Arbitration: First Circuit Compels Arbitration in Comcast Fees Fight (Web)
April 26, 2006
In Kristian v. Comcast Corp., Nos. 04-2619, 04-2655, 2006 WL 1028758 (1st Cir. April 20, 2006)(available at the opinions link at www.ca1.uscourts.gov), the First U.S. Circuit Court of Appeals evaluated the enforceability of arbitration agreements required by Comcast's cable television subscription agreements.
In an opinion covering a range of key current arbitration issues, a unanimous three-judge panel allowed an arbitration to proceed, reversing a lower federal court decision--but not before the First Circuit employed an arbitrability analysis that led it to severing the arbitration agreements’ limits on treble damages, attorneys’ fees recovery, and bar on class arbitration.
Comcast had invoked the arbitration agreements and moved to compel arbitration in response to claims filed against it in state and federal courts by longtime Boston-area cable television subscribers under the Clayton Antitrust Act and the Massachusetts Antitrust Act. The subscribers alleged that the prices they had been paying for cable services were inflated as a result of Comcast's anticompetitive practices.
In response to Comcast's motion to compel arbitration in both the state and federal cases, the subscribers argued before the district court that the facts giving rise to their antitrust claims occurred before the arbitration agreements were put into the service agreements, and thus, that the agreements should not apply retroactively to their claims. Id. at *2.
In addition, the subscribers argued that the arbitration agreements were unenforceable and should be invalidated because: (1) Comcast failed to give the subscribers the statutory 30-days notice of the agreements; (2) the agreements prevented the subscribers from vindicating their statutory rights, because they provided for limited discovery; established a shortened statute-of-limitations period; barred treble damages; prevented recovery of attorneys fees, and prohibited the use of class mechanisms. The cable customers also claimed that the agreements violated public policy and were unconscionable under state law.
The district court denied Comcast's motion to compel arbitration and held that the arbitration agreements did not apply retroactively. The district court did not reach the subscribers' remaining claims because it found the retroactivity issue dispositive. Id. at *7.
But the First Circuit addressed each of the claims in allowing the arbitration to proceed–but without many of the features that were in Comcast’s consumer arbitration agreement.
A unanimous First Circuit panel reversed the district court and held that the arbitration agreements had retroactive effect. Id. at *7. The opinion cited the following as a key part of the arbitration agreements: "If we are unable to resolve informally any claim or dispute related to or arising out of this agreement or the services provided, we have agreed to binding arbitration except as provided below." Id. at *3.
The appeals court found that the phrase "or the services provided" covered claims or disputes that did not arise "out of this agreement," and that any ambiguity in the language of the agreements should be resolved in favor of finding arbitrability. Id. at *3-6.
Finding that the district court had incorrectly relied on a state contract principle requiring adhesion contracts to be construed strictly against the drafter, the First Circuit cited Paul Revere Variable Annuity Ins. Co. v. Kirschofer, 226 F.3d 15 (1st Cir. 2000): "Where the federal policy favoring arbitration is in tension with the tenet of contra proferentem for adhesion contracts, and there is a scope question at issue [here, the question whether the subscribers' claims fell within the arbitration agreements], the federal policy favoring arbitration trumps the state contract law tenet." Id. at *6.
The subscribers argued that the arbitration agreements were unenforceable because Comcast had failed to give the subscribers advance 30-day notice of the agreements as required by the federal statute interpreting and implementing a portion of the Cable Television and Consumer Protection Act. Id. at *7. The Court found that the statute established a flexible notice standard and that Comcast was not required by the statute to provide any more notice than setting out the entire text of the new subscription agreement for the subscribers.
VINDICATION OF STATUTORY RIGHTS:
THE SUPREME COURT ‘TRILOGY’
The subscribers argued that the arbitration agreements should be invalidated because the agreements prevented the subscribers from vindicating their statutory rights, thus contravening the rule that unless an arbitral forum allows for fair and adequate enforcement of a party's statutory rights, the forum is not a valid alternative to traditional litigation. Id. at *7.
Before considering the arbitration agreements’ validity, the appellate panel–in a decision written by Circuit Judge Kermit V. Lipez--examined U.S. Supreme Court precedents on arbitrability.
The decision examined and summarized three key cases addressing this question: Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79 (2002); Pacificare Health Systems Inc. v. Book, 538 U.S. 401 (2003); and Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003).
In Howsam, the Supreme Court stated that the question whether the parties have submitted a particular dispute to arbitration was "an issue for judicial determination unless the parties clearly and unmistakably prove otherwise." Id. at *8. One element of determining arbitrability is the application of the "interpretive rule," which presumes that the contracting parties favor judicial determination of whether a particular dispute has been submitted to arbitration. Id. at *9.
