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In re Universal Service Fund Telephone Billing Prac. Litig.

United States District Court, D. Kansas
May 27, 2003
No. 02-MD-1468 (D. Kan. May. 27, 2003)

Opinion

No. 02-MD-1468

May 27, 2003.


MEMORANDUM ORDER


Currently before the court are Sprint's and ATT's motions to compel arbitration (Doc. 68 and 75). The court will retain the motions under advisement at least until the United States Supreme Court decides whether it will grant ATT's petition for writ of certiorari in ATT Corp. v. Ting, No. 02-1521, with the exception of one issue which the court will now address. The exception concerns plaintiffs' position that the court should not enforce ATT's and Sprint's arbitration clauses with their residential customers because the clauses are allegedly the product of an antitrust conspiracy in violation of Section 1 of the Sherman Act. The court now rejects that argument as a matter of law. The court believes that plaintiffs' remedy for any violation which may have occurred should be limited to an award of damages. If plaintiffs can establish that an antitrust conspiracy existed that violated Section 1 of the Sherman Act, then they may be entitled to an award of damages for any injury arising from that conduct. The court does not believe, however, that invalidating the arbitration clauses is an available remedy.

In the event cert is granted, the court will likely further retain the motions under advisement until the Supreme Court decides the case.

In addition, because the court is waiting to decide the remainder of the motions to compel arbitration, the court is cancelling the hearing on plaintiffs' motion for class certification. The court believes the motion for class certification should be decided after the motions to compel arbitration and that plaintiffs will not be prejudiced by any delay.

BACKGROUND

In this multidistrict litigation, plaintiffs' second amended complaint contains the following causes of action against ATT and Sprint: (1) declaratory judgment claim alleging that the arbitration clauses contained in residential customers' contracts are unenforceable; (2) Sherman Act claim alleging that ATT and Sprint violated Section 1 of the Sherman Act by engaging in a conspiracy (a) to raise, fix, or maintain the charge they assess their long distance customers, to recoup federally-mandated contributions they must make to a fund know as the Universal Service Fund ("USF") charges, at an artificially high and noncompetitive level and (b) to implement similar dispute resolution clauses requiring their customers to arbitrate all disputes; (3) 47 U.S.C. § 201(b) claim alleging that the USF charges were unjust and unreasonable in violation of this section; (4) 47 U.S.C. § 202 claim alleging that ATT discriminated by charging direct-dial long distance customers but not certain other classes of customers in violation of this section; (5) statutory consumer fraud act of New York claim alleging that ATT misrepresented the USF charge it imposed on its customers; (6) statutory consumer fraud act of Kansas claim alleging that Sprint misrepresented the USF charges it imposed on its customers; (7) money had and received claim alleging that plaintiffs paid excessive fees as a result of ATT's and Sprint's practices; (8) breach of contract claim alleging that ATT and Sprint broke their contractual promise to charge their customers only the amount they contribute to the USF. Plaintiffs bringing these causes of action include business and residential customers of ATT and Sprint, as well as of MCI, which is not presently a defendant in this action. All of the residential customers' contracts contain arbitration clauses.

MCI was an original defendant in this case, as well, but due to its filing bankruptcy, claims against it were dropped in the plaintiffs' first and second amended complaint. Plaintiffs, however, are now seeking to lift the automatic stay of their claims against MCI in order to bring it back into the case.

ATT and Sprint filed motions to compel arbitration against all residential customers (except, as a result of Ting v. ATT, 319 F.3d 1126 (9th Cir. 2003), petition for cert. filed, No. 02-1521, ATT customers in California) who are plaintiffs in this action. ATT and Sprint argue that plaintiffs agreed, in the contract governing their telephone service, that any disputes arising out of or relating to their contract are subject to arbitration. Thus, according to ATT and Sprint, the Federal Arbitration Act ("FAA") compels this court to enter an order staying or dismissing all further proceedings in this matter until arbitration has occurred. Plaintiffs, on the other hand, argue that (1) the arbitration clauses in question are not enforceable because they are unconscionable and/or illegal (the product of an antitrust conspiracy), (2) the antitrust claims are not subject to arbitration, and (3) several of the claims, at least in part, are beyond the scope of the arbitration clauses.

The issues governing this case, with the exception of whether the arbitration clauses are unenforceable because they are allegedly the product of an antitrust conspiracy, are impacted by cases recently decided by or pending before the United States Supreme Court. The Supreme Court recently issued its opinion in Pacificare Health Sys., Inc. v. Book, 123 S.Ct. 1531 (April 7, 2003), and the court has invited comment by the parties on that decision. Also, ATT has filed a petition for writ of certiorari in ATT Corp. v. Ting, No. 02-1521, and the court believes it is prudent to wait and see whether the Supreme Court grants cert. Thus, the court will proceed only on the issue of whether the arbitration clauses are unenforceable because they are allegedly the product of an antitrust conspiracy. If that defense were viable it would provide a potential basis to avoid the arbitration clauses that is entirely independent of the issues addressed in Ting.

