The Evolution of Antitrust Arbitration

• Publication year: 2021
• Author: By Christopher R. Leslie

THE EVOLUTION OF ANTITRUST ARBITRATION

By Christopher R. Leslie¹

Until the 1920s, arbitration was not generally an option for legal disputes being heard in federal court. But then Congress enacted the Federal Arbitration Act (the FAA) in 1925 to allow inter-merchant disputes to be decided in private arbitration. For the next sixty years, federal courts held that pre-dispute arbitration clauses were unenforceable with regards to federal statutory claims, including antitrust lawsuits. Beginning in the 1980s, however, the Supreme Court imagined a new revisionist history of the FAA as creating an omnibus federal pro-arbitration regime. Federal courts began enforcing arbitration clauses and compelling the arbitration of antitrust claims. In many ways, the expansion of antitrust arbitration has undermined America's antitrust law regime. This evolution compels courts and Congress to reevaluate aspects of antitrust doctrine that were premised on the non-arbitrability of antitrust claims. This Essay traces the relationship between antitrust law and private arbitration.

I. THE 1920S: THE EARLY DAYS OF PRE-DISPUTE BINDING ARBITRATION

In the early years of the Sherman Act, antitrust claims were not arbitrated because, broadly speaking, almost nothing was arbitrated. Although private arbitration is older than the country,² until the twentieth century arbiters' decisions were unenforceable without a court order.³ Arbitration decisions and awards were not self-executing, but instead required judicial enforcement, which American judges often resisted because they viewed "irrevocable arbitration agreements as 'ousting' the courts of jurisdiction."⁴ And, further, the parties retained the power to revoke their promise to arbitrate,⁵ and either party could "repudiate arbitration agreements at any time before the arbitrator's award was made."⁶ Some merchants in disputes with other merchants — such as retailers purchasing products or produce from wholesalers or distributors — preferred arbitration over litigation. Arbitrators chosen for their knowledge of the trade at issue were seen as better equipped to interpret contract terms and apply appropriate remedies.⁷ Acceding to the merchants' requests, some states — most notably New York and New Jersey — enacted laws to enforce predispute arbitration agreements.⁸

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Even as states in 1920s began to make arbitration agreements enforceable in state court, federal courts remained hostile to arbitration whether the claims arose from federal law or arrived in federal court through diversity jurisdiction.⁹ Because their inter-merchant contractual disputes could end up in federal court through diversity jurisdiction, these business interests sought federal legislation that would make their arbitration agreements enforceable in federal court.¹⁰ They championed the Federal Arbitration Act of 1925 (the FAA). The key provision of the FAA — Section 2 — provides that some predispute arbitration clauses "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."¹¹

The promoters of arbitration in Congress highlighted private arbitration's advantages over litigation, including its efficiency, speed, and lower costs.¹² The FAA advocates stressed the importance of expeditiousness in resolving commercial disputes,¹³ particularly when the dispute involves perishable goods.¹⁴ These arguments proved persuasive and Congress enacted the FAA with no speeches in opposition and no dissenting votes.¹⁵ While revolutionary, the FAA was extremely limited. Throughout the hearings, deliberations, and voting, every witness and every report emphasized that they were discussing only the arbitration of inter-merchant disputes, not consumer or labor claims.¹⁶ For example, when clarifying that the FAA would not make labor disputes subject to arbitration, W.H.H. Piatt, Chairman of the Committee on Commerce, Trade, and Commercial Law of the American Bar Association, explained that the FAA "is purely an act to give the merchants

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the right or the privilege of sitting down and agreeing with each other as to what their damages are, if they want to do it. Now, that is all there is in this."¹⁷ These inter-merchant disputes could involve either breach of contract and maritime claims.¹⁸ The FAA's narrow reach did not extend to statutory or constitutional claims. The FAA's prime advocate, Julius Henry Cohen, the general counsel of the New York State Chamber of Commerce, noted that arbitration was "'not the proper method for deciding points of law of major importance involving constitutional questions or policy in the application of statutes.'"¹⁹ While arbiters from the trade may be better positioned to decide certain factual issues, the FAA's proponents acknowledged that questions of statutory interpretation were "better left to the determination of skilled judges with a background of legal experience and established systems of law."²⁰ Furthermore, the FAA's drafters and proponents explicitly rejected the notion that the act would apply to contracts of adhesion.²¹

Neither the drafters of the Sherman Act nor the FAA ever considered that private antitrust claims were subject to arbitration.