The Supreme Court rejected the interpretive rule’s application to a dispute over the enforceability of a statute of limitations provision contained in a federal statute. Id. It stated that for purposes of applying the interpretive rule, arbitrability was limited in scope to three circumstances: (1) where the contracting parties likely would have expected a court to determine whether the parties had submitted the dispute to arbitration; (2) where the parties were not likely to have thought that they had agreed that an arbitrator would decide the question; and (3) where referring the question to the court avoided the risk of forcing the parties to arbitrate a matter that they might not have agreed to arbitrate.
In two categories of disputes, a court could presume that courts, rather than arbitrators, should resolve the arbitrability question: "(1) disputes about whether the parties are bound by a given arbitration clause; and (2) disagreements about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy." Id. (quotations omitted).
In Pacificare, the Court considered RICO claims brought by a group of physicians against a number of healthcare management organizations. The HMOs moved to compel arbitration. The physicians opposed the motion on the ground that they could not obtain meaningful relief in arbitration for their RICO claims, because while the RICO statute permitted a treble damages award, the arbitration provision prohibited an award of punitive damages.
The Supreme Court granted the motion to compel, finding that there was too much legal ambiguity regarding whether the arbitration agreement permitted recovery of treble damages, and whether the agreement conflicted with the RICO statute, to conclude that a court must decide the question of arbitrability. Id. at *11.
"Since such a conflict [between the RICO statute and the arbitration agreements] might threaten the validity of the arbitration agreements in a manner that casts their enforceability into doubt, [the Court should not] on the basis of mere speculation that an arbitrator might interpret these ambiguous agreements in a manner that casts their enforceability into doubt, take upon ourselves the authority to decide the antecedent question of how the ambiguity is to be resolved." Id. (Quotations omitted.)
Moreover, "[g]iven the presumption in favor of arbitration, a court should not foreclose the operation of that presumption by deciding that there is a question of arbitrability when there is the possibility that an arbitrator's decision in the first place would obviate the need for judicial decision making." Id.
In Bazzle, the Supreme Court considered whether an arbitration clause that did not explicitly provide for class arbitration was truly "silent," or actually forbade class arbitration. The Court’s plurality opinion held that because the clause was ambiguous as to the availability of class arbitration, an arbitrator, not a judge, should decide what kind of arbitration proceeding the parties had agreed to. Id. at *12.
In the current case, the First Circuit found that the subscribers' claims did not fit into either of the two Howsam categories of clear questions of arbitrability. Accordingly, whether the subscribers had raised arbitrability questions remained to be determined. Id. at *12-13.
Following Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the First Circuit held that the subscribers could not oppose the enforcement of the arbitration agreements on the ground of limited discovery. Id. at *13. Limited discovery did not raise an arbitrability question, and discovery questions were left by the First Circuit to the arbitrator.
STATUTE OF LIMITATIONS PERIOD
The First Circuit examined the texts of the Sherman Antitrust Act and the Massachusetts Antitrust Act, each of which provides a four-year statute of limitations period for antitrust claims. Id. at *13. In contrast, the arbitration agreements provided a one-year statute of limitations period for disputes.
The appellate panel defined the issue as "whether a statute of limitations found in the arbitration agreement must yield to a statutorily mandated statute of limitations." Id. at *14. The panel considered that the subscribers had alleged violations of the antitrust laws, and that “ongoing injury” is traditionally understood as tolling statutes of limitation. Id.
The opinion held that the subscribers' challenge to the statute of limitations contained in the arbitration agreements was a question of fact touching on the merits of the case--i.e., a question within the arbitrator’s jurisdiction.
TREBLE DAMAGES: FEDERAL ANTITRUST CLAIMS
The First Circuit found that the Sherman Antitrust Act explicitly mandates that a party who successfully sues an antitrust violator recovers treble damages. Id. at *15, 17. In contrast, the subscription agreements’ arbitration provisions prohibited any damages remedy other than simple, compensatory damages. Id. at *15.
Unlike the Pacificare case, here there was no initial ambiguity for an arbitrator to construe--rather, there was a clear conflict between the language of the federal antitrust statute and the arbitration agreements. Id. at *16.
The First Circuit found that the mandatory treble damages award under the federal antitrust statute could not be waived. Id. at *17. It referred to a savings clause in the arbitration agreements, which stated that if the law did not permit a remedy to be waived, a party bound by the arbitration agreements would still have that remedy. Id. at *18. The appeals panel held that the savings clause required an arbitrator to award treble damages if a party prevailed on his or her claim for federal antitrust violations.
TREBLE DAMAGES: STATE ANTITRUST CLAIMS
The First Circuit noted that the Massachusetts Antitrust Act did not require a court to award treble damages if a party prevailed on his or her antitrust claim. The act, the circuit court noted, placed the treble damages award within a court's discretion. Id. at *18.