DISCUSSION

Plaintiffs allege that ATT, Sprint, and MCI violated Section 1 of the Sherman Act, 15 U.S.C. § 1, by colluding to implement similar arbitration clauses to shield themselves from liability and to eliminate potential competition among themselves with respect to the imposition of those agreements. As a result, plaintiffs contend that the arbitration clauses they agreed to are not enforceable. Conversely, ATT and Sprint argue that even if they did conspire and such action violated the Sherman Act (which they adamantly deny), plaintiffs' remedy should be an award of damages, not invalidation of the arbitration clauses. The court agrees with ATT and Sprint and concludes that even if plaintiffs can establish that the arbitration clauses are the product of an antitrust conspiracy, invalidation of the arbitration clauses is not an appropriate remedy for such a violation.

The FAA requires that courts enforce arbitration clauses in contracts the same way they would enforce any other contractual clause. See, e.g., Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 478 (1989). The statute was designed to overturn the traditional common-law hostility to arbitration clauses. See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 55 (1995); Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270 (1995). Section 2 of the FAA broadly provides that a written provision in "a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. This language clearly intends to place arbitration clauses on equal footing with other contractual clauses and, therefore, achieves the policy goal of eliminating the prior hostility to arbitration. Thus, like other clauses, an arbitration clause is enforceable, "save upon such grounds" as would invalidate any other contractual clause. Like any other contractual clause, though, an arbitration clause may be invalidated without violating the FAA if, for instance, there is mutual mistake or impossibility; it is procured through forgery or fraud; the provision is unconscionable; or the terms of the clause are illegal under a different federal statute which does not exhibit hostility to arbitration. See, e.g., Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 555-56 (1995) (Stevens, J. dissenting).

In this action, plaintiffs argue that the arbitration clauses are not enforceable because they are the product of an illegal antitrust conspiracy in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. Thus, plaintiffs in this action are in the same position as a defendant to a contract action who argues that his or her contract is void because it violates antitrust laws. Dickstein v. DuPont, 443 F.2d 783, 785-86 (1st Cir. 1971). The United States Supreme Court has reiterated that antitrust defenses to contract actions are viewed with disfavor. Kelly v. Kosuga, 358 U.S. 516, 518 (1959) (noting that as a defense to a contract action, "the plea of illegality on violation of the Sherman Act has not met with much favor in this Court"). As a result, antitrust defenses will be upheld only in cases where the court's judgment "would itself be enforcing the precise conduct made unlawful by the Act." Kelly, 358 U.S. at 520; Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 79 (1982). Stated another way, antitrust defenses will be upheld only "in cases where the intrinsic illegality of the contract is so clear that enforcement would make a court party to the precise conduct forbidden by the law." Dickstein, 443 F.2d at 786 (citations omitted). The policy behind the rule is simple: a party having received the benefits of its contract should not, under normal circumstances, be allowed to turn to the court in an effort to escape its contractual obligations. Viacom Int'l v. Tandem Prods., 526 F.2d 593, 599 (2d Cir. 1975). Thus, a contract that is legal on its face and does not call for unlawful conduct in its performance is not voidable or unenforceable simply because it resulted from an antitrust conspiracy. Kelly, 358 U.S. at 520-21.

Section 1 of the Sherman Act provides that "[e]very contract . . . or conspiracy, in restraint of trade or commerce . . . is declared to be illegal." 15 U.S.C. § 1.

The court does not believe that the arbitration clauses in question here are intrinsically illegal on their face such that enforcement of the clauses would make this court party to the precise conduct forbidden by the Sherman Act. Plaintiffs do not allege that there is anything anti-competitive about the terms of the arbitration clauses. Instead, plaintiffs allege that ATT, Sprint, and MCI conspired to implement similar arbitration clauses to shield themselves from liability and to eliminate potential competition among themselves with respect to the imposition of those agreements. Thus, plaintiffs' core concern with the arbitration clauses is not that the terms of the clauses are anti-competitive but that they are unconscionable (an argument the court leaves for another day). According to plaintiffs, the anti-competitive behavior is the conspiracy ATT, Sprint, and MCI allegedly entered into to adopt similar clauses so that their customers would have no choice but to accept the unconscionable clauses. Thus, it is not the clauses themselves that allegedly violate the Sherman Act, it is the underlying conspiracy ATT, Sprint, and MCI allegedly entered to implement the clauses.

