitrust defendants wishing to compel arbitration. The court granted the motion to compel arbitration, but under the mandatory provisions of the Clayton Act, it would be an arbitration in which treble damages would be available, attorney's fees could be levied, and a class could be certified. If the First Circuit's view becomes the rule in other circuits as well, the huge sums of money at stake in a complex antitrust action combined with the lack of true appellate oversight of an arbitrator's decision may cause potential defendants to review carefully future use of arbitration clauses with respect to antitrust claims.

This review is particularly important in situations where enforcement of the arbitration clause as written may lead to the waiver of substantive rights, such as treble damages under the federal antitrust laws. Potential antitrust defendants may wish to provide a safeguard within their "savings clauses" that certain enumerated clauses, particularly class action waivers, are material to the agreement and cause the agreement to fail if they are not enforced. This might allow a defendant to avoid arbitration of a class action treble damage case if it so desires. 1 446 F.3d 25 (1st Cir. 2006).
2 Id. at 30.
3 Id.
4 Id.
5 Id.
6 Id. at 41.
7 Id.
8 538 U.S. 401 (2003).
9 539 U.S. 444 (2003).
10 Kristian, at 41 .
11 Id. at 42 .
12 Id . at 42-43, citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).
13 Kristian, at 43 .
14 Id.
15 Id. at 43-44, citing Marie v. Allied Home Mortgage Corp., 402 F.3d 1, 11 (1st Cir. 2005).
16 Id. at 44.
17 Id.
18 Id.
19 Id. at 45.
20 Id.
21 Id.
22 Id. at 46-47, citing PacifiCare, 538 U.S. at 407.
23 Id . Tellingly, the court reached the opposite conclusion regarding the claims under Massachusetts law, finding ambiguity because the state antitrust law gave discretion ("may") to the court in awarding treble damages . Id. at 49-50. Finding PacifiCare dispositive, the court declared that the arbitrator must decide in the first instance whether the treble damages waiver conflicts with Plaintiff's statutory rights under the discretionary provision set out by Massachusetts law.
24 Id. at 47, citing Mitsubishi Motor Corp. v. Soler Chrysler-Plymouth, Inc. 473 U.S. 614, 637 n.19 (1985).
25 Id. at 48
26 Id.
27 Id.
28 Id. at 50.
29 Id.
30 531 U.S. 79 (2000).
31 Randolph, 531 U.S. at 90.
32 Id. at 92.
33 Kristian, at 52.
34 Id. at 52-53.
35 Id. at 53.
36 Id.
37 Id. at 53-54.
38 Id. at 54.
39 Id. at 55-58.
40 Id. at 58-59.
41 Id. at 59.
42 Id. at 61 .
43 Id. at 63.

Daniel B. Hodes is an Associate in the Litigation/Regulatory Department at Weil, Gotshal & Manges LLP. His focus is on antitrust and consumer financial services litigation.

Please email the author at daniel.hodes@weil.com with questions about this article.