Supreme Court Declines Arbitration Case that Would Have Preempted Public Injunction Relief

By Yixian Sun

The U.S. Supreme Court this morning let stand a Ninth U.S. Circuit Court of Appeals ruling that struck a consumer arbitration agreement because it waived litigation including “public injunctive relief,” California’s so-called McGill Rule.

            Specifically, today, the Court this morning declined to hear AT&T Mobility LLC v. McArdle, Docket No. 19-1078, and Comcast Corp. v. Tillage, Docket No. 19-1066, two companion cases that raised a prominent question on consumer arbitration agreements.

            Arbitration experts believed the Court would take the case as a sequel to Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1623 (2018), and AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), which, respectively, backed individual arbitrations in employment and consumer cases.

McArdle is a Ninth Circuit case concerning the enforceability of a consumer arbitration agreement.  The specific issue, according to AT&T’s petition for certiorari, is that: “[w]hether California’s public-policy rule conditioning the enforceability of arbitration agreements on acquiescence to public-injunction proceedings is preempted by the Federal Arbitration Act (FAA).” Brief for Petitioner at i, AT&T Mobility LLC v. McArdle, No. 19-1078 (available on the Supreme Court’s website at https://bit.ly/2TYos7M).

Under the McGill Rule, any provision that precludes consumers from seeking public injunctive relief–injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public–in arbitration or in other dispute resolution forums, is contrary to California public policy and thus is unenforceable in California. McGill v. Citibank, N.A., 393 P.3d 85, 86 (Cal. 2017).

In 2019, the Ninth Circuit issued similar holdings in three cases including McArdle; it held that the McGill Rule was not preempted by the FAA, which directed courts to treat arbitration agreements as “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” McArdle v. AT&T Mobility LLC, 772 Fed. Appx. 575, 575 (9th Cir. 2019) (unpublished) (available at https://bit.ly/3eQsmrx); see also Blair v. Rent-A-Ctr. Inc., 928 F.3d 819 (9th Cir. 2019) (articulating reasons for upholding the McGill Rule).

AT&T filed its cert petition in February, seeking to have the Ninth Circuit’s decision overruled. According to the petition, since public-injunction claims focus on third parties’ interests and frequently involve complicated proceedings, they are “fundamentally inconsistent with arbitration’s traditionally individualized and informal nature” protected by the FAA. Brief for Petitioner at 14–20.

Relying on Justice Clarence Thomas’s previous interpretation of the FAA’s saving clause, it added that the McGill Rule cannot be saved because it deals with the enforceability rather than the validity of arbitration clause. FAA Section 2, the source of the saving clause, states “an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, 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. Code § 2.

Many commentators believed that the petitioners should have had a compelling case if they were able to set foot into the Supreme Court, given the Court’s “35-year history of declaring numerous California laws preempted by the FAA,” and its “unabashedly pro-arbitration Justices” including the Chief Justice John G. Roberts Jr. and Justice Brett Kavanaugh. See, e.g., Mark J. Levin, Possible Supreme Court Review of California’s “McGill Rule” Moves One Step Closer as Ninth Circuit Stays Mandates in Blair Appeals, JDsupra (Jan. 31) (available at https://bit.ly/2XNsFfz); Richard E. Gottlieb & Brad W. Seiling, Arbitration: Will U.S. Supreme Court Step In to Solve California’s McGill Problem? Manatt (Feb. 5) (available at https://bit.ly/2XmEgn5).  See also Alan S. Kaplinsky & Mark J. Levin, “FAA Preemption Petitions Now Ripe for Scotus Conference,” Consumer Finance Monitor (Ballard Spahr) (May 12) (available at https://bit.ly/3eFpOwg).

In addition to AT&T Mobility LLC v. Concepcion, and Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018), last year the Supreme Court sought to preserve the enforceability and the individualized nature of bilateral arbitration in the context of consumer and employment disputes via Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019). A major argument made by the petitioners is that Concepcion governed, because granting public injunctive relief would interfere with the bilateral nature of arbitration just as class action does. Brief for Petitioner at 20–22.

Precedents at lower courts on public injunction suits and arbitration are split, however, as AT&T Mobility reported itself in the McArdle cert petition. Brief for Petitioner at 26 (citing McGovern v. U.S. Bank, N.A., 362 F. Supp. 3d 850, 862-64 (S.D. Cal. 2019)).

The petitioners believed that the stakes are high. AT&T Mobility warned that under the Ninth Circuit ruling, it would only take a public-injunctive request for parties to circumvent an arbitration provision, thereby forcing companies to abandon consumer arbitration altogether.

Business interests strongly backed AT&T Mobility’s claim.  In order to support AT&T Mobility and Comcast’s position, more than half dozen pro-business groups, including the U.S. Chamber of Commerce, filed amicus curiae briefs, reasoning that the McGill rule’s deterrence effect against traditional bilateral arbitration will leave both businesses and consumers worse off. See., e.g., Brief amici curiae of The Chamber of Commerce of the United States of America at 7–11.

* * *

The author, a second-year Harvard Law School student, is a 2020 CPR Institute Summer Intern in Cambridge, Mass.

