The extent to which private arbitration agreements can be used to restrict the availability of class actions is currently a topic of enormous interest and a rapidly evolving body of federal and state law. In Kristian, et al. v. Comcast Corporation, et al., case number 04-2619 (1st Cir. 2006), the United States Court of Appeal for the First Circuit recently decided a potentially very influential case challenging efforts by Comcast Corporation to compel arbitration of antitrust claims by its cable television subscribers, and to enforce contractual prohibitions on various kinds of procedural and substantive remedies, including that the antitrust claims could not proceed as a class action. The Comcast arbitration agreement required all disputes relating to cable television service, including federal statutory claims, to be arbitrated. It also restricted discovery, barred the recovery of treble damages, established contractual statutes of limitations, barred the recovery of attorneys fees and costs and barred the arbitration from proceeding as a class action or on anything other than an individual basis.

The First Circuit began its analysis by discussing certain factual issues relating to whether Comcast had given its subscribers sufficient notice of the change in its policies concerning arbitration of disputes, and whether the notice was sufficient to create retroactive affect for the arbitration clause. After a detailed and fact specific analysis, the First Circuit concluded that Comcast’s change of its rules to require arbitration was effective, and reversed the lower court finding that it was not. This then required the Court of Appeals to consider the substantive challenges by the plaintiffs below to various portions of the arbitration provisions.

The First Circuit began by concluding that in order to assess challenges to specific aspects of the Comcast arbitration agreement, it first had to determine whether enforceability of any of the disputed prohibitions should be decided by a court or by the arbitrator in the first instance. This in turn required, in the First Circuit’s view, determining whether there were factual issues which an arbitrator must first decide, or whether the disputed contractual prohibition was clearly so potentially at odds with specific guaranteed statutory rights that it "implicated arbitrability," and so a court could determine initially on the merits whether that portion of the arbitration contract should survive. After having determined in the case of each disputed limitation whether a federal court or the arbitrator should rule in the first instance, the court then turned to the merits of whether each prohibition was enforceable. For ease of organization, the First Circuit’s threshold procedural discussion and the substantive determination on the merits for each of the specific disputed prohibitions in the Comcast arbitration agreement are combined below.

1. Limited Discovery

The arbitration provision in the Comcast contract warned subscribers that participating in arbitration "may result in limited discovery." The putative plaintiffs’ class argued that this restriction would prevent the vindication of statutory rights. Applying the analysis laid out above, the First Circuit concluded that this argument did not clearly raise a threshold issue of arbitrability. Instead, it raised only procedural issues about the potential scope of discovery which meant that, under settled Supreme Court precedent, enforceability should be resolved in the first instance by the arbitrator.

2. Reduced Statute of Limitations

Comcast’s arbitration provisions also contain a requirement that any subscriber with a potential claim had to contact Comcast "within one year of the date of the occurrence of the event or facts giving rise to the dispute." Such provisions are now routinely included in arbitration provisions, driven by the growing body of law that, at least with respect to contractual disputes and tort claims directly related to a contract, contracting parties can agree to their own shorter statutes of limitations. The putative plaintiffs’ class argued that this attempt to shorten the limitations period threatened their ability to vindicate their statutory rights under the Sherman Act and the Massachusetts Antitrust Act, both of which contain four year statutes of limitations for antitrust claims. The First Circuit again concluded that whether ongoing injury and the conduct at issue tolled applicable statutes of limitations created factual questions that would have to be answered by an arbitrator to determine what statute of limitations actually applied. The potential tension between the state and federal antitrust statutes of limitations and the contractual statute of limitations did not raise a "threshold issue of arbitrability" given open factual issues, and therefore had to be presented to the arbitrator in the first instance.

3. Treble Damages

The Comcast arbitration provision reflected a growing trend to limit the scope of damages which could be awarded in an arbitration, and attempted to eliminate liability for "punitive, treble, exemplary, special, indirect, incidental or consequential damages." Again, the putative class argued that this provision would directly preclude their ability to vindicate statutory rights provided under both federal and state antitrust law. Comcast responded that questions concerning the applicability of remedy stripping provisions do not present basic questions of arbitrability, and so should be addressed by the arbitrator in the first instance. The First Circuit began its analysis by noting that the requirement of awarding treble damages under the Sherman Act is compulsory by virtue of the use of the word "shall," while the award of treble damages under the Massachusetts Antitrust Statute is discretionary because the statute provides only that such damages "may" be awarded.

The different wordings in the statutes proved pivotal to the First Circuit’s analysis. In considering the mandatory award of treble damages under the Sherman Act, the First Circuit reached one of what will likely be remembered as a pivotal ruling in this decision, and concluded that the Sherman Act’s unequivocal grant of treble damages was a statutory right that could not be abrogated. Since the effort to preclude the right was unambiguous, the First Circuit distinguished some prior cases in which initial ambiguity caused federal courts to defer to the arbitrator in the first instance. Here, finding a direct conflict between the Sherman Act and the Comcast contract, the First Circuit concluded that a threshold issue of arbitrability was created which permitted court intervention, and precluded deferring to the arbitrator. The First Circuit then announced that its decision was one of first impression, and ruled unequivocally that the award of treble damages under federal antitrust statutes cannot be waived by contract.

