Amicus Curiae Brief — PacifiCare Health Systems, Inc. v. Book

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No. 02-215

IN THE a

Supreme Court of the United States

PACIFICARE HEALTH SYSTEMS, INC.., ef al.,

Petitioners,

Vv.

JEFFREY BOOK, D.O., et al.,

Respondents.

On Writ Of Certiorari

To The United States Court Of Appeals

For The Eleventh Circuit

BRIEF OF

NATIONAL ASSOCIATION OF MANUFACTURERS AND

AMERICAN ASSOCIATION OF HEALTH PLANS, INC.

AS AMICI CURIAE IN SUPPORT OF PETITIONERS

Of Counsel: MIGUEL A. ESTRADA

AMUND Counsel of Record

a an “ ANDREW S. TULUMELLO

. pom TION OF GIBSON, DUNN & CRUTCHER LLP

scimcmeieiaen” 1050 Connecticut Ave., N.W.

~ Washington, D.C. 20036

1331 Pennsylvania Ave., N.W. '

Washington, D.C..20004 (202) 955-8500

(202) 637-3000

STEPHANIE KANWIT

AMERICAN ASSOCIATION OF

HEALTH PLANS, INC.

1129 20th Street, N.W.

Washington, D.C. 20036

(202) 778-8464

Counsel for Amici Curiae

QUESTION PRESENTED

Whether a district court must compel arbitration of a

plaintiff's RICO claims under a valid arbitration agreement

even if that agreement does not allow an arbitrator to award

punitive damages, leaving to the arbitrator in the first instance

the decision of what remedies are available to the RICO plain-

tiff in arbitration.

TABLE OF CONTENTS

Page

SRE URIES PRMIIIS DD 5 cocececcccecsosecesccccoscocecsoeseccnsnseconeececes i

TABLE OF AUTHORITIES. ............cccccscsssessesescesseseeseseeeeevenes ili

INTEREST OF AMICI CURIAE...00..ccccccccssssssscsescesseesereseeeeeeees l

a scstuupetneeeesmmenes 2

SUMMARY OF ARGUMENT............cccccccscscssesessecesscererseseeeees 6

ESSIEN 8

I. THE ARBITRATOR, NOT THE COURT,

SHOULD HAVE DECIDED IN THE FIRST

INSTANCE WHETHER THE PARTIES’

WAIVER OF “PUNITIVE” DAMAGES

APPLIES TO RICO AND IS VALID. ..........cccccccsees 8

A. The District Court Should Have Decided

Threshold Issues Of Arbitrability Only. ............. )

B. The Validity Of A Remedial Waiver Is Not

A Threshold Issue Of Arbitrability................... 16

fl. AGREEMENTS THAT PRECLUDE

ARBITRATORS FROM AWARDING

“PUNITIVE” DAMAGES ARE VALID AND

ENFORCEABLE IN BOTH ARBITRAL AND

JUDICIAL PROCEEDINGS. .............:secccseseseseseeveee 20

A. The Parties’ Agreements, When Properly

Construed, Do Not Preclude An Award Of

EE 21

B. In Any Event, No Congressional Policy

Precludes Parties From Agreeing T. Waive

Treble Damages Under RICO. .............cccccce0ees 23

C. Respondents’ RICO Claims Must Be

Arbitrated Even If The Remedial Waivers

Are Unenforceable. ...................ccccccccececocececeeeeee 28

Ee 30

ill

TABLE OF AUTHORITIES

Page(s)

CASES

Allied-Bruce Terminix Companies, Inc. v.

Benet, SED TB. BO Cop eccscncecxsesesesessvsssssnscscssstesssesse 25

Baravati v. Josephthal, Lyon & Ross, Inc., 28

ep 24

Brooklyn Sav. Bank v. O'Neil, 324 U.S. 697

SEITE tsranieniensepmapennnememnssnmnansemmmanesesnnpensemnmmansensqansensense 26

Central Bank of Denver, N.A. v. First Interstate

Bank of Denver, N.A., 511 U.S. 164 (1994) ........cccccceseeeees 5

Cox v. Administrator U.S. Steel & Carnegie, 17

ee 5

Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213

EE ceiensntsseemntunsnnsmnenentnenesmnmnnmnsneatenmsmasemenssmaansaseate 10, 23

De Falco v. Bernas, 244 F.3d 286 (2d Cir. 2001).............cc0008 5

Doctor's Assocs. v. Casarotto, 517 U.S. 681

I ceernccemnesssnnennamnenesesnemecensesensnsssenscnstensnenesn 24, 25, 28

Eastern Associated Coal Corp. v. United Mine

Workers of Am., 531 U.S. 57 (2000) .......-cc-ccesceseeseeeeeeeeees 16

Evans v. Jeff D., 475 U.S. 717 (1986) ........-ccecceceecereneeneenensees 26

First Options of Chicago v. Kaplan, 514 U.S. 938 |

BRIG .csacsceseresnssnssensensensnsveccscnensesssscesscessscseccossessessesy passim

Gannon v. Circuit City Stores, Inc., 262 F.3d 677

en 29

Gilmer v. Interstate/Johnson Lane Corp., 500 |

ee passim

Green Tree Fin. Corp. v. Randolph, 531 U.S. 79

I eeenenenesnesnnsenmnssennessssnsmsemanssssmemnessessnenenenassnecs 18, 19

In re Managed Care Litig., 135 F. Supp. 2d 1253

SN Eee at ieriinseniehinininsienansieatieemeaiieteminsiitaaineaiiiasitiiiiaiiaiaaial 5

In re Managed Care Litig., 132 F. Supp. 2d 989

EEE Ss AIT cnichidestenteneicentinieiiantataenenninsaiammhatetiaiiinatainii 19

International Union of Operating Engineers v.

Flair Builders, Inc., 406 U.S. 487 (1972) ............ 12, 14, 20

Investment Partners, L.P. v. Glamour Shots

Licensing, Inc., 9° F.3d 314 (Sth Cir. 2002).........0.000000.. 22

John Wiley & Sons, Inc. v. Livingston, 376 U.S.

Co 11, 12, 14, 20

Mastrobuono v. Shearson Lehman Hutton, Inc.,

ae Ser eicciictinnstnshiineciiireinrstarinansesinetinieiniinailnciciaaiaad 24

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985))........ccccccccceeeseeee passim

Moses H. Cone Mem’! Hosp. v. Mercury Constr.

Sig GE ee 6 Co ccrercenensmnnesnccsnnenencnans 12, 15, 18, 29

New York v. Hill, 528 U.S. 110 (2000).............cccccccccceeceeeeeeeee 28

Paladino v. Avnet Computer Tech., Inc., 134 F.3d

EE icirrrecerncineicenmninsiceanrericcinaereinctenatateeniaiiel 6

Perez v. Globe Airport Sec. Servs., Inc., 253 F.3d

TT 30

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

es Se iaricneteterenctiecinintciiiteniniainciiel passim

Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989) .......ccccccccceesees 14, 25, 27

Rolo v. City Investing Co. Liquidating Trust, 155

Pa ECD SEIU icrescicniessicssicihiceiliiintaslneinsirieneceiaieati 5

Scherk v. Alberto-Culver Co., 417 U.S. 506

Shearson/American Express, Inc. v. McMahon,

GER ULD, TID CRIS FD ccccccccsccncccsccscsssssnssessssssessssssssss004 passim

Shutte v. Thompson, 15 (Wall.) 151 (1873) ...........-cceseeeeee 8, 25

Southland Corp. v. Keating, 465 U.S. 1 (1984) .............. 18, 29

Steelworkers v. Enterprise Wheel & Car Corp.,

DED UG. SEB CIDE cccceccscsscsscnssnsssesessssesessesssssscsssssssssnssese 16

Thomas v. Union Carbide Agricultural Prod.

