Credit card antitrust judge: Client marketing is ‘professional peril’

April 10, 2014

In 1999, a couple of partners at the firm now known as Wilmer Cutler Pickering Hale and Dorr had a fabulous idea. Businesses were just beginning to recognize the potential advantages of imposing mandatory arbitration provisions and class action waivers on their customers. In early 1998, First USA was the first credit card bank issuer to adopt a mandatory arbitration clause, followed by American Express at the end of the year. Wilmer, which had a roster of credit card clients, came up with a marketing strategy to position itself as an expert on the clauses. In May 1999, Wilmer lawyers invited big credit card issuers to attend a conference on arbitration provisions at its Washington offices “to show these folks that this was something on which we were at the leading edge,” one of the partners later testified.

Wilmer was absolutely right about the marketing potential of mandatory arbitration. After that initial meeting at the firm’s offices on May 25, 1999, Wilmer teamed up with another firm, Ballard Spahr, and several in-house credit card lawyers. They dubbed themselves the “Arbitration Coalition” and invited lawyers from other outside firms and from companies in other industries to join the group. The coalition met throughout 1999 and 2000, as credit card issuers rushed to adopt class action waivers and arbitration clauses. Spin-off groups — including a very short-lived cluster called the Class Action Working Group and a loose band of lawyers for credit card issuers, known as the In-house Working Group — also held sessions in 2000 and 2001.

In all, including that initial session Wilmer convened in 1999, members of the credit card industry met 28 times over the course of four years to discuss how to impose and implement mandatory arbitration clauses. By the end of 2001, when Citi adopted the provisions in its agreements with cardholders, mandatory arbitration clauses had become the industry standard.

That mass conversion to mandatory arbitration was not a coincidence — but nor was it a violation of antitrust law, according to a 92-page opinion issued Thursday by U.S. District Judge William Pauley of Manhattan. After 10 years of litigation, culminating with a five-week bench trial last spring, Pauley held that Discover, Citigroup and American Express did not engage in an antitrust conspiracy when they and other credit card issuers adopted antitrust clauses between 1999 and 2001.(Four other issuers previously settled out of the two parallel, injunction-only class actions before Judge Pauley and agreed to remove mandatory arbitration clauses from cardholder agreements.)

Pauley considered the allegations by class counsel at Berger & Montague and Scott + Scott credible enough that he denied the credit card defendants’ summary judgment motions and permitted the two cardholder class actions to proceed to last year’s bench trial. But when he weighed the evidence from the trial, he said in Thursday’s opinion, he concluded that credit card holders hadn’t shown an anticompetitive agreement among the banks to implement arbitration across the industry. “While the extensive record of inter-firm communications among competitors would give any court pause,” he wrote, “this court cannot infer an illegal agreement based on the evidence marshaled at trial.”

The banks clearly had an agreement to work together to expand the enforceability of arbitration clauses and to establish class action waivers as the industry norm, Pauley said. But many of the meetings at which issuers discussed these goals were like trade association gatherings or lobbying conferences, open to participants outside of the industry and protected by the Noerr-Pennington doctrine, which shields lobbying efforts from antitrust liability. Pauley said the record on the Arbitration Coalition gatherings was “ambiguous,” but that he considered its activities to be “akin to that of a fledgling special interest group cooperating to advance a mutually beneficial business initiative.” The Class Action Working Group meetings, he said, “had the trappings of a trade association or special interest group.” The In-House Working Group “permits the strongest inference of an agreement,” since outsiders weren’t involved, Pauley said. But plaintiffs lawyers just couldn’t show that the loosely defined group’s activities were collusive. It was equally plausible, he said, that the companies involved in the group were engaged in parallel but independent decision-making.

“The bottom line is that the plaintiffs never came close to proving collusion,” said Robert Sperling of Winston & Strawn, who represented Discover. “They fell woefully short.” (Evan Chesler of Cravath, Swaine & Moore represented Amex and David Graham of Sidley Austin represented Citigroup.) Class counsel Merrill Davidoff of Berger & Montague said in an email that plaintiffs “are obviously disappointed that Judge Pauley did not agree with our contention that a series of 28 meetings over a several year period, which at least coincided with all the subject banks adopting class-action-barring arbitration clauses, plus a number of other interbank communications, did not rise to the level of ‘agreement’ under the Sherman Act.” He said it’s too soon to say whether he will appeal; the 2nd U.S. Circuit Court of Appeals has twice issued opinions benefiting the class in these cases, but Pauley’s ruling will be tough to overcome since it’s based on his findings of fact from an extensive record.

You’re probably wondering about now why I started this post by describing how Wilmer and Ballard Spahr alerted credit card issuers about the opportunities of mandatory arbitration and then facilitated the industry’s discussion of how to implement the provisions. The answer lies in the last pages of Pauley’s opinion. The judge wasn’t content just to clear Amex, Discover and Citi. He also found a larger meaning in this long-running litigation.

The cases “offer a cautionary lesson to all lawyers who labor under inexorable pressure to generate new business,” Pauley wrote. “When outside counsel convene meetings of competitors in the hope of propelling themselves to the forefront of an emerging trend … they do so at their professional peril.” It was only a “slender reed,” Pauley continued, “that plaintiffs failed to demonstrate that the lawyers who organized those meetings had spawned a Sherman Act conspiracy among their clients.”

I wrote last year, before the bench trial began in Judge Pauley’s courtroom, about the cardholders’ claims that Wilmer and Ballard Spahr — which were never defendants in the cases — had facilitated the alleged credit card cartel. At the time, the firms said those claims were absurd. There was nothing improper about the meetings they hosted, the firms said. Industry participants and outsiders legitimately shared information after the law firms delivered standard antitrust cautions at the start of each session.

In his factual findings and legal analysis, Pauley agreed. He noted that Wilmer’s invitation to sponsors for the initial conference in May 1999 included the cautionary language that “companies sending counsel to such a meeting are competitors and that for legal reasons, certain issues will need to remain off-limits.” He also, of course, concluded that the meetings organized by Wilmer and Ballard were not evidence of an illegal conspiracy. He said specifically that the class failed to establish that the Arbitration Coalition and Class Action Working Group meetings were anything but legitimate gatherings to discuss the credit card industry’s shared interest in promoting mandatory arbitration.

Yet Pauley also felt compelled to make his last words in the credit card collusion case an admonition about the “perils” of business development. I don’t see how you can read his words — that class counsel failed by “a slender reed … to demonstrate that the lawyers who organized these meetings had spawned a Sherman Act conspiracy” — as anything but the judge’s disapproval of the marketing efforts of Wilmer and Ballard Spahr. Pauley lists the firm’s clients in the credit card industry as of the early 2000s in the early part of the opinion. At the end, he points out that attending meetings to discuss how to lower litigation costs through mandatory arbitration and class action waivers seems to have backfired, at least in the short term, because the credit card companies had to lay out the cost of defending themselves against antitrust accusations.

That’s not the kind of marketing, he seems to be suggesting, that any law firm should want to engage in.

Wilmer sent me an email statement on the ruling: “Any suggestion that WilmerHale lawyers engaged in improper conduct was put to rest by Judge Pauley.” Ballard Spahr partner Alan Kaplinsky declined to comment.

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