II. THE 1930S: ARBITRATION AS ANTITRUST VIOLATION

In its first opinion considering the intersection of antitrust law and arbitration in the post-FAA period, the Supreme Court condemned concerted efforts by defendants to impose arbitration clauses. In 1930, the Court in Paramount Famous Lasky Corp. v. United States,²² held that an agreement among ten movie distributors to impose upon all theaters a standard contract that included mandatory arbitration of all contractual disputes violated Section One. Using language evocative of the per se rule, the Court held that the distributors' agreement "necessarily and directly tends to destroy 'the kind of competition to which the public has long looked for protection.'"²³ The Court cast a skeptical eye on both arbitration and rivals that sought to collectively impose arbitration on their customers. The Justices were right to condemn this form of collusion because a conspiracy among competitors to impose arbitration clauses inflicts antitrust injury by denying consumers and employees the option of entering a superior contract that does not force them to waive their rights. In many contexts, these arbitration-laden contracts

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constitute inferior products.²⁴ The federal court adjudicating an alleged conspiracy to arbitrate among banks to only issue credit cards burdened by arbitration clauses with class action waivers explained that "[t]he mere existence of the clauses, diminishes the cards' value by foreclosing the opportunity for cardholders to go to court and address grievances through class action litigation."²⁵ By agreeing to impose mandatory arbitration, firms are agreeing not to compete on product quality.²⁶

Beyond a standalone conspiracy, members of a traditional price-fixing conspiracy may agree to also impose mandatory arbitration clauses on all of their customers. Such a move may help the illegal cartel in many ways. First, it can help conceal the cartel because consumers suspicious of price fixing who bring an antitrust claim will be denied the relatively generous discovery afforded in federal court.²⁷ Because antitrust plaintiffs generally require more discovery than antitrust defendants, discovery limitations favor the defendant.²⁸ Not only does arbitration offer less capacious discovery than litigation, price-fixing conspirators can draft their uniform arbitration clauses to explicitly limit discovery.²⁹ Second, price-fixing conspirators may attempt to use arbitration clauses to undermine various pro-plaintiff aspects of antitrust law, including treble damages, attorneys' fees, and reasonable costs for successful plaintiffs.³⁰

III. FROM THE 1920S TO THE 1980S: SIXTY YEARS OF SOLITUDE WHEN ANTITRUST CLAIMS WERE NON-ARBITRABLE

For its first six decades of existence, federal courts recognized the limited scope of the FAA and refused to enforce arbitration clauses in the context of federal statutory claims.³¹ In 1953, for example, the Supreme Court in Wilko v. Swan held that federal securities claims were not subject to mandatory arbitration because Congress "enacted the Securities Act to protect the rights of investors and has forbidden a waiver of any of those rights."³² The Court reasoned that arbitration may work fine for inter-merchant contractual disputes, but Congress never intended the FAA to apply to legal disputes

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arising from the sale of securities.³³ The lower federal courts applied Wilko's holding and reasoning to antitrust law, declining to enforce arbitration clauses in antitrust litigation. In the most influential opinion of this era, the Second Circuit in American Safety Equipment Corp. v. J.P. Maguire & Co.³⁴ held that arbitration claims had to be adjudicated by federal judges, not private arbiters, regardless of whether the parties had entered a pre-dispute arbitration agreement.³⁵ The Second Circuit articulated four independent reasons why pre-dispute arbitration agreements did not apply to antitrust claims:³⁶

(1) deference to private arbitration agreements could lessen the plaintiffs' incentive to pursue antitrust actions, weakening the use of "private attorneys general" as a foundation of Sherman Act enforcement; (2) arbitration clauses often result from adhesion contracts, and Congress intended that these matters be heard in the courts; (3) arbitrators may be incompetent to comprehend complex antitrust issues; and (4) arbitrators may be biased business people unable to reach fair outcomes.³⁷

The American Safety doctrine became the law of the land as every circuit to consider the issue held that arbitration clauses did not cover antitrust claims.³⁸ For the next two decades, the American Safety doctrine was uncontroversial.

IV. THE 1980S: AN IMAGINED LEGISLATIVE HISTORY AND THE DAWN OF...