Corp., 473 U.S. 568 (1985)........-.-cscecesereereeensesennnnsenenenees 15

United States v. Bonnano, 879 F.2d 20 (2d Cir.

a 27

United States v. Mezzanatto, 513 U.S. 196 (1995).8, 25, 26, 28

United States v. Shabani, 513 U.S. 10 (1994)..........-cceceeeeees 19

Volt Info. Sciences, Inc. v. Board of Trustees, 489

CRE, GIB CIID cceccccccsesccsssssssssscssnssssssssensssssssssssssssmensssess 23

Wilko v. Swan, 346 U.S. 427 (1953) ......cccccscecsceeseeeeeeeeeeeeennes 14

STATUTES

Ud | 7

Jil) ft >) 24, 27, 28

| 10

JU) Sf 7,9, 11

iE ) 15

Ut Cd 5 | 15

Ut |) 5

9B UBC. © BGG nnceccccccscesescrsesscscsscssescesesssescssssnesnssnscssssesecseesens 2

SUS Cel) 27

4B UBC. § 1GGB ncccecenceececsececesesececesscsscsccsscsscsswesssessssesescsenesess 26

OTHER AUTHORITIES

DAN B. Dosss, Law OF REMEDIES §§ 3.12, 12.1

(2d ed. 1993)

Paul D. Carrington & Paul H. Haagen, Contract

and Jurisdiction, 1996 S. Ct. REV. 331 (1996) ............... 14

United States Department of Justice, Health Care

Fraud Report (April 2002) .........ccccccececesesesessesseseeeseeeeeeeeeee. 4

United States Government Accounting Office,

Health Care: Consultants’ Billing Advice

May Lead To Improperly Paid Insurance

Claims, GAO-01-818 (June 2001) .......ccccccccececeseeeseceseeeeee. 3

BRIEF OF

NATIONAL ASSOCIATION OF MANUFACTURERS AND

AMERICAN ASSOCIATION OF HEALTH PLANS, INC.

AS AMICI CURIAE IN SUPPORT OF PETITIONERS

INTEREST OF AMICI CURIAE'

The question presented in this case is whether a district

court is required to enforce the terms of an arbitration agree-

ment when the agreement expressly precludes a RICO plain-

tiff from recovering “extracontractual” or “punitive” dam-

ages on his RICO claim. Amici have a vital interest in the

correct resolution of that question, because amici’s members

have entered into thousands of arbitration agreements that

expressly preclude arbitrators from awarding punitive and

extracontractual damages. Amici’s members will be ad-

versely affected by a decision rendering such agreements un-

enforceable, because they will be deprived not only of the

benefit of their bargains but of the inexpensive, prompt, and

expeditious arbitration mechanism they rely upon to resolve

many of their business disputes.

The National Association of Manufacturers (““NAM”)—

18 million people who make things in America—is the na-

tion’s largest industrial trade association. The NAM repre-

sents 14,000 members (including 10,000 small and mid-sized

companies) and 350 member associations serving manufac-

turers and employees in every industrial sector and all 50

states.

The American Association of Health Plans, Inc.

(“AAHP”) is the national association for the managed health

care community. AAHP represents more than 1000 managed

health care organizations serving nearly 150 million Ameri-

| Pursuant to this Court’s Rule 37.3(a), letters of consent from all parties

to the filing of this brief have been filed with the Clerk. Pursuant to this

Court’s Rule 37.6, amici state that this brief was not authored in whole or

in part by counsel for any party, and that no person or entity other than

amici, its members, or its counsel made a monetary contribution to the

preparation or submission of this brief.

cans. AAHP’s mission is to advance health care quality and

affordability through leadership in the health care commu-

nity, advocacy, and the provision of services to member

health plans.

STATEMENT

1. This case arises from a massive nationwide class ac-

tion filed on behalf of more than 600,000 physicians against

ten of the largest managed care organizations (“MCOs”) in

the United States. The plaintiff physicians—respondents

here—provide treatment to individuals who receive health

coverage under employee benefit plans insured or adminis-

tered by the MCOs. Respondents allege that, for more than a

decade, the MCOs have failed to pay them adequate reim-

bursements for the medical services that respondents have

= to the insureds of the relevant employee benefit

plans.

In particular, respondents allege that the MCOs—on

their own and as part of a conspiracy with every other defen-

dant MCO—have implemented a plan to “deny, delay and

diminish” the reimbursement payments due to physicians.

See Second Am. Compl. at § 5. The complaint alleges that

the MCOs have orchestrated this scheme by using commer-

cially available computer software that, though required to be

used in processing reimbursements under Medicare, Tricare

and other federal programs, allegedly processes physician

bills in a way that artificially reduces the amount the physi-

cians are paid; the complaint also alleges that the MCOs de-

lay payment on claims in order to obtain a “float” on the

monies due. Respondents allege that, by engaging in that

conduct, the MCOs have conspired to violate, violated, and

aided-and-abetted violations of the Racketeer Influenced and

Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 ef

seq.; and that they have violated state statutes and contractual

and quasi-contractual obligations. The RICO claims—which

are at issue here—allege that the MCOs are part of an illegal

country- and industry-wide “enterprise” that spans virtually

every aspect of the health care delivery system in the Nation,

and that the MCOs have engaged in acts of “racketeering” —

mail fraud, wire fraud, and extortion—that have harmed the

physician class. See Second Am. Compl. at {J 183-98.

For the most part, respondents’ right to reimbursement

from MCOs arises either from a direct contract entered into

by the physician and MCO, or by a contract entered into by

the MCO and a provider group, such as an independent phy-

sician association or a physician hospital association. The

terms of those contracts are heavily negotiated and vary sig-

nificantly from physician to physician (and from physician

group to physician group) over terms as fundamental as the

services that will be covered, claim submission provisions,

claim payment timeframe requirements, and fee schedules.

Given the tremendous volume of claims for reimburse-

ment that MCOs process every year, many physician groups

and MCOs have found it mutually beneficial to include arbi-

tration clauses in their provider contracts. Not every MCO

has entered into an arbitration agreement with every physi-

cian or physician group, but many MCOs and physician

groups are attracted to the arbitration mechanism because it

ensures that reimbursement disputes are resolved promptly

and efficiently and without the expense of full-blown litiga-

tion—attributes that are particularly important in the man-

aged care area, where the cost of litigation can easily exceed

the value of disputed reimbursement claims. As with other

terms in provider agreements, arbitration clauses vary and are

subject to vigorous negotiation. =

As part of their agreements to arbitrate, many MCOs and

provider groups also may agree to waive any right to recover

punitive or extracontractual damages. By limiting recoveries

to actual, out-of-pocket losses, MCOs and provider groups

can better predict their respective liabilities to one another.

The benefits from such waivers are mutual. Overbilling and

even fraudulent reimbursement claims are not uncommon in

the health care delivery system. See United States Govern-

ment Accounting Office, Health Care: Consultants’ Billing

Advice May Lead To Improperly Paid Insurance Claims,

GAO-01-818 (June 2001). Indeed, the federal government

frequently initiates prosecutions for billing abuse and Medi-

care fraud. See United States Department of Justice, Health

Care Fraud Report (April 2002) (reviewing enforcement ef-

forts). When such overbilling is discovered, MCOs may off-

set payments or seek affirmative relief against physician

groups to obtain monies wrongfully paid. In those disputes,

the waiver of punitive relief also operates to cap the damages

that can be assessed against a provider or provider group.