US Ct of Appeals Relies on Baseball Arbitration Structure to Reject DOJ Antitrust Attack on AT&T/Time Warner Merger

By Mark Kantor

Kantor Photo (8-2012)

The antitrust/competition law battle between the US Department of Justice (DOJ) and AT&T over AT&T’s acquisition of Time Warner involves a “baseball arbitration” issue that played a prominent role in today’s US Court of Appeals decision denying the DOJ’s request to block the acquisition.  In a unanimous opinion, a three-person panel of the US Court of Appeals for the District of Columbia, in the course of upholding the District Court’s approval of the acquisition, rejected DOJ’s arguments that the acquisition would create anti-competitive incentives for A&T to block “content” competitors by denying them non-discriminatory access to popular channels owned by Time Warner such as CNN.  As summarized by CNN (https://www.cnn.com/2019/02/26/media/att-time-warner-merger-ruling/index.html):

AT&T, the Justice Department claimed, would have greater bargaining leverage over rival TV distributors because the company would have valuable live content from Turner’s networks, like the sports that TNT carries and CNN’s news coverage.  The Justice Department contended that AT&T could during negotiations threaten to “black out” Turner’s channels — that is, pull them from the rivals’ lineups — tempting customers to drop their current providers and switch to AT&T services like DirecTV.  The Justice Department alleged that AT&T would also have the power to raise the prices its competitors pay for their content.

The AT&T acquisition offer ultimately included a “baseball arbitration” provision found in many Consent Orders and Consent Judgments from the DOJ and the US Federal Communications Commission intended to provide for “final offer” baseball arbitration of a competitor’s claim that the merged company was not offering non-discriminatory terms for use by the competitor on the competitor’s own network of content owned by the merged company.  The arbitration would resolve the terms and conditions, including the economic terms, on which the competitor would be allowed to license for its own use content owned by the merged AT&/Time Warner company.

A week after the government filed suit to stop the proposed merger, Turner Broadcasting [which is owned by Time Warner] sent letters to approximately 1,000 distributors “irrevocably offering” to engage in “baseball style” arbitration at any time within a seven-year period, subject to certain conditions not relevant here.  According to President of Turner Content Distribution Richard Warren, the offer of arbitration agreements was designed to “address the government’s concern that as a result of being . . . commonly owned by AT&T, [Turner Broadcasting] would have an incentive to drive prices higher and go dark with [its] affiliates,” ….  In the event of a failure to agree on renewal terms, Turner Broadcasting agreed that the distributor would have the right to continue carrying Turner networks pending arbitration, subject to the same terms and conditions in the distributor’s existing contract.

Like the lower District Court ruling before, the Court of Appeals opinion (available at https://www.cadc.uscourts.gov/internet/opinions.nsf/390E66D6D58F426B852583AD00546ED6/%24file/18-5214.pdf) noted the impact of this arbitration structure on the DOJ’s arguments regarding the anti-competitive nature of the acquisition.

The post-merger arbitration agreements would prevent the blackout of Turner Broadcasting content while arbitration is pending. ….  As mentioned, Turner Broadcasting “irrevocably offer[ed]” approximately 1,000 distributors agreements to engage in baseball style arbitration in the event the parties fail to reach a renewal agreement, and the offered agreement guarantees no blackout of Turner Broadcasting content once arbitration is invoked.  AT&T’s counsel represented the no-blackout commitment is “legally enforceable,” …, and AT&T “will honor” the arbitration agreement offers ….  Consequently, the government’s challenges to the district court’s treatment of its economic theories becomes largely irrelevant, at least during the seven-year period.  Counsel for Amici Curiae 27 Antitrust Scholars explained that arbitration agreements make the Nash bargaining model premised on two-party negotiations “substantially more complicated,” …, and Professor Shapiro [DOJ’s expert witness] acknowledged that taking the arbitration agreements into account would require “a completely different model.”

Moreover, the appeals panel quoted with apparent approval the lower court’s earlier acknowledgment that this arbitration structure would have “real world effects” on negotiations between AT&T/Time Warner, on the one hand, and its competitors, on the other hand, over renewal of  licenses from Time Warner/Turner Broadcasting of content for use on a competitor’s networks.

Neither the model nor Professor Shapiro’s opinion [the report from DOJ’s expert witness] accounted for the effect of the irrevocably-offered arbitration agreements, which the district court stated would have “real world effects” on negotiations and characterized “as extra icing on a cake already frosted,” … another reason the government had not met its first-level burden of proof.

The bottom line here is that the “baseball arbitration” structure employed in the AT&T/Time Warner acquisition, as well as in earlier media transactions such as the Comcast-NBCU merger, has received a blessing from the DC Circuit Court of Appeals as a “real world” means of mitigating anti-competitive incentives arising when one party controls access to assets that a competitor must rely upon to remain competitive.  Other industry examples of such a potentially anti-competitive situation include control by an oil & gas producer of crucial pipelines and and control a by power producer of crucial electricity transmission or distribution systems.

We shall have to see if the DOJ will seek US Supreme Court review of its defeat in this antitrust dispute.

_______________________________________________

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.