When Arbitration and Non-Compete Clauses Mix, a Simple Mistake Could Cost Millions

The City of Chicago is moving aggressively forward with efforts to plug its budgetary holes through privatization. Sure, we’ve all heard about the parking meters, but every few weeks it seems like there is a new proposal: the fare collection system on the CTA, privatizing the redline, putting billboards on public highways and bridges, or funding Chicago’s energy efficiency initiatives with private money through the Chicago Infrastructure Trust.  These deals may come at the expense of taxpayers, who could again be on the hook for deals that contain hidden or poorly understood provisions.  Years into a privatization deal, these provisions can obligate governments (i.e. taxpayers) to pay contractual fines, bar performance of public functions, or contort policy so that it neglects the public interest.

At the same time, when shiny new corporate cash is offered to help pay for major city improvements, it’s important to remember exactly why privatization isn’t always the best idea.

Illinois PIRG is highlighting a series of privatization mistakes that demonstrate the need for oversight, transparency and accountability in any attempt to privatize a city service or asset.By shining a light on privatization deals gone awry, we hope to prevent bad deals that harm the public interest in the future.

The Perils of Privatization: Part One “Arbitration and Non-Compete Clauses Don’t Mix”

Chicago’s Privatized Garages Cost the City (and taxpayers) Millions – and the City Has Nothing to Show For It

In 2006, the city of Chicago signed a deal with Chicago Loop Parking LLC to privatize the four city-owned parking garages downtown.[i] Under the agreement, Chicago Loop Parking paid the city $563 million to operate and receive the revenue from all 9,178 spaces in the garages for 99 years.[ii] Now, however, the city of Chicago is on the hook for $57.8 million in damages as a result of a claim filed by Chicago Loop Parking that the city violated the “non-compete” clause of the privatization deal. Because of an additional arbitration clause in the contract, the City was also forced to settle this dispute behind closed doors, and cannot challenge the outcome.

The agreement between the city and Chicago Loop Parking LLC – which is owned by Morgan Stanley –included a non-compete clause that prohibited the city from permitting other parking garages within a 50-square block area.However within months of signing the deal with Chicago Parking LLC, the city approved a permit for a 1,288-space garage at the Aqua skyscraper – located within the 50 block non-compete zone.

The City claimed that the permit to build the garage at the Aqua skyscraper had been “issued in error” and would be revoked, but lawyers for Standard Parking, the operator of the garage at Aqua, fought against the revocation of their permit.[iii]The compromise offered by the city was an “accessory garage license,” allowing people to park in Aqua’s garage if they were going to the building or anywhere inside the surrounding 43-acre area.

Not satisfied that the limited parking agreement was in accord with the terms of the original non-compete clause, Chicago Loop Parking filed a claim against the city in March 2011.The claim alleged that Aqua’s public garage violated the 2006 privatization agreement. Chicago Loop Parking took the city to arbitration court seeking damages of upwards of $200 million – revenue they claimed will be lost through the contract’s expiration in 2105 because of competition from Aqua.[iv]They argued that despite the “accessory garage license,” public drivers were still using Aqua’s spaces.

The non-compete clause has enabled Chicago Loop Parking to force Mayor Rahm Emanuel’s administration into an arbitration case that lasted several months.[v]To make matters worse, the public was not able to monitor the case between the city and Chicago Parking Loop because the privatization deal mandates that cases be resolved in closed-door arbitration sessions. With the public unable to oversee the arbitration proceedings, Chicago residents could not ensure that the privatized parking garages are being managed in ways that uphold the public interest. Furthermore, lawyers on both sides signed an agreement that prohibits them from discussing many of the arbitration proceedings with the public.[vi]

On February 25th, an arbitration agreement that held the City of Chicago liable to Chicago Loop Parking for $57.8 million was finalized.The terms of the arbitration agreement give the City no chance to appeal, as arbitration decisions are final.

In this case, the non-compete clauses not only took away the ability of city planners to best serve the public interest, like building a parking garage when they determine parking spaces in downtown Chicago are too limited, it also left the city liable for expensive human error.

The City is not the benefactor from Aqua’s parking garage, but is still on the hook for the $57 million to Chicago Loop LLC.The money won’t be spent on the construction of a new garage that would provide revenue to Chicago in the future. It’s merely an apology for allowing a different private corporation action to build a competing garage.In this case, a simple oversight by a permitting agent working for the City of Chicago ended up costing Chicago millions of dollars, thanks to a non-compete clause that went against the public interest.

None of this was anticipated in the original privatization agreement. And who knows what else won’t be.When city functions must also serve as a profit stream for an outside company like Morgan Stanley, inadvertent or unanticipated city decisions can incur huge additional costs. The financial burden on the city and the limits on the public’s choices should incite heightened public scrutiny and backlash; which is why additional privatization clauses to stifle democratic scrutiny and reforms are such a dangerous combination.

[i] American Arbitration Association, Chicago Loop Parking LLC, Claimant, vs. The City of Chicago, Respondent, Statement of Claim, 1 March 2011.

[ii] Dan Mihalopoulos and Chris Fusco, “Chicago faces $200 million claim over Aqua parking garage,” Chicago Sun Times, 16 April 2012.

[iii] http://www.suntimes.com/news/cityhall/19035394-452/city-halls-578-millio...

[iv] Michael Lipkin, “Parking Garage Privatization,” WTTW, 17 April 2012. Available at http://chicagotonight.wttw.com/2012/04/17/parking-garage-privatization

[v] Michael Lipkin, WTTW, personal communication, 29 August 2012.

[vi] Dan Mihalopoulos and Chris Fusco, “Chicago faces $200 million claim over Aqua parking garage,” Chicago Sun Times, 16 April 2012.