2. The provider contracts at issue in this case contain

arbitration clauses. Respondent Porth—an orthopedic sur-

geon in Florida—has entered into a contract with United

Healthcare that requires “any disputes about their business

relationship” to be resolved through “binding arbitration in

accordance with the rules of the American Arbitration

Association.” Pet. App. 63. Dr. Porth’s provider contract

also states that the arbitrator shall have no authority to award

“extracontractual damages of any kind, including punitive or

exemplary damages.” Jd. Respondent Kelly has entered into

a similar agreement with United providing that the arbitrator

“shall have no authority to award any punitive or exemplary

damages.” Pet. App. 62. Respondent Breen has similarly

entered into an arbitration agreement with PacifiCare Health

Systems that precludes the arbitrator from awarding “puni-

tive damages” (Pet. App. 61), and respondent Book has con-

tracted with PacifiCare to submit disputes to an arbitrator au-

thorized to “grant all legal and equitable remedies and [to]

award compensatory damages provided by California law,

except that punitive damages shall not be awarded” (Pet.

App. 60).

3. Citing those arbitration agreements, on September 22,

2000, petitioners PacifiCare Health Systems, Inc. and Pacifi-

Care Operations, Inc. (“PacifiCare”) and United Healthcare,

Inc. and UnitedHealth Group Inc. (“United”), moved to com-

pel arbitration of the claims asserted by Drs. Breen, Kelly,

Porth, and Book. The other MCO defendants also sought

orders compelling respondents to arbitrate their aiding-and-

abetting and conspiracy RICO claims, which sought to hold

the other MCOs derivatively liable for PacifiCare’s and -

United’s conduct toward respondents. The other MCOs as-

serted that those derivative-liability claims had been pleaded

in a transparent attempt to avoid the arbitration agreements

that respondents had with PacifiCare and United, and that

respondents were estopped from attempting to litigate deriva-

tive-liability theories in federal court if respondents would be

required to arbitrate with the party that was alleged to be pri-

marily liable.*

Respondents opposed arbitration, contending first that

the limitations on “punitive” and “extracontractual” damages

rendered their arbitration agreements with United and

PacifiCare unenforceable, because those limitations purport-

edly deprived respondents of the ability to obtain treble dam-

ages on their RICO claims. Respondents also contended that,

notwithstanding their agreement to arbitrate any and all

claims with United and PacifiCare, they nonetheless were

free to pursue conspiracy and aiding-and-abetting claims

against other MCO defendants—in court—for their participa-

tion in United’s and PacifiCare’s purported misconduct.

4. The district court granted in part and denied in part

the motions to compel arbitration. See Pet. App. 11-46, 47-

54. Rejecting United’s and PacifiCare’s contentions that

such issues should be decided by the arbitrator in the first

2 In Central Bank of Denver, N.A. v. First Interstate Bank of Denver,

NA., 511 U.S. 164, 182 (1994), this Court held that 18 U.S.C. § 2 is not

“a general civil aiding and abetting statute,” and thus cannot be relied on

to assert a aiding-ard-abetting cause of action under the Securities Ex-

change Act of 1934. In light of Central Bank, several courts of appeals

have concluded that 18 U.S.C. § 2 may not be invoked, as respondents

seek to do here, to assert a private cause of action for aiding and abetting

a RICO violation. See, e.g., De Falco v. Bernas, 244 F.3d 286, 330 (2d

Cir. 2001); Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644,

657 (3d Cir. 1998). The district court has so far permitted the “aiding and

abetting” claims to proceed by relying on pre-Central Bank Eleventh Cir-

cuit authority. See In re Managed Care Litig., 135 F. Supp. 2d 1253,

1267 (S.D. Fla. 2001) (citing Cox v. Administrator U.S. Steel & Carne-

gie, 17 F.3d 1386 (11th Cir. 1994)).

instance, the district court accepted respondents’ claims that

the various limitations on “punitive” and “extracontractual”

damages rendered the arbitration agreements unenforceable

with respect to any claim arising under RICO. Relying pri-

marily on the Eleventh Circuit’s decision in Paladino v. Av-

net Computer Technologies, Inc., 134 F.3d 1054 (11th Cir.

1998), the district court reasoned that the “arbitrability of

[statutory] claims rests on the assumption that the arbitration

clause permits relief equivalent to court remedies.” Pet. App.

-- (emphasis added) (citation and quotation omitted). The

district court opined that because the exclusions for “extra

contractual” and “punitive” damages would preclude an arbi-

trator from awarding “treble” damages under RICO, it would

be impossible for the respondents to obtain “meaningful re-

lief in an arbitration forum.” Pet. App. 22-23, 29-32, 40-41.

The district court also denied the MCO defendants’ mo-

tions to compel arbitration to the extent those motions con-

tended that respondents were required to arbitrate all deriva-

tive liability theories if they would be required to arbitrate

with the party that was primarily liable. The district court

concluded that ordinarily a party can be required to arbitrate

“only when there is a signed agreement between the parties.”

Pet. App. 16-22.

5. The Eleventh Circuit affirmed. To the extent relevant

here, the court of appeals “affirm[ed] in its entirety the dis-

trict court’s order for the reasons set forth in its comprehen-

sive opinion.” Pet. App. 4.

SUMMARY OF ARGUMENT

The judgment of the court of appeals must be reversed

for two independent reasons. First, the court of appeals erred

in concluding that the district court—nor the arbitrator—

should determine in the first instance whether the parties’

3 The court’s opinion was primarily devoted to rejecting the MCO de-

fendants’ argument that respondents are estopped from litigating the de-

rivative liability claims in court if they agreed to arbitrate with the party

alleged to be primarily liable. That issue is not before this Court.

waivers of “punitive” and “extracontractual” damages were

valid and enforceable. Under Section 4 of the Federal Arbi-

tration Act (“FAA”), 9 U.S.C. § 1 et seq., a district court re-

viewing a motion to compel arbitration ordinarily has author-

ity to decide only whether the parties have entered into an

arbitration agreement and whether the particular claims at

issue fall within that agreement’s scope. Any question be-

yond those threshold issues of arbitrability must be decided

by the arbitrator in the first instance. Because the validity of

the parties’ remedial waivers is not a threshold issue of arbi-

trability, but rather goes to the subsidiary issue of the relief

available to respondents if they ultimately prevail on their

RICO claims, that question should have been resolved by the

arbitrator—nor the district court—in the first instance. See 9

U.S.C. § 4.

Second, the court of appeals erred in concluding that the

parties’ arbitration agreements were unenforceable because

they would deny the respondents “meaningful relief” on their

RICO claims. As a preliminary matter, the court of appeals’

holding was premised on a determination that the agree-

ments’ limitations on “punitive” and “extracontractual” dam-

ages would operate to bar an abitrator from awarding “treble”

damages under RICO. That determination cannot be recon-

ciled with this Court’s holding in Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220 (1987), that treble

damages under RICO are “remedial”—not “punitive.” Prop-

erly construed, a contractual prohibition on “punitive” and

“extracontractual” damages does not preclude an award of

RICO treble damages. The court of appeals thus erred as an

initial matter in holding that the arbitration agreements limit

RICO remedies at ail.

In any event, even assuming the parties’ agreements did

preclude an award of treble damages under RICO, those

agreements nonetheless would be enforceable. This Court

has never held that an otherwise valid agreement to arbitrate

will be deemed unenforceable merely because the parties

have elected to narrow the set of remedies the arbitrator can

award. Instead, this Court has repeatedly held that arbitration

agreements must be enforced according to their terms, absent

a clear indication from Congress to the contrary. This Court

has already—and emphatically—held that Congress did not

intend to preclude the arbitration of claims arising under

RICO. See McMahon, 482 U.S. at 228. Nothing in RICO’s

text, structure, or legislative history suggests that Congress

had precisely the opposite intention with respect to RICO

cases in which treble damages might be unavailable.