However, the First Circuit then reached a different conclusion with respect to Massachusetts state antitrust law, because the award of treble damages under Massachusetts antitrust law is discretionary rather than mandatory. Since such an award is discretionary, an ambiguity exists about whether the vindication of statutory rights is necessarily an issue and so a threshold issue of arbitrability is not presented. The First Circuit therefore concluded that with respect to Massachusetts state law, it would defer to the arbitrator in the first instance to decide enforceability.

4. Attorney Fee Shifting

Again, as is now routinely the case in consumer arbitration clauses, the Comcast arbitration agreements stated that Comcast would pay for reasonable arbitration filing fees and arbitrators’ costs, but that each side would be responsible for its own attorney’s and expert witness fees. In effect, this contractual provision seeks to restrict fee shifting to the prevailing party which is available under both federal and Massachusetts antitrust law. The First Circuit embarked on an extensive review of prior precedent, focusing on the Supreme Court’s decision in Greentree Financial Corp. v. Randolph, 531 U.S. 79 (2000). In Greentree, the Supreme Court concluded that an ambiguous arbitration clause, which was silent on fees, created only the possibility of prohibitive arbitration costs for a federal Truth In Lending Act claim ("TILA"), and therefore did not by itself render the arbitration clause at issue there unenforceable. The First Circuit reasoned that, although the ambiguous clause in Greentree survived, Greentree represented recognition by the Supreme Court that excessive arbitration costs could imperil a plaintiff’s ability to vindicate federal statutory rights. On this basis, the First Circuit concluded preliminarily that the putative class of Comcast subscribers had in fact raised a threshold issue of arbitrability by challenging the enforceability of the arbitration agreement’s prohibition against an award of attorneys fees in direct contravention to federal and state statutes.

Then, the court observed that in the case of a complex antitrust claim, regardless of whether it was litigated in court or in arbitration, precluding fee shifting would have the very likely affect of preventing as a practical matter the ability of any plaintiff to prosecute the claim. Under that circumstance, a threshold issue of arbitrability was clearly presented and, in the First Circuit’s view, the prohibition on fee shifting contained in the Comcast arbitration agreement placed the entire arbitration clause at risk. It then concluded that the clause could be saved by invoking a severance provision also contained in the arbitration agreement, which provided that the arbitration clause could survive even if certain portions were found unenforceable. On that basis, the First Circuit concluded that the ban on fee shifting was unenforceable as an impermissible interference with the ability to vindicate statutory rights, but preserved the arbitration clause by severing the fee shifting prohibition.

5. Class Action Arbitrability Prohibition

The Comcast arbitration agreement explicitly prohibited class actions by attempting to restrict the arbitrator’s authority to arbitrate a class action or on a consolidated basis. Analyzing prior Supreme Court and Federal Circuit court precedent nationwide, the First Circuit concluded that this issue clearly presented a threshold question of basic arbitrability. As a result, it could not be deferred to the arbitrator for decision, and must be decided by the federal court in the first instance. In so doing, it distinguished some prior cases involving factual situations where the arbitration clause at issue was silent or ambiguous about a class action prohibition. Here the issue was squarely presented because the contract clearly contained an attempt to prohibit class actions. Turning to the merits, the First Circuit noted that the Third, Fourth, Seventh and Eleventh Circuits have enforced consumer arbitration clauses which in effect barred class actions in federal TILA claims. The Court distinguished these cases in two ways. First, it noted that some of them arguably turned on the preclusion of attorney’s fee shifting as well, and that issue had already been dealt with by finding the prohibition on fee shifting in the Comcast agreement to be unenforceable and severing it from the arbitration provision.

Second, and likely to be remembered as the MOST significant aspect of this decision, the First Circuit made a fundamental distinction between TILA claims and antitrust claims for purposes of analyzing the enforceability of the class action prohibition. Essentially, the First Circuit concluded that without the ability to proceed on a class action basis, consumer driven federal antitrust cases would not be brought because of the complexity and expense of such claims relative to the very small potential recoveries by individual consumers, even with fee shifting. The First Circuit engaged in a fascinating comparative analysis and concluded that TILA claims are ultimately individually based, relatively simple and would continue to be brought if attorney’s fees were available. Antitrust claims, in contrast, typically implicate corporate conduct affecting large numbers of consumers, involve highly complex facts and require years of sophisticated attorney and expert time costing millions of dollars. As a consequence, the First Circuit ruled that the attempt to bar the class action procedure impermissibly interfered with the plaintiff’s ability to vindicate their statutory rights under federal and state antitrust law, and held that they could not be compelled to arbitrate with that prohibition in place.

This then created an interesting follow on issue, which should be an education to all out there drafting arbitration agreements. Comcast argued before the Court of Appeal that if in fact the class action prohibition were found unenforceable, it did not want to arbitrate. The First Circuit rejected the notion. Instead, it enforced the general severance provision in the Comcast arbitration agreement, holding in effect that Comcast was now forced to arbitrate an antitrust class action. The result dramatically illustrates the necessity for drafters of arbitration clauses to decide in advance what they want to have happen if and when class action waivers are struck down and explicitly so provide in the agreement.

Authored by:

David R. Garcia