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From Antitrust Law Daily, January 23, 2018

Claims against used car auction operator stayed pending arbitration

By Robert B. Barnett Jr., J.D.

Antitrust claims brought by a company that purchased used wholesale vehicles at auctions against the auction operator for monopolizing and conspiring to restrain trade in the wholesale used car market and to drive the complaining company into bankruptcy were subject to arbitration, in accordance with arbitration agreements contained in both auction and financing contracts that were found to be enforceable under the Federal Arbitration Act. A Florida federal district court ruled that the arbitration agreements were not unconscionable, despite some limitations benefitting the auction companies, because the contracts were between two sophisticated companies with equal bargaining power, and, in any event, the contracts included opt-out provisions that the buyer could have exercised to avoid the arbitration agreements. Furthermore, the arbitration agreements’ liability limits did not contravene the remedial purpose of ant-trust law because the arbitrator had the power to sever any invalid provisions, and subsidiaries that did not sign the contracts could nonetheless pursue arbitration because the claims against signatories and non-signatories arose out of the same factual allegations (Citi Cars, Inc. v. Cox Enterprises, Inc., January 22, 2018, Moore, K.).

Background. Citi Cars, Inc. began buying used wholesale vehicles in 2006 at auctions operated by Manheim Auctions, a subsidiary of Cox Enterprise, Inc. After two years, Citi obtained a line of credit from Next Gear, another Cox Enterprise subsidiary, to finance its auction purchases. After a number of years under this arrangement, Citi began going directly to franchise vehicle dealers, believing that it could buy the used vehicles for about $2,000-$3,000 cheaper per car than it could obtain them through auction. The franchise dealers, however, refused, telling Citi that they were required to send all vehicles to Manheim Auctions. After eight years of doing business with Manheim Auctions and Next Gear, Citi ceased making payments and declared bankruptcy. Citi then filed suit in federal district court in the Southern District of Florida, alleging that Cox Enterprises and its subsidiaries conspired to restrain trade and force Citi into bankruptcy. Cox Enterprises filed a motion to compel arbitration, relying on arbitration agreements contained in both the auction contract with Mannheim Auctions and the loan contract with Next Gear. Citi maintained that the arbitration agreements were unenforceable because (1) they were unconscionable, (2) they were void as against anti-trust public policy, and (3) some of the subsidiaries named as defendants did not sign the contracts containing the arbitration agreements.

Validity. Did the parties agree to arbitrate? Yes, the court said, because the claims clearly fell within the broad scope of the arbitration clauses, which, for example, covered all disputes arising of Citi’s relationship with Next Gear, and because the clauses were enforceable under the Federal Arbitration Act. Clearly, the court concluded, the Next Gear arbitration clause constituted a written agreement to arbitrate. The court also found that the Manheim contract constituted a valid written contract to arbitrate, despite the fact that Citi never actually signed that agreement. The FAA requires a writing but it does not require that it be signed by the parties. By abiding by its terms for more than eight years, Citi had accepted its terms. Both agreements—the Next Gear agreement and the Manheim agreement—were found to involve interstate commerce. Thus, the FAA applied, and the arbitration clauses were valid and enforceable, unless Citi could establish some reason for voiding them.

Unconscionability. Citi attacked the arbitration clauses with three unconscionability arguments: (1) the clauses did not mutually require the Cox subsidiaries to arbitrate their disputes against Citi, (2) the clauses included limitations on liability that improperly limited Citi’s damage recovery, and (3) the arbitrator was specifically barred from allowing pre-hearing discovery or depositions. The court swatted away all three concerns. In Florida, the person challenging an arbitration agreement must prove that the agreement was both procedurally and substantively unconscionable. Beginning with procedural unconscionability, the court noted that the cases cited by Citi involved an imbalance in bargaining power between a consumer and a business entity. In this case, however, both parties were business entities with experience in multiple commercial and financial transactions. In any event, a mismatch in bargaining power alone is not enough to void the clause. Furthermore, the arbitration agreements included an opt-out clause, allowing Citi to opt out of the arbitration agreement. This existence of this opt-out clause, the court said, obviated any procedural unconscionability argument. Given that no procedural unconscionability existed, the court never addressed substantive unconscionability.

Public policy. Citi argued that anti-trust public policy was violated by the provision limiting the Cox subsidiaries’ liability. The enforceability of such a provision, the court said, was to be determined by the arbitrator. Florida does not generally consider damage limitations to go to the essence of the arbitration agreement. As a result, their existence does not void the arbitration agreement. Furthermore, if the provision was found to be unenforceable, under the terms of the arbitration agreements, the arbitrator had the right to sever it from the agreement. In that event, the parties could still arbitrate with the remaining provisions.

Non-signatories. Citi argued that it could not be compelled to arbitration by entities, including Cox Enterprises, that did not sign the contracts containing the arbitration agreement. The court, however, ruled that these non-signatories could compel arbitration on the theory of equitable estoppel. A non-party, the court said, could compel arbitration if the relevant state contract law allows it to enforce the agreement. Equitable estoppel applies when the signatories’ claims allege substantially interdependent and concerted misconduct by both signatories and non-signatories. In this complaint, all the claims against the non-signatories were inextricably interwoven with the claims by the signatories (Manheim and Next Gear). The complaint’s claims were lodged against Cox and its subsidiaries without differentiation. In fact, the complaint claimed that they acted in concert. As a result, equitable estoppel applies, and the non-signatories were permitted to pursue arbitration.

Stay. The FAA requires that the court stay the proceedings until the arbitration is completed, if a party so requests it, as Cox did. The court, therefore, granted Cox’s motion to compel arbitration, and it granted Cox’s request for a stay.

The case is No. 1:17-cv-22190-KMM.

Attorneys: Stephen Charles Breuer (Moffa & Breuer, PLLC) and Martin G. McCarthy (Richard S. Gendler & Associates, PA) for Citi Cars, Inc. Alicia J. Batts (Squire Patton Boggs [US] LLP) for Cox Enterprise, Inc., Cox Automotive, Inc., Manheim Auction, LLC and NextGear Capital, Inc.

Companies: Citi Cars, Inc.; Cox Enterprise, Inc.; Cox Automotive, Inc.; Manheim Auction, LLC; NextGear Capital, Inc.

MainStory: TopStory Antitrust FloridaNews

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