Moreover, this Court has long recognized that the FAA

requires arbitration agreements to be put on an “equal foot-

ing” with other contracts. It is axiomatic that, in federal

court, parties could agree to waive treble damages, consistent

with the long-standing rule that “‘[a] party may waive any

provision, either of a contract or of a statute, intended for his

benefit.”” United States v. Mezzanatto, 513 U.S. 196, 201

(1995) (quoting Shutte v. Thompson, 15 (Wall.) 151, 159

(1873)). Because no congressional or federal policy would

prohibit such waivers in federal court, the FAA requires that

they be enforceable in arbitration. The court of appeals’

judgment to the contrary reflects the very hostility to arbitra-

tion agreements that the FAA was enacted to prevent. In-

deed, even if respondents could carry the heavy burden of

demonstrating that the background presumption of waivabil-

ity does not apply here, the appropriate remedy would not be

invalidation of the arbitration agreements, but merely sever-

ance of the offending waiver provisions. For all of these rea-

sons, the judgment of the court of appeals must be reversed.

ARGUMENT

I. THE ARBITRATOR, NOT THE COURT,

SHOULD HAVE DECIDED IN THE FIRST

INSTANCE WHETHER THE PARTIES’

WAIVER OF “PUNITIVE” DAMAGES

APPLIES TO RICO AND IS VALID.

The court of appeals fundamentally erred by deciding, in

the first instance, the issue whether a contractual limitation

on “punitive” and “extracontractual” damages encompasses

treble damages under RICO and whether, if so construed, the

waiver is valid. In ruling upon a motion to compel arbitra-

tion, a district court ordinarily is authorized to determine only

threshold issues of arbitrability—i.e., whether the parties en-

tered into a valid agreement to arbitrate that covers the dis-

pute at hand. Because the validity of a remedial limitation in

an arbitration agreement does not present a threshold issue of

“arbitrability,” but instead goes to the downstream, subsidi-

ary issue of the measure of relief available to the plaintiff in

the event he ultimately is successful, the arbitrator—not the

district court—must decide it in the first instance under the

FAA. See 9 U.S.C. § 4.

A. The District Court Should Have Decided

Threshold Issues Of Arbitrability Only.

The Federal Arbitration Act was originally enacted in

1925, 43 Stat. 883, and then reenacted and codified in 1947

as Title 9 of the United States Code. “Its purpose was to re-

verse the longstanding judicial hostility to arbitration agree-

ments that had existed at English common law and had been

adopted by American courts, and to place arbitration agree-

ments upon the same footing as other contracts.” Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). In

particular, Congress sought to ensure “that the arbitration

procedure, when selected by parties to a contract, be speedy

and not subject to delay and obstruction in the courts.”

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395, 404 (1967).

Section 4 of the FAA governs the disposition of motions

to compel arbitration and makes clear that a district court’s

authority to review those motions is heavily circumscribed.

It provides that upon petition and

upon being satisfied that the making of the agree-

ment for arbitration or the failure to comply

therewith is not in issue, the court shall make an

order directing the parties to proceed to arbitration

in accordance with the terms of the agreement.

9 U.S.C. § 4 (emphasis added). As this Court has instructed,

“[b]y its terms, [Section 4] leaves no place for the exercise of

discretion by a district court, but instead mandates that dis-

trict courts shail direct the parties to proceed to arbitration on

issues as to which an arbitration agreement has been signed.”

Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985)

(emphasis in original).

This Court’s cases make clear that Section 4 is designed

to ensure that a district court decides only those issues relat-

ing to whether the arbitration agreement was validly made,

and whether the particular claims at issue between the parties

fall within the scope of that agreement. The Court has re-

ferred to those questions as threshold issues of “arbitrability,”

and has held that the authority to decide those threshold is-

sues rests presumptively with the courts. See First Options

of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995).

1. The seminal case construing Section 4 of the FAA is

Prima Paint Corp..v. Flood & Conklin Mfg. Co., 388 U.S.

395 (1967). At issue in Prima Paint was whether the district

court or the arbitrator should consider in the first instance a

claim by a party resisting arbitration that the agreement in

which the arbitration provision was contained had been in-

duced by fraud. 388 U.S. at 402. Prima Paint entered into a

consulting agreement with the Flood & Conklin Manufactur-

ing Company in connection with its acquisition of Flood &

Conklin’s assets. The agreement contained an arbitration

clause. When it became clear that Flood & Conklin would be

unable to fulfill its contractual obligations, and that it had

misrepresented its financial condition, Prima Paint sued, al-

leging that the consulting arrangement was void because it

had been fraudulently induced. Flood & Conklin moved un-

der Section 3 of the FAA to stay Prima Paint’s suit pending

arbitration.4 Prima Paint opposed the stay—and sought an

order enjoining arbitration—on the ground that the issue of

whether the parties’ agreement had been fraudulently in-

duced should be decided by the court—not the arbitrator—in

the first instance.

4 Section 3 authorizes courts to stay judicial proceedings in any matter

that is properly referable to arbitration. See 9 U.S.C. § 3.

This Court explained that “Congress ha[d] provided an

explicit answer” to the allocation of decision-making author-

ity between courts and arbitrators “in Section 4 of the Act.”

Id. at 403. The Court emphasized that Section 4 authorizes a

“federal court [to] consider only issues relating to the making

and performance of the agreement fo arbitrate,” and that a

district court had identical authority when acting pursuant to

Section 3. Jd. 404 (emphasis added). By limiting the district

court’s focus to the “making” of the arbitration agreement,

the Court explained, Section 4 “does not permit the . . . court

to consider claims of fraud in the inducement of the contract

generally,” and thus Prima Paint’s fraudulent inducement

claim would have to be submitted to the arbitrator. Jd. The

Court noted, however, that had Prima Paint asserted a claim

for “fraud in the inducement of the arbitration clause itself,”

an issue which the Court described as “go[ing] to the ‘mak-

ing’ of the agreement to arbitrate,” the district court would

have been empowered to adjudicate the claim. /d. at 403

(quoting 9 U.S.C. § 4) (emphasis added).

Prima Paint draws a clear line between issues that relate

to the “‘making’ of the agreement to arbitrate” or the validity

of “the arbitration clause itself’—threshold arbitrability is-

sues that presumptively should be decided by courts—and all

other issues, which must be submitted in the first instance to

arbitration. Jd. at 404. This Court’s arbitration cases—both

before and after Prima Paint—are fully in accord with that

principle.

In John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543

(1964), for example, an employer sought to resist arbitration

on the ground that the union had not complied with the notice

and exhaustion requirements that the parties’ collective bar-

gaining agreement imposed as a prerequisite to arbitration.

Id. at 555-56. The Court concluded that the parties were

bound by a valid arbitration agreement, but held that the em-

ployer’s procedural defenses to arbitration should be decided

by the arbitrator in the first instance. “Once it is determined

... that the parties are obligated to submit the subject matter

of the dispute to arbitration,” the Court reasoned, other

“questions which grow out of the dispute and bear on its final

disposition should be left to the arbitrator.” Jd. at 557

(emphasis added). The Court took particular care to note

that, in reviewing motions to compel arbitration, courts

should consider only those issues that might “operate to bar

arbitration altogether,” and not issues whose resolution

would “merely limit or qualify an arbitral award.” Jd. at

55 8. Similarly, in International Union of Operating Engi-

neers v. Flair Builders, Inc., 406 U.S. 487 (1972), the Court

held that whether arbitration was barred by laches was a

question for the arbitrator to decide because the agreement

called for arbitration of “any difference” between the parties.

The Court noted that courts ordinarily are responsible only

for determining “whether a union and employer have agreed

to arbitration” as well as “the scope of the arbitration clause.”

