February 17, 2022
Jesse W. Markham, Donald I. Baker, Lucy Clippinger
It has long been settled that private antitrust disputes are arbitrable. In 1985, the US Supreme Court ruled that antitrust disputes are arbitrable if the claims are “encompassed within a valid arbitration clause in an agreement embodying an international commercial transaction”.(1) In the wake of Mitsubishi Motors Corp v Soler Chrysler-Plymouth, arbitrability has been broadly extended to domestic antitrust and other federal statutory claims. The principal statute that governs arbitration in the United States is the Federal Arbitration Act (FAA).(2) The FAA supports arbitrability of disputes that arise under a contract involving interstate or foreign commerce. In applying the FAA, the US courts have not hesitated to enforce arbitration clauses to domestic antitrust claims.
Federal agencies, including the Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission are also authorised to resolve certain antitrust cases through arbitration. The Administrative Dispute Resolution Act 1996(3) authorises agencies to use binding arbitration if the agency in question has issued appropriate guidelines.(4) In 1996, the DOJ issued specific guidance on the appropriate use of binding arbitration. That guidance provides that it is the policy of the DOJ:
to encourage the use of ADR techniques in those civil cases where time permits and there is a reasonable likelihood that ADR would shorten the time necessary to resolve a dispute or otherwise improve the outcome for the United States.(5)
Indeed, a recent merger challenge, US v Novelis Inc,(6) was referred to arbitration by the DOJ. In Novelis, the agency submitted to the court the proposal to arbitrate, noting that there was a single dispositive issue, which both parties agreed made the case suitable for a focused resolution through the more efficient mechanism of arbitration.
Drafting arbitration agreements
The key advantage to arbitration is that, when carefully planned, it can enable a party to design its own rules that are tailored to more efficient dispute resolution. The high cost of antitrust litigation in court and often slow process of resolving big cases have made arbitration something that a well-counselled company should consider.
There are two broad circumstances for doing so:
- The most common circumstance involves a company that is concerned about a real risk of antitrust litigation based on the history of the company itself or its industry. For example, supply contracts in some industries tend to trigger antitrust claims by discontinued customers and network operations can frequently generate antitrust disputes over fees and rules. Consumer contracts frequently include arbitration provisions.
- The second (and more unusual) circumstance occurs when two parties to an antitrust dispute share a common interest in achieving a quick resolution (eg, the Novelis merger challenge case).
However, failure to pay close attention when crafting arbitration agreements can lead to unexpected and unwanted results. When drafting a contract for a specific transaction or some type of consumer relationship, it is not unusual for attorneys to draw on forms for standard arbitration clauses. By doing this, commercial lawyers forego the opportunity to create a dispute resolution process more precisely tailored to their perceived needs. Failure to do so can be an expensive mistake.
A recent case in California highlights the need for thoughtful drafting of arbitration agreements where antitrust claims can be anticipated. In Intuit Inc v 9,933 Individuals,(7) Intuit’s Turbo Tax division had faced federal class actions including antitrust claims asserting that Intuit had coordinated with rivals to stifle offers of “free” software. Intuit invoked its anti-class action arbitration clauses to divert the claims into arbitration under the auspices of the American Arbitration Association (AAA). The plaintiffs responded by filing 40,000 arbitrations (with potentially thousands more to come). The Intuit draftsmen apparently had overlooked that AAA rules would impose significant per demand fees on Intuit for every claim it litigated, running the company’s cost just for the privilege of defending the 40,000 arbitrations to roughly $128 million, which was well in excess of the amount in controversy and also far more than it would have expended on class action litigation.
As a way out, Intuit then sought to opt out of arbitration and remove all the cases to small claims court, partly on the basis of the following contractual provision:
Any dispute or claim relating in any way to the services or this agreement will be resolved by binding arbitration, rather than in court, except that you may assert claims in small claims court if your claims qualify. (Emphasis added.)
Both the trial court and the court of appeals held that the reference to “you” meant that only consumers, but not Intuit, could opt into small claims court. Intuit also invoked another contractual provision that generally incorporated the AAA rules by reference, one of which permitted either party to divert claims into small claims court. The courts of appeals found that the AAA rules created an ambiguity since one provision of the contract allowed only consumers to resort to small claims court while another allowed either party to do so. However, the court found that the more Intuit-drafted specific provision quoted above took precedence over the more general provision that broadly incorporated AAA rules by reference. In short, the Turbo Tax contract led the company into an arbitration of antitrust claims with crushingly high fees, and then foiled the company’s effort to escape such a result. Had the contract simply said “either party” or simply incorporated the AAA rules, the outcome almost certainly would have been different. Alternatively, the contract might have invoked a less costly arbitral authority.