The circumstances here are therefore distinguishable from other cases where courts did not enforce contracts because the terms of the contract clauses themselves were alleged to be anti-competitive. Kaiser Steel Corp. v. Kaiser Steel, 488 U.S. 72 (1982), a case plaintiffs cite, is one such example. In Kaiser Steel, the Supreme Court allowed the defense of illegality to be raised because the contract provision itself, which tied the amount of a steel maker's contributions to a union pension fund to the amount of coal that it purchased from firms that were not represented by the union, was alleged to be anti-competitive and therefore illegal. Id. at 82. The Court explained that "[i]f the purchased-coal agreement is illegal, it is precisely because the promised contributions are linked to purchased coal and are a penalty for dealing with producers not under contract with the [union]." Id. In other words, the terms of the contract were anti-competitive.

The facts in Kaiser Steel are distinguishable from the Court's prior decision in Kelly, 358 U.S. at 520-21. In Kelly, the plaintiff and defendant were engaged in marketing onions. The defendant agreed to purchase a substantial portion of the plaintiff's onions. The parties also agreed that neither would deliver any onions to the futures market for the rest of the trading season. The agreement intended to fix the price and limit the amount of onions sold in the State of Illinois. After the defendant defaulted on the payments due under the contract, the plaintiff sued for the balance of the purchase price. The defendant countered that the contract was unenforceable because part of it violated the Sherman Act. The Supreme Court disagreed and upheld the trial court's ruling that the plaintiff was entitled to be paid. In Kaiser Steel, the Court distinguished its facts from Kelly. It explained that in Kelly there were two promises, one to pay for purchased onions and the other to withhold onions from the market. The former was legal and could be enforced, the latter illegal and unenforceable. Withholding onions from the market was not itself illegal and could have been done unilaterally. But the agreement to do so, as the Court recognized, was unenforceable. Kelly therefore involved an agreement that was anti-competitive and illegal but a contract with terms attempting to be enforced that were not anti-competitive or illegal. As such, the Court enforced the terms of the contract.

The facts here are closer to those in Kelly than those in Kaiser Steel. Plaintiffs do not contend that the terms of the arbitration clauses are on their face anti-competitive. Instead, it is the alleged agreement or conspiracy to implement the arbitration clauses that plaintiffs contend is anti-competitive and thus illegal. The court therefore rejects plaintiffs' argument that the arbitration clauses should not be enforced because they are the product of an illegal antitrust conspiracy. Given the Supreme Court's disfavor toward such a remedy and the FAA's strong policy toward enforcing arbitration clauses, the court believes that declaring the arbitration clauses unenforceable is not an appropriate remedy under these circumstances. As a result, the court believes the appropriate remedy is damages. If plaintiffs ultimately establish that ATT, Sprint, and MCI engaged in anti-competitive behavior in violation of Section 1 of the Sherman Act, then they are entitled to an award of damages for any injury stemming from that conduct.

The court's holding here does not address whether plaintiffs' allegation that ATT, Sprint, and MCI conspired to implement similar arbitration clauses is sufficient to state a claim entitling them to damages for a violation of Section 1 of the Sherman Act, 15 U.S.C. § 1.

The court's holding is consistent with other courts that have addressed this issue. For example, in Dillard v. Merrill Lynch, Pierce, Fenner Smith, Inc., 961 F.2d 1148 (5th Cir. 1992), the plaintiff attempted to resist arbitration on the grounds that the arbitration provision in his brokerage agreement was an "unconscionable adhesion contract" and the result of "an antitrust conspiracy among brokerage firms." Id. at 1154. The Fifth Circuit rejected this argument and compelled arbitration of the plaintiff's claims, holding:

[T]he allegations of antitrust conspiracy do not lead to the conclusion that the Merrill Lynch contract was an unconscionable contract of adhesion. Even if the district court were to find that such an antitrust conspiracy existed, this finding would not compel the invalidation of the agreement to arbitrate; instead it would lead to an award of damages for any injury stemming from the anticompetitive behavior.

Id. at 1155. The First Circuit reached a similar result in Dickstein, 443 F.2d at 786-87. In that case, the plaintiff sought to avoid enforcement of an arbitration clause under the terms of his employment agreement with the New York Stock Exchange because he claimed it was the product of an antitrust conspiracy. Citing to and applying Kelly, the court rejected the argument and refused to permit the plaintiff to avoid arbitration. Id. The court noted that "while arbitration may be so linked with market-dominating devices as to the [sic] antithetical to the antitrust laws in some situations, cf. Paramount Famous Lasky Corp. v. United States, 282 U.S. 30, 51 S.Ct. 42, 75 L.Ed. 145 (1930), we fail to see any such effect here." Id. at 787. Finally, the court concluded that although the result may have been different if the arbitration clause was "suspect on its face" or was "frontally attacked in a treble damage suit," the plaintiff could not avoid arbitration under these facts. Id. at 788.