Id. at 491. But “once a court finds that, as here, the parties

are subject to an agreement to arbitrate, and that the agree-

ment extends to ‘any difference’ between them, then a claim

that particular grievances are barred by laches is an arbitrable

question under the agreement.” Jd. at 491-92.

Prima Paint, John Wiley, and Flair Builders stand for

the proposition that claims that can be characterized as going

to the validity of “the arbitration clause itself’ (Prima Paint,

388 U.S. at 400), or the “‘making’ of the agreement to arbi-

trate” (id. at 404), should generally be decided by courts in

the first instance, but that any other issues ordinarily must be

submitted to the arbitrator. This is true even where, as in

John Wiley and Flair Builders, the claim asserted by the

party resisting arbitration, if meritorious, could preclude the

need for arbitration at all. See Moses H. Cone Mem’! Hosp.

v. Mercury Constr. Corp., 460 U.S. 1, 22 n.27 (1983) (be-

cause Congress intended to “speed[] the procedure under § 3

[and] § 4,” “some issues that might be thought relevant to

arbitrability are themselves arbitrable’’).

2. This Court also has confined the inquiry under Sec-

tion 4 to threshold issues of arbitrability in cases where the

party resisting arbitration has challenged the propriety of

submitting statutory claims to arbitration. In recent years,

many plaintiffs have resisted arbitration on the asserted

ground that Congress sought to override the FAA’s mandate

by exempting particular statutes from the FAA’s scope. Al-

though this Court has suggested that Congress could con-

ceivably pass statutes that make clear that certain statutory

rights are unsuitable for arbitration, it has made clear that any

such “congressional command” must be “deducible from [the

statute’s] text, or legislative history, from an ‘inherent con-

flict’ between arbitration and the . . . [statute’s] underlying

purposes.” See McMahon, 482 U.S. at 226-27. This Court

has been particularly reluctant to find such “statutory direc-

tives,” and it already—and squarely—has determined that

Congress did not evidence any such intent in RICO. /d. at

226.

For example, in Mitsubishi Motors Corp. v. Soler Chrys-

ler-Plymouth, Inc., 473 U.S. 614, 625 (1985), the Court con-

sidered—and rejected—the claim that treble-damages actions

under the Sherman Act are nonarbitrable. Building on the

analysis in Mitsubishi, this Court has also concluded—in a

holding directly controlling here—that Congress did not in-

tend to prohibit arbitration of RICO claims. See McMahon,

482 U.S. at 242. The McMahon Court explained, first, that

“there is nothing in the text of the RICO statute that even ar-

guably evinces congressional intent to exclude civil RICO

claims from the dictates of the Arbitration Act.” Jd. at 238

(emphasis added). Second, the Court determined that

“[(t}here [wa]s no hint in the[] /egislative debates that Con-

gress intended for RICO treble-damages claims to be ex-

cluded from the ambit of the . . . [Federal Arbitration] Act.”

Id. (emphasis added). Third, the Court concluded that there

was no “irreconcilable conflict between arbitration and

RICO’s underlying purposes” (id. at 239), and that “the pub-

lic interest in the enforcement of RICO” did not preclude ar-

bitration of RICO claims. /d. at 236-40.

McMahon is hardly an outlier. In recent years, this

Court has upheld arbitration agreements relating to claims

arising under a variety of other statutes.‘ Indeed, since the

overruling of Wilko in Rodriguez de Quijas, it can be said

that this Court has not discerned an intention by Congress to

preclude the arbitration of any federal statutory claim. See

Paul D. Carrington & Paul H. Haagen, Contract and Juris-

diction, 1996 S. CT. REV. 331, 377 (1996) (“In light of Mit-

subishi, Rodriguez de Quijas [and] Gilmer . . . it is not clear

that there remains any private claim of federal right that can-

not be diverted into an arbitral tribunal”).

In each of these cases, this Court has adhered to the rule

in Prima Paint—and to the text of Section 4—by entertain-

ing, at the motion to compel stage, the threshold issue of

whether Congress intended claims arising under the statute at

issue to be arbitrable at all. It did not engage in a searching

inquiry of the particular terms of the parties’ agreements, nor

review the merits of the asserted claims. As in Prima Paint,

John Wiley, and Flair Builders, it merely sought to determine

the validity of “the arbitration clause itself’ (Prima Paint,

388 U.S. at 400) by ascertaining whether Congress sought to

preclude arbitration of every single claim under the statute in

question.

3. Aside from being compelled by the statutory text and

this Court’s precedents, the presumptive division of authority

between courts and arbitrators reflected in Section 4 and in

this Court’s cases serves important federal interests. First,

the presumption ensures that federal courts will not be re-

quired to resolve legal and factual issues prematurely. By

confining its consideration to only those issues that will de-

termine in which forum a dispute will be heard, a court

avoids entanglement with factual and legal merits-related is-

sues that the arbitral proceeding might render ultimately un-

necessary to decide.

Here, for example, the issue that the district court de-

cided—the validity of waiving some of RICO’s remedies—

5 See, e.g., Gilmer, 500 U.S. at 24 (ADEA); Rodriguez de Quijas v.

Shearson/American Express, Inc., 490 U.S. 477 (1989) (Securities Act of

1933) (overruling Wilko v. Swan, 346 U.S. 427 (1953)).

may never need to be considered if respondents do not pre-

vail in arbitration on the merits of their RICO claims. Even

then, the arbitrator might conclude that the punitive damages

exclusion does not apply to RICO “treble” damages or that

the waiver is legally unenforceable, as respondents contend.

Like the ripeness doctrine, the presumption therefore oper-

ates “to prevent the courts, through premature adjudication,

from entangling themselves in abstract disagreements,” par-

ticularly when those disagreements are premised on “contin-

gent future events that may not occur as anticipated, or in-

deed may not occur at all.” Thomas v. Union Carbide Agri-

cultural Prod. Corp., 473 U.S. 568, 580-81 (1985).°

Second, the presumption helps to effectuate the FAA’s

purpose “to move the parties to an arbitrable dispute out of

court and into arbitration as quickly and easily as possible.”

Moses H. Cone Mem'l Hosp., 460 U.S. at 22. Requiring dis-

trict courts to entertain any and every claim that could con-

ceivably bear on arbitrability would transform the expedited

review contemplated by Section 4 into a slow, cumbersome

process, leading to “delay and obstruction” in the courts

(Prima Paint, 388 U.S. at 404), and “frustrat[ing] the statu-

tory policy of rapid and unobstructed enforcement of arbitra- .

tion agreements” (Moses H. Cone Mem'l Hosp., 460 U.S. at

23). By requiring a district court to consider only the thresh-

old arbitrability issues of the existence and scope of an arbi-

tration agreement, however, Congress’ goal to provide

prompt enforcement of arbitration agreements will be ad-

vanced.

6 Section 10 of the FAA affords courts an opportunity to review arbitral

awards, albeit under a deferential standard of review. See 9 U.S.C. § 10

(enumerating grounds on which district court may set aside an arbitration

award and stating that awards can be vacated if arbitrators “exceeded

their powers”); see also 9 U.S.C. § 11 (listing grounds for modifying and

correcting arbitral awards). This Court has recognized that “‘although

judicial scrutiny of arbitration awards necessarily is limited, such review

is sufficient to ensure that arbitrators comply with the requirements of the

statute’ at issue.” Gilmer, 500 U.S. at 32 n.4 (quoting McMahon, 482

U.S. at 232).

Third, the presumption advances the likely intentions of

the parties. By entering into an arbitration agreement, the

parties “grant[] to the arbitrator the authority to interpret the

meaning of their contract’s language.” Eastern Associated

Coal Corp. v. United Mine Workers of Am., 531 U.S. 57, 61

(2000). Part of what the parties have “‘bargained for’ [is] the

‘arbitrator’s construction’ of their agreement.” Jd. (quoting

Steelworkers v. Enterprise Wheel & Car Corp., 363 U.S.