Creating more tailored antitrust arbitration rules
Antitrust litigation can be notoriously long and expensive. Numerous parties may be involved on either side or both sides. Extensive discovery and/or expert testimony are regularly required. Factual disputes can be complicated and technical and are not necessarily likely to best be resolved by 12 randomly selected jurors. Finally, the automatic trebling of damages and one-way litigation costs rules under the Clayton Act encourage plaintiff’s counsel to convert common law business torts into federal antitrust claims whenever it is plausible to do so. With these realities in mind, there are at least five alternatives for draftsmen to consider when they should recognise that some serious antitrust claim(s) might arise under their proposed arbitration clause:
- selecting a particular category of arbitrator or even a specific decision maker – the arbitration clause can provide for a more knowledgeable decider than someone randomly selected from an arbitration association’s panel. This is particularly true for antitrust arbitrations, since an arbitrator already versed in antitrust law and economics would bring more efficiency to the process and an arbitrator with knowledge of market realities may be desirable if the clause covers only a specific industry or type of situation;
- allowing (or preventing) collective resolution of the antitrust claims – the Supreme Court has held that the FAA can be used to pre-empt class action remedies contained in rule 23 of the Federal Rules of Civil Procedure or even class remedies guaranteed by state law. Many of today’s arbitration agreements used in consumer contracts now include “anti-class action” provisions. The decision to include or omit such terms can reflect on the company and its reputations with consumers;
- specifying discovery rules – antitrust cases are often fact-intensive, and the prospective costs of seemingly endless discovery can force the parties to settle. An appropriate arbitration agreement can tailor discovery rules to the intentions of the parties, such as by limiting discovery time periods, numbers of depositions or interrogatories, or the general scope of permitted discovery;
- providing for the use of early dispositive motions and, if so, under what standard – antitrust cases are particularly well-suited to early narrowing or dismissal by motion given the unusually high costs of antitrust litigation. Some arbitral tribunals rules either do not permit dispositive motions or leave it to the arbitrator’s discretion whether to allow them. Since these rules can be displaced by contract, it may be appropriate to specify that motions to dismiss and summary judgment motions are permitted by either side, and then to provide standards for their resolution. Otherwise, absent contractual guidance, the standard for deciding such a motion would be discretionary and, hence, uncertain. A well-drafted arbitration agreement could, for example, embrace the standards that would apply in a local federal district court (thus adopting the Supreme Court’s defendant-friendly jurisprudence on dispositive motions); and
- including special procedures for presenting expert testimony – economic experts tend to be important in any antitrust case where market definition, competitive effects or efficiency justifications have not been stipulated. Arbitration makes it possible to be much more flexible in how the expert’s testimony is presented than is possible in District Court under the Federal Rules. For example, the arbitration clause could provide for a much more interactive expert testimony under a process that is now called “hot tubbing”, which was invented decades ago during a complicated antitrust arbitration. The way it works is that:
- the direct testimony is submitted in writing; and
- then both opposing experts are put on the stand at the same time for cross examination.
This enables an arbitrator to interrupt to ask one side’s expert to answer the same question (or hypothetical) that its counsel has just asked the other side’s expert to answer, or to comment on the answer that the other side’s expert has just given.
A standard form arbitration clause is rarely an efficient substitute for a thoughtful, well-crafted contract when dealing with almost any significant antitrust dispute. The advantages of arbitrating antitrust disputes lie in the efficiency, predictability and speed of resolution that can be facilitated with contractual rules that have been drafted with the benefit of some antitrust knowledge.
(1) Mitsubishi Motors Corp v Soler Chrysler-Plymouth, 473 US 614, 616 (1985).
(2) 9 USC sections 1-16.
(3) 5 USC section 571 et seq.
(4) 5 USC section 575(c).
(5) 61 Fed Reg 36896 et seq.
(6) ND Ohio Case No.: 1:19-cv-02033-CAB.
(7) Unpublished decision by the California Court of Appeal, Second Appellate District, filed 29 July 2021.
This content was originally published on February 17, 2022, via the International Law Office (ILO) newsletter. It can be found here: Arbitration of Antitrust Disputes
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