The panel found that the arbitration agreements precluded the court from exercising its discretion to award treble damages. Id. Following Pacificare, the opinion stated that to resolve the question of arbitrability, the court must "ascertain the extent of the legal ambiguity" on whether waiver of treble damages was permissible under Massachusetts law. Id. at *19.
The First Circuit found that Massachusetts case law was ambiguous on whether a treble damages waiver was permissible. It held that "[w]hen there is an underlying legal ambiguity, and the parties have not explicitly expressed otherwise, Howsam's interpretive rule does not apply and an arbitrator must decide the underlying legal question in the first instance so that the federal policy in favor of arbitration is not frustrated." Id.
In other words, there was no question of arbitrability because of the ambiguity on the waiver issue. Id. at *20.
The First Circuit found that the Sherman Antitrust Act and Massachusetts Antitrust Act explicitly provide for the recovery of attorney's fees and costs in antitrust cases. Id. at *20. In contrast, the arbitration agreements stated that the subscribers were responsible for all costs of the arbitration, including attorney's fees.
To resolve the conflict, the First Circuit considered Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), where the Supreme Court assumed that the issue of arbitration costs raises a question of arbitrability, and that a showing of prohibitive arbitration costs was a valid challenge to the enforcement of an arbitration agreement. Id. at *21.
The First Circuit found that the subscribers had made a strong showing that the costs of prosecuting their antitrust claims in an arbitral forum would be prohibitively expensive.
The panel held that the ban on the recovery of attorney's fees and costs would burden the subscribers with prohibitive arbitration costs, thus preventing the subscribers from vindicating their statutory rights in arbitration. Id. at 22.
Invoking the severance clause of the arbitration agreements, the Court held that the subscribers could recover attorney's fees and costs. Id. at *22-23.
The First Circuit noted that the arbitration agreements clearly prohibited any type of class or consolidated action. While the prohibition on class actions did not directly conflict with the Sherman Antitrust Act or the Massachusetts Antitrust Act, the prohibition conflicted with the Federal Rules of Civil Procedure, which provide for class actions.
The appeals panel found that the bar on class arbitration threatened the presumption that arbitration would be a fair and adequate mechanism for enforcing the subscribers' statutory rights. Id. at *24. "The class mechanism ban–‘particularly its implicit ban on spreading across multiple plaintiffs the costs of experts, depositions, neutrals' fees, and other disbursements’--forces the putative class member ‘to assume financial burdens so prohibitive as to deter the bringing of claims. . . . ’" Id. (quotations and citations omitted). The Court held that because the denial of class arbitration had the potential to prevent the subscribers from vindicating their statutory rights, a question of arbitrability was presented. Id. at *25.
The appeals court examined decisions from the Third, Fourth, Seventh and Eleventh Circuits, where the courts enforced arbitration clauses barring the use of class mechanisms. Id. at *25. The Court found that these decisions shared two common characteristics: (1) either attorney's fees and costs were recoverable by the plaintiffs who contested the arbitral forum on the basis of a class arbitration ban, or the fees and costs issue was moot; and (2) in each decision, the plaintiffs raised claims against banks or other financial lenders, primarily under the Truth in Lending Act. Id. at *26.
The First Circuit opinion found that the complexity of an antitrust case generally, and the complexity and costs required to prosecute an antitrust case against Comcast specifically, undermined the grounds employed by the circuit courts for enforcing bars on class arbitration. Id. at *27-28.
It noted that the subscribers had "provided uncontested and unopposed expert affidavits demonstrating that without some form of class mechanism--be it class action or class arbitration--a consumer antitrust plaintiff will not sue at all." Id. at 28.
The panel held that the subscribers could not be compelled to arbitrate their antitrust claims if the bar to class arbitration remained in place. Id. at *29. "If the class mechanism prohibition here is enforced, Comcast will be essentially shielded from private consumer antitrust enforcement liability, even in cases where it has violated the law. Plaintiffs' [sic] will be unable to vindicate their statutory rights. Finally, the social goals of federal and state antitrust laws will be frustrated because of the 'enforcement gap' created by the de facto liability shield." Id. at *30.
The panel severed the class arbitration bar, holding that because the arbitration agreements anticipated severance of the class arbitration bar, Comcast "cannot claim that it did not foresee the possibility that, despite its strong preference for individual arbitration, it would have to arbitrate on a class basis because the contractual bar on class arbitration might, in its application to particular claims, run afoul of controlling law." Id. at *32.
The First Circuit held that the subscribers' unconscionability arguments were mostly reiterations of their statutory rights arguments, and thus did not require separate analysis under Massachusetts law. Id. at *33.
--Kristien Kahn, Associate, Dewey Ballantine LLP