593, 599 (1960)). To give effect to that bargain, this Court

has made clear that it will “set aside the arbitrator’s interpre-

tation of what their agreement means only in rare instances.”

Eastern Associated Coal Corp., 531 U.S. at 62. Section 4

respects the intentions of the parties by limiting the district

court’s consideration to threshold issues of arbitrability only

and by assigning to the arbitrator the task of interpreting the

parties’ agreement in the course of resolving the merits of

their dispute.

B. The Validity Of A Remedial Waiver Is Not A

Threshold Issue Of Arbitrability.

Respondents’ attack on the parties’ waiver has nothing

to do with the “making” of the agreement to arbitrate, or with

the validity of the arbitration clause itself, but rather goes to

the subsidiary (and manifestly contingent) issue of the reme-

dies available to respondents in the event they ultimately

prevail on their RICO claims. Section 4—as interpreted by

Prima Paint and its progeny—requires that issue to be de-

cided by the arbitrator in the first instance.

1. Respondents seek to avoid that conclusion by relying

on the “two-step inquiry” undertaken in Mitsubishi, McMa-

hon, and Gilmer. See Resp. Br. in Opp. at 9-10. Respon-

dents rely principally on the passage in Mitsubishi stating:

In sum, the Court of Appeals correctly concluded a

two-step inquiry, first determining whether the

parties’ agreement to arbitrate reached the statu-

tory issues, and then, upon finding it did, consider-

ing whether legal constraints external to the par-

ties’ agreement foreclosed arbitration of those

claims.

Mitsubishi, 473 U.S. at 627-28; see also Gilmer, 500 U.S. at

20-21; McMahon, 482 U.S. at 226-27. According to re-

spondents, the second step of that inquiry authorizes courts—

when reviewing a motion to compel arbitration under Section

4—to entertain any challenge to an arbitration agreement, so

long as it is assertedly founded on external “legal con-

straints,” and in particular respondents’ generalized asser-

tions of congressional “policy” or “intent.” Opp. 12 n.3.

Respondents’ reading of the second step of the Mitsubi-

shi inquiry is vastly overbroad and cannot be reconciled with

the text of Section 4 or with McMahon. To begin with, the

core holding of McMahon is that no “external” “legal con-

straint” prohibits arbitration of RICO claims. The “two-step

inquiry” to which respondents advert has already been under-

taken—and resolved against respondents—in McMahon.

In any event, the second step of the Mitsubishi inquiry

does not authorize courts to engage in a free-wheeling in-

quiry into every conceivable defense to arbitrability. See

McMahon, 482 U.S. at 227 (stating that issue is limited to

whether “Congress intended to make an exception to the Ar-

bitration Act for claims arising under . . . the statute” in ques-

tion); Gilmer, 500 U.S. at 26 (issue is whether “Congress in-

tended to preclude a waiver of a judicial forum for” claims

arising under the statute at issue). The second-step of the

Mitsubishi inquiry asks only whether any limitation grounded

in positive law categorically exempts particular statutory

claims from the reach of the FAA. See McMahon, 482 US.

at 227; see also Gilmer, 500 U.S. at 26. It does not confer

unbridled discretion on district courts to entertain case-by-

case “public policy” defenses to arbitrability grounded on the

particular terms of the parties’ agreement.

That is why respondents err in suggesting that the Mitsu-

bishi “two-step inquiry” expands the limited scope of issues

that can be considered under Section 4. The defenses to arbi-

tration asserted in Gilmer, McMahon, and Mitsubishi are best

understood as having been directed to the validity of “the ar-

bitration clause itself’ (Prima Paint, 388 U.S. at 402), be-

cause each of those cases was concerned with whether Con-

gress by “statutory directive” had foreclosed arbitration for

the entire “category” (Mitsubishi, 473 U.S. at 627) of claims

that could be asserted under the statute in question. What the

Court sought to determine was whether “[C]ongress[]- in-

ten{ded] to make an exception to the Arbitration Act for

RICO claims,” Sherman Act claims, and ADEA claims

(McMahon, 482 U.S. at 242)—an exception that would make

any agreement to arbitrate those claims invalid. That ques-

tion presented a threshold issue of arbitrability in the most

basic sense. Respondents’ challenges to limitations on the

damages that might ultimately be recoverable in an arbitra-

tion proceeding, by contrast, are analytically distinct from the

contention that Congress intended to preclude any claims un-

der the statute at issue from being arbitrated at ail.

Indeed, virtually any defense to arbitration could be in-

ventively recharacterized as a defense emanating from ab-

stract “congressional policies.” The multiplicity of issues

that could be raised at the motion to compel stage under such

a regime would contradict the text of Section 4 and frustrate

Congress’ goal “to move the parties to an arbitrable dispute

out of court and into arbitration as quickly and easily as pos-

sible.” Moses H. Cone Mem’! Hosp., 460 U.S. at 22; of.

Southland Corp. v. Keating, 465 U.S. 1, 7 (1984) (“pro-

longed litigation” is “one of the very risks the parties, by con-

tracting for arbitration, sought to eliminate”’).

2. Nor can respondents find support for their position in

Green Tree Financial. Green Tree Financial held that the

mere fact that an arbitration clause is silent with respect to

the allocation of costs does not by itself render the arbitration

agreement unenforceable. 531 U.S. at 91. Because the case

was decided on appeal from an order denying a motion to

compel arbitration, respondents suggest that the Court im-

plicitly accepted the proposition that “public policy” defenses

to arbitration can appropriately be raised with the district

court in the first instance. Opp. at 8. But Green Tree Finan-

cial cannot be read as establishing a blanket rule that any de-

fense to arbitration founded on an asserted federal or con-

gressional “policy” should be decided by courts in the first

instance. To begin with, the issue of whether the arbitrator

should decide the “expense” argument was not raised in

Green Tree Financial. Thus, Green Tree Financial cannot

be dispositive on that question. See United States v. Shabani,

513 U.S. 10, 16 (1994) (“questions which merely lurk in the

record are not resolved, and no resolution of them may be

inferred”’).

More importantly, Green Tree Financial involved a

claim that the arbitral forum itself was not reasonably avail-

able to one of the parties, because of costs associated with

arbitration. Requiring a party to raise such an “accessibility”

argument in a tribunal that party alleges is not accessible

would potentially deprive that party of the opportunity to

raise its challenges to the arbitration agreement. That

claim—which essentially challenges the arbitration clause

itself as unconscionable—is analogous to the type of inquiry

permitted by Prima Paint. In any event, that principle sim-

ply has no application here. Here, there is no risk that the

party resisting arbitration will be deprived of an opportunity

to assert its challenges to the arbitration agreement. Indeed,

in a ruling from which respondents did not appeal, the district

court found that respondents are “sophisticated actors” and

was “unpersuaded” that respondents’ “statutory claims will

not be vindicated in an arbitration forum due to excessive

filing fees and costs.” Jn re Managed Care Litig., 132 F.

Supp. 2d 989, 998 (S.D. Fla. 2000). Respondents may not be

able to obtain judicial review of their challenge to the puni-

tive damage waiver until the arbitration has been concluded,

but the forum accessibility concerns that justified front-end

judicial review under Section 2 in Green Tree Financial are

not present here. Green Tree Financial simply does not ad-

vance respondents’ cause.

