Sunday, October 14, 2007, 8:35 PM

Fourth Circuit Issues Significant Arbitration Decision

On Friday the Fourth Circuit issued a significant arbitration decision arising from the Middle District of N.C. The case is In re: Cotton Yard Antitrust Litigation. Judge Traxler wrote the majority opinion. The other panel members dissented from various parts of his opinion.

The case was brought by business-purchasers of cotton and poly-cotton yarns. They alleged that manufacturers of the yarns had engaged in a price-fixing conspiracy in violation of the Sherman Act.

The manufacturers moved to dismiss, contending that plaintiffs were bound by arbitration clauses. Judge Beaty disagreed. He concluded the arbitration clauses couldn't be enforced because they prevented plaintiffs from effectively vindicating their statutory antitrust claims.

The Fourth Circuit reversed, issuing three key holdings, discussed below.

1. Arbitration Agreement May Be Implied Into Oral Agreement By Usage Of Trade

The first issue the Fourth Circuit confronted was this: one of the defendant manufacturers (Frontier) had reached oral agreements over the phone with customers, and arbitration was never discussed. Frontier sent written confirmations after the conversations, and those writings contained an arbitration clause. But Judge Beatty held that the arbitration clause in those confirmations materially altered the oral contracts, and therefore the arbitration clause wasn't binding.

On appeal, Frontier argued that arbitration was automatically part of the oral agreements reached by the parties by "usage of trade," because arbitration of disputes is well established in the textile industry. See N.C.G.S. 25-2-201 (usage of trade is part of agreements under U.C.C.). Chief Judge Williams dissented as to this holding.

2. Arbitration Agreements Are Enforceable Despite Prohibition On Joinder

The arbitration agreements prevent joinder -- a single plaintiff bring claims against multiple defendants in a single proceeding. The plaintiffs argued, and Judge Beaty agreed, that because they allege the existence of a price-fixing conspiracy, the inability to join all defendants in a single proceeding prevents plaintiffs from vindicating their statutory rights.

The Fourth Circuit found the argument unpersuasive. The Court observed that co-conspirators aren't necessary parties: a plaintiff can prove the existence of a conspiracy in an action against just one of the members of the conspiracy; nothing prevents the plaintiffs from presenting evidence about the actions of non-party defendants in order to establish the existence of the alleged price-fixing conspiracy. While individual proceedings may be less efficient, the inefficiency, the Court held, is a function of Congress's preference for resolution of disputes by arbitration. (The Court also deemed it important to note that some defendants had settled, leaving only two defendants remaining, with the consequence that each plaintiff would have to pursue, at most, two arbitrations.) The Court suggested that in another case it might be possible for a plaintiff to develop an evidentiary record to prove that the cost of pursuing individual proceedings would be prohibitive and thwart the plaintiff's ability to vindicate statutory rights. Finally, the Court found unpersuasive the fact that discovery against third parties is limited in arbitration, meaning discovery against non-party co-conspirators would be limited.

3. Contractual Shortening Of Limitations Period Not Per Se Invalid

The federal antitrust statutes have a four-year statute of limitations. The arbitration agreements in this case, however, establish a one-year limitations period. Plaintiffs argued that the shortening of the limitations period rendered the arbitration agreements unenforceable. The Fourth Circuit disagreed.

First, the Court held that the one-year period wasn't unreasonably short.

Second, the Court held that the statutory limitations period isn't substantive but instead is procedural; therefore, the contractual shortening of the limitations period didn't run afoul of the Supreme Court's admonition that arbitration agreements may not dispossess plaintiffs of the substantive rights established by the statute under which they are suing.

Third, the Court addressed plaintiffs' argument that, even if a portion of their claims are timely under the one-year limitations period, they nonetheless can't effectively vindicate their rights because the one-year period could substantially reduce the amount of damages recoverable. The Court rejected the notion that an agreement is unenforceable simply because less damages are available than would be available in a judicial forum.

(The latter two holdings drew a dissenting opinion by the district judge who sat on the panel by designation. He would invalidate the one-year limitations period and sever it from the arbitration agreements.)

The Court remanded for the district court to determine whether plaintiff's claims were timely filed under the one-year limitations period. If the district court on remand concludes that the claims were not timely filed (i.e., that they are entirely barred by the one-year limitations period), the district court must consider whether severance of the limitations provisions, rather than invalidation of the arbitration agreements, would be the appropriate remedy.

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