Conspiracy to Arbitrate

77 Pages Posted: 24 Oct 2019

See all articles by Christopher R. Leslie

Christopher R. Leslie

University of California, Irvine School of Law

Date Written: 2017

Abstract

Beginning in the 1980s, the Supreme Court has ushered in a new Age of Arbitration in which firms can use arbitration clauses to include otherwise unenforceable terms in their contracts, which may allow defendants to shorten statutes of limitations, to limit damages, and to prevent injunctive remedies altogether. Given the pro-business nature of arbitration clauses, mandatory arbitration clauses have become standard in some industries. Some industries may transition to market-wide mandatory arbitration, in part, through conspiracies to arbitrate. A conspiracy to arbitrate exists when the competing firms in a market illegally agree that they will all impose mandatory arbitration on their consumers.

This Article highlights the dangers of conspiracies to arbitrate. Part One of this Article discusses the evolution of arbitration from a method of settling inter-merchant disputes to a mechanism that businesses use to prevent their customers from pursuing claims altogether. Recognizing that mandatory arbitration clauses are ubiquitous in many industries, Part Two hypothesizes that one reason for the expansion might be collusion among competitors. The Supreme Court first discussed conspiracies to impose arbitration clauses in 1930 in Paramount Famous Lasky, which condemned a conspiracy to arbitrate implemented by motion picture distributors on movie theaters. The Court’s language indicates that conspiracies to impose arbitration clauses are per se illegal. Since that opinion came down, no scholarship has analyzed the issue of conspiracies to arbitrate.

Part Two then presents a typology of conspiracies to arbitrate. Such conspiracies can be primary conspiracies – that is, stand-alone conspiracies untethered to any other illegal agreements among the conspirators. Alternatively, a conspiracy to arbitrate can be a secondary conspiracy when it is part of a larger antitrust conspiracy. In this latter scenario, rivals in a market have already decided to violate antitrust laws, for example, by fixing price. The agreement to fix price is the primary conspiracy; the conspiracy to arbitrate is a secondary conspiracy designed to conceal and protect the primary conspiracy. Part Two explains how both primary and secondary conspiracies to arbitrate violate antitrust law.

Part Three explores how courts have misapplied arbitration law in ways that make conspiracies to arbitrate profitable and perhaps inevitable in some markets. Prior to the Supreme Court’s pro-arbitration decisions, firms had little reason to conspire to impose arbitration clauses on their customers. Relying on the false premise that Congress created a federal policy favoring arbitration, federal courts have employed seemingly neutral doctrines in ways that actively enforce conspiracies to arbitrate. For example, courts have compelled antitrust plaintiffs to arbitrate their conspiracy to arbitrate claims, which means courts are enforcing – instead of condemning – the very conspiracy that they are supposed to adjudicate. Courts have also misapplied equitable doctrines and have given retroactive effect to arbitration clauses. These judicial decisions protect both conspiracies to arbitrate and price-fixing cartels. Part Three shows how all of these opinions flow from a misreading of congressional intent regarding arbitration.

Part Four presents a case study of recent litigation involving an alleged conspiracy to arbitrate among banks that issue credit cards. Following a bench trial, the federal judge held – and the Second Circuit affirmed – that the plaintiffs failed to prove an agreement among the defendants to impose arbitration clauses. In reaching this conclusion, the court committed a litany of mistakes and ultimately failed to recognize that it did, in fact, actually find an illegal conspiracy to arbitrate. This Part explains how these errors flowed from the court’s incorrect belief that Congress intended courts to favor arbitration over litigation.

Part Five proposes changes to how courts evaluate conspiracy-to-arbitrate claims. Federal courts are essentially complicit in antitrust violations when they compel compliance with arbitration clauses that are the product of alleged conspiracies. The Supreme Court’s rush to encourage and enforce arbitration clauses should not blind lower courts to the possibility that conspiracies to arbitrate are preventing the free market from operating properly to protect consumer interests.

Suggested Citation

Leslie, Christopher R., Conspiracy to Arbitrate (2017). North Carolina Law Review, Vol. 96, No. 2, 2017; UC Irvine School of Law Research Paper No. 2019-56. Available at SSRN: https://ssrn.com/abstract=3474672

Christopher R. Leslie (Contact Author)

University of California, Irvine School of Law ( email )

401 E. Peltason Drive, Suite 1000
Irvine, CA 92697-1000
United States
949-824-5556 (Phone)

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