3. In short, this Court’s decisions in Mitsubishi, McMa-

hon, Gilmer, and Green Tree Financial do not establish any

sort of “exception” to Section 4 of the FAA. Like Prima

Paint, John Wiley, and Flair Builders, those cases stand only

for the proposition that courts should decide threshold issues

of arbitrability, leaving other issues to the arbitrator to re-

solve in the first instance. Under no reading of Section 4 can

respondents’ challenge to the contractual limitations on the

remedies that ultimately might be—or might not b—

awarded be construed as going to the validity “of the arbitra-

tion clause itself” (Prima Paint, 388 U.S. at 402). Accord-

ingly, respondents’ challenge does not constitute a threshold

issue of arbitrability and should not have been decided by the

district court in the first instance. The court of appeals’ con-

clusion to the contrary must be reversed.

Il. AGREEMENTS THAT PRECLUDE

ARBITRATORS FROM AWARDING

“PUNITIVE” DAMAGES ARE VALID AND

ENFORCEABLE IN BOTH ARBITRAL AND

JUDICIAL PROCEEDINGS.

Even if it had been proper for the court of appeals to rule

upon the validity of the parties’ waivers of “punitive” and

“extracontractual” damages, reversal nonetheless would be

warranted. The court of appeals erred in concluding that the

arbitration agreements preclude the arbitrator from awarding

treble damages on respondents’ RICO claims. By their

terms, the parties’ agreements do not even purport to deprive

any party of the right to seek “treble damages” under

RICO—they ban “punitive” and “extracontractual” damages

only—and thus the agreements can be enforced according to

their terms without implicating any congressional “policy”

about the waiver of statutory remedies. In any event, even

assuming the parties’ agreements did preclude an award of

treble damages under RICO, those agreements would be

valid and enforceable—in both arbitral and judicial proceed-

ings.

ee ek ee

A. The Parties’ Agreements, When Properly

Construed, Do Not Preclude An Award Of

Treble Damages.

The court of appeals’ conclusion that the parties’ arbitra-

tion agreements violate congressional “policy” was premised

on its determination that the arbitration agreements forbid the

award of treble damages to a RICO plaintiff. That determi-

nation was erroneous. Properly construed, the parties’ arbi-

tration agreements do not preclude the arbitrator from award-

ing treble damages under RICO. Instead, the agreements

preclude arbitrators from awarding “punitive or exemplary

damages” ((Pet. App. 62) (Kelly-United)), “extracontractual

damages of any kind, including punitive or exemplary dam-

ages” ((Pet. App. 63) (Porth-United)), and “punitive dam-

ages” ((Pet. App. 60-61) (Breen-PacifiCare and Book-

PacifiCare)).

As this Court recognized in McMahon, treble damages

under RICO are primarily designed to compensate an injured

party rather than to punish a wrongdoer. See McMahon, 482

U.S. at 240. In rejecting the contention that arbitration of

RICO claims would undermine the “public policy” goals

served by the statute, the Court explained that RICO’s treble-

damages provision serves a private, “remedial” role and that

its “policing function, although important,” was “secondary.”

Id. at 241-42; see also id. at 240 (“The legislative history of

§ 1964(c) reveals [an] emphasis on the remedial role of the

treble-damages provision”). Indeed, the Court distinguished

RICO claims from Sherman Act claims in that respect, not-

ing that the “private attorney general role for the typical

RICO plaintiff is simply less plausible than it is for the typi-

cal antitrust plaintiff’ because RICO actions “are seldom as-

serted against the archetypal intimidating mobster” in an ef-

fort to advance the statute’s aim to “fight against organized

crime,” but are instead most commonly “brought against le-

gitimate enterprises.” 482 U.S. at 241-42 (quotations and

citations omitted). The fact that RICO allows for accumu-

lated recovery simply does not convert its otherwise “reme-

dial” scheme into a “punitive” one.

McMahon makes clear that treble damages under RICO

are not properly characterized as “punitive” or “exemplary”

damages within the meaning of the parties’ arbitration

agreements. Indeed, the- distinction between punitive and

treble damages makes sense “from the standpoint of the par-

ties’ expectations when they entered the arbitration agree-

ment.” Jnvestment Partners, L.P. v. Glamour Shots Licens-

ing, Inc., 298 F.3d 314, 317 (Sth Cir. 2002). “[S]tatutory

multiple damages differ from . . . common law punitive dam-

ages in that punitive damages involve no fixed sum or limit.”

DAN B. DOBBS, LAW OF REMEDIES § 3.12 at 543 (2d ed.

1993). Common law punitive damages “are awarded under

notoriously open-ended legal standards and a broadly defined

constitutional limit concerning the amount awarded,” while

treble damages “represent a mere mathematical expansion of

the actual damages calculated by the arbitrator.” Jnvestment

Partners, 298 F.3d at 317. For that reason, private parties

might well exclude common law punitive damages but none-

theless vest the arbitrator with authority to award any treble

damages authorized by statute. Construing the terms “puni-

tive” and “exemplary” as excluding RICO treble damages

thus is consistent with this Court’s construction of RICO (see

McMahon, 482 U.S. at 241) and with the parties’ likely

intentions.’

Each of the arbitration agreements in this case could

plausibly be read to permit an arbitrator to award every form

of relief afforded by RICO, including treble damages. By so

interpreting the parties’ arbitration agreements, respondents’

objections to arbitration would be rendered irrelevant, and

the arbitration agreements could be enforced according to

their terms without implicating any “public policy” concerns

about limitations on statutory remedies.

7 Similarly, the term “extracontractual” is a term of art that would pre-

clude the arbitrator from awarding non-economic damages on contract-

based claims but would not prevent an award of treble damages under

RICO. See DAN B. DoBBs, LAW OF REMEDIES § 12.1(1) at 753 (2d ed.

1993) (“Punitive damages and mental anguish damages are . . . consid-

ered ‘extracontractual’”).

B. In Any Event, No Congressional Policy Pre-

cludes Parties From Agreeing To Waive

Treble Damages Under RICO.

Even assuming that the parties’ agreements are best read

as preventing an arbitrator from awarding treble damages to a

RICO plaintiff, those agreements would be enforceable. As

this Court has repeatedly recognized, one of “[t]he preemi-

nent concern[s] of Congress in passing the [Federal Arbitra-

tion] Act” was to ensure that arbitration agreements were

“rigorously enforce[d]” (Dean Witter Reynolds Inc. v. Byrd,

470 U.S. 213, 221 (1985)), like other contracts, “according

to their terms, and according to the intentions of the parties”

(First Options, 514 U.S. at 947 (citation and quotation omit-

ted) (emphases added)).

1. This Court has repeatedly held that under the FAA

parties are free “to structure their arbitration agreements as

they see fit.” Volt Info. Sciences, Inc. v. Board of Trustees,

489 U.S. 468, 479 (1989). In Volt, for example, this Court

held that the FAA did not preempt a California statute au-

thorizing a trial court to stay arbitration proceedings pending

resolution of related litigation, because the parties had agreed

that their arbitration agreement would be governed by Cali-

fornia law. Indeed, even though the FAA did not authorize a

trial court to enter a stay in such circumstances, and even

though such a stay would have deferred prompt and expedi-

tious resolution of the arbitrable claims, this Court made

clear that “[t]here is no federal policy favoring arbitration

under a certain set of procedural rules” and that “the federal

policy is simply to ensure the enforceability, according to

their terms, of private agreements to arbitrate.” Jd. at 476

(emphasis added). To invalidate the election of California

law in the parties’ agreement, the Court concluded, “would

be quite inimical to the FAA’s primary purpose.” Jd. at 479.