Plaintiffs argue that the Supreme Court's decision in Paramount Famous Lasky Corp. v. United States, 282 U.S. 30 (1930), compels a different result. In Paramount Famous Lasky, the United States brought an action against a group of motion picture producers and distributors seeking to declare invalid mandatory arbitration clauses contained in standard contracts between the distributors and exhibitors. The United States argued that the terms of the arbitration clauses violated the Sherman Act. The producers and distributors, who were competitors in the film industry but collectively controlled 60% of the films released to movie theaters, agreed to use a standard exhibition contract containing an arbitration clause in their dealings with movie theaters. If a theater owner did not submit disputes to an industry-controlled arbitration panel, or if he or she refused to abide by the arbitration award, the industry competitors would refuse to do business with him or her until he or she put up a security deposit, arbitrated the dispute, or complied with the arbitration award. The Supreme Court found that the terms of the arbitration clauses had "the manifest purpose to coerce the Exhibitor and limit the freedom of trade" and that the "necessary and inevitable" effect of such an agreement was the unreasonable restraint of competition. Id. at 41. It added that the contract "cannot be classed among `those normal and usual agreements in aid of trade and commerce' which, though restraints of trade, are deemed reasonable and permissible." Id. at 43. Finally, the Court concluded: "It may be that arbitration is well adapted to the needs of the motion picture industry; but when under the guise of arbitration parties enter into unusual arrangements which unreasonably suppress normal competition their action becomes illegal." Id.

Several factors discount the applicability of Paramount Famous Lasky to the facts here. First, the case involved an action by the United States and not a party seeking to avoid enforcement of an arbitration clause. Thus, the policy arguments — favoring arbitration and disfavoring the illegality defense in contract actions — discussed above were not a factor. To the contrary, as the Court noted, the "interest of the public in the preservation of competition [was] the primary consideration." Id. at 44. Second, the case was decided in 1930, just five years after the FAA was passed and at a time when arbitration was viewed much less favorably. See Drayer v. Krasner, 572 F.2d 348, 354-55 (2d Cir. 1978) (implying that the Court's generally low opinion of arbitration at that time may have impacted the result), implied overruling on other grounds recognized by In re Crysen/Montenay Energy Co., 226 F.3d 160 (2d Cir. 2000). Third, and by far most significantly, the terms of the arbitration clause are distinct from the clauses in this action. As the Court noted, the producers and distributors, under the guise of arbitration, "entered into unusual agreements which unreasonably suppressed normal competition." Paramount Famous Lasky, 282 U.S. at 43. Thus, the terms of the arbitration clauses themselves were found to be anti-competitive. By contrast, in this action plaintiffs have not alleged that the terms of the arbitration clauses themselves are anti-competitive. Instead, plaintiffs contend that ATT, Sprint, and MCI implemented the arbitration clauses to shield themselves from liability and that, to eliminate potential competition among themselves with respect to the imposition of those agreements, they allegedly colluded or conspired to implement arbitration clauses with similar terms. Thus, the anti-competitive effect is not the result of the terms of the arbitration clauses but instead is the result of the conspiracy allegedly entered into as a means to implement the arbitration clauses without losing business. In short, then, the arbitration clauses at issue here are distinct from the arbitration clause in Paramount Famous Lasky.

In sum, the court rejects plaintiffs' argument that the arbitration clauses in this case are not enforceable because they are allegedly the product of an antitrust conspiracy. If plaintiffs can establish that such an anti-competitive conspiracy existed in violation of Section 1 of the Sherman Act, then they may be entitled to damages for any injury that resulted from such conduct. Invalidating the arbitration clauses, however, is not an appropriate remedy because the terms of the arbitration clauses are not themselves anti-competitive.

IT IS THEREFORE ORDERED BY THE COURT THAT plaintiffs' argument that the court should not enforce ATT's and Sprint's arbitration agreements because they are the product of an antitrust conspiracy is rejected. The court will retain the remainder of the motions to compel arbitration (Doc. 68 and 75) under advisement. The hearing on plaintiffs' motion for class certification is hereby postponed until further notice.

IT IS SO ORDERED.


Summaries of

In re Universal Service Fund Telephone Billing Prac. Litig.

United States District Court, D. Kansas
May 27, 2003
No. 02-MD-1468 (D. Kan. May. 27, 2003)
Case details for

In re Universal Service Fund Telephone Billing Prac. Litig.

Case Details

Full title:IN RE: UNIVERSAL SERVICE FUND TELEPHONE BILLING PRACTICES LITIGATION This…

Court:United States District Court, D. Kansas

Date published: May 27, 2003

Citations

No. 02-MD-1468 (D. Kan. May. 27, 2003)

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