Volt is merely illustrative of the deference afforded to

parties to structure their arbitration agreements “as they see

fit” (Volt, 489 U.S. at 479) under the FAA. Parties are obvi-

ously free to exclude claims from an agreement to arbitrate

(see Mitsubishi, 473 U.S. at 625), and they are free to specify

that an arbitrator—not a court—must decide threshold issues

of arbitrability in the first instance (see First Options, 514

U.S. at 943). Indeed, this Court has concluded—at least with

respect to state-law claims—that parties can freely waive

their right to punitive recoveries. See Mastrobuono v. Shear-

son Lehman Hutton, Inc., 514 U.S. 52, 56-57 (1995) (“if the

contract [in effect] says ‘no punitive damages,’ that is the end

of the matter, for courts are bound to interpret contracts in

accordance with the expressed intentions of the parties”). As

the lower courts have recognized, “short of authorizing trial

by battle or ordeal or, more doubtfully, by a panel of three

monkeys, parties can stipulate to whatever procedures they

want to govern the arbitration of their disputes.” Baravati v.

Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 709 (7th Cir.

1994) (Posner, J.) (collecting authorities).

What the FAA does not permit is the invalidation of ar-

bitration agreements under “laws applicable only to arbitra-

tion provisions.” Doctor’s Assocs. v. Casarotto, 517 U.S.

681, 687 (1996) (emphasis in original). The entire purpose

of the FAA was “‘to revers[e] centuries of judicial hostility to

arbitration agreements [by] plac[ing] arbitration agreements

upon the same footing as other contracts.”” McMahon, 482

U.S. at 225 (quoting Scherk v. Alberto-Culver Co., 417 U.S.

506, 510 (1974)) (emphasis added). Thus, Section 2 of the

FAA provides that arbitration agreements “shall be valid, ir-

revocable, and enforceable, save upon such grounds as exist

at law or equity for the revocation of any contract.” 9 U.S.C.

§ 2 (emphasis added). Any legal principle—including a

state-law principle—‘“that takes its meaning precisely from

the fact that a contract to arbitrate is at issue does not com-

port with the text of § 2.” Casarotto, 517 U.S. at 685 (inter-

nal brackets and quotation omitted).

The FAA’s nondiscrimination principle seeks to ensure

equal treatment between agreements to arbitrate and any

other agreements enforceable in federal (or state) court.

Thus, the district court and court of appeals erred in suggest-

ing that arbitration agreements are merely forum selection

clauses that cannot contain any substantive waivers of statu-

tory rights. See Pet. App. 22 (stating that remedies in arbitra-

tion must be “equivalent” to court remedies). Although this

Court has stated that “‘by agreeing to arbitrate a statutory

claim, a party does not forgo the substantive nghts afforded

by the statute [but] only submits to their resolution in an arbi-

tral, rather than a judicial, forum” (Gilmer, 500 U.S. at 26

(quoting Mitsubishi, 473 U.S. at 628)), it was merely describ-

ing the ordinary consequences of an arbitration agreement,

not declaring a federal policy prohibiting parties from waiv-

ing any substantive rights in arbitration. Congress has never

evidenced that intention—under the FAA, RICO, or any

other federal statute.

To the contrary, the FAA’s nondiscrimination principle

makes clear that if parties can lawfully waive substantive

rights in federal court, they also can waive those rights in an

arbitration agreement. Indeed, to deny enforcement in an

arbitration agreement of a waiver that would be enforceable

in federal court would be to indulge the very “hostility” and

“outmoded” suspicion of arbitration agreements the FAA

was enacted to eradicate. Rodriguez de Quijas, 490 U.S. at

481; Allied-Bruce Terminix Companies, Inc. v. Dobson, 513

U.S. 265, 270 (1995). Such a rule “would place arbitration

clauses on an unequal footing, directly contrary to the Act’s

language and Congress’s intent.” Casarotto, 517 U.S. at 686

(quotation and citation omitted).

2. That principle controls this case. This Court has long

recognized that—in cases litigated in a judicial forum—*“‘[a]

party may waive any provision, either of a contract or of a

statute, intended for his benefit.”” United States v. Mez-

zanatto, 513 U.S. 196, 201 (1995) (quoting Shutte v. Thomp-

son, 15 (Wall.) 151, 159 (1873)). Indeed, “absent some af-

firmative indication of Congress’ intent to preclude waiver,

[this Court] ha[s] presumed that statutory provisions are sub-

ject to waiver by voluntary agreement of the parties.” Mez-

zanatto, 513 U.S. at 201 (emphasis added). RICO was en-

acted against this background “presumption of waivability”

(id. at 204), and thus a RICO plaintiff is as much at liberty to

waive his right to treble damages as is a criminal defendant

to waive protections afforded by the Constitution.

This Court has repeatedly held that parties in a judicial

forum are free to waive their right to statutorily prescribed

remedies. In Evans v. Jeff D., 475 U.S. 717 (1986), for ex-

ample, the Court concluded that a private plaintiff could val-

idly waive his right to an award of attorney’s fees under the

Civil Rights Attorney’s Fee Awards Act of 1976, 42 U.S.C.

§ 1988 (“Fees Act”), as part of a negotiated settlement. The

Court explained that nothing in the text or legislative history

of the Fees Act “supporti[ed] . . . the proposition that Con-

gress intended to ban all fee waivers,” notwithstanding the

fact that Congress had established fee awards “as an integral

part of the remedies necessary to obtain compliance with

civil rights laws” and to add “to the arsenal of remedies

available to combat violations of civil rights.” Jd. at 730-32.

The Court rejected the contention that such waivers could

“deter attorneys from representing plaintiffs in civil rights

suits,” noting in particular that fee proponents had “not of-

fered to prove that petitioners’ tactics [in proposing a settle-

ment with no fee award] . . . implemented a. . . policy de-

signed to frustrate the objectives of the Fees Act.” Jd. at 740

(emphasis added).

As was true of the Fees Act in Evans, there is nothing in

RICO’s text or legislative history to suggest that Congress

intended to preclude parties from waiving the right to recover

8 In Brooklyn Sav. Bank v. O'Neil, 324 U.S. 697 (1945), this Court held

that employees could not waive the statutory entitlement to liquidated

damages recoverable from an employer who violates the minimum wage

or maximum hour requirements of the Fair Labor Standards Act of 1938

(“FLSA”) because “the structure and legislative history of the FLSA

evinced a specific ‘legislative policy’ of ‘preventing private contracts’ on

such matters.” Mezzanatto, 513 U.S. at 206 n.4 (quoting Brooklyn Sav.

Bank, 324 U.S. at 706). Nothing in the text, structure or history of RICO

evinces a similar intention to prevent private bargaining.

treble damages. See McMahon, 482 U.S. at 240-42. Indeed,

at no stage in this case have respondents ever identified the

source in positive law that ostensibly “evidences” a congres-

sional “policy” to preclude arbitration of RICO claims when

treble damages are unavailable. The mere fact that Congress

authorized a treble-damages remedy under RICO does not

mean that Congress deemed that remedy to be so indispensa-

ble to RICO’s goals that it intended to preclude arbitration

whenever that remedy was unavailable, just as the fact that

Congress expressly authorized a judicial forum for resolution

of claims under Section 12(2) of the Securities Act of 1933

and Section 10(b) of the Securities Exchange Act of 1934 did

not mean that Congress intended to preclude non-judicial

resolution of those claims. See Rodriguez de Quijas, 490

U.S. at 482; McMahon, 482 U.S. at 227-28.

Respondents thus are left to contend that “the restricted

remedies afforded by the arbitration clause” somehow con-

flict with the “public policy” interest in RICO enforcement.

Opp. 11. But McMahon itself makes clear that RICO’s

treble-damages provision was enacted primarily for the “re-

medial” purpose of providing compensation to injured par-

ties, and that the goal of fighting organized crime through

private civil claims was merely “secondary.” Jd. at 242. In-

deed, Congress has not deemed the treble-damages remedy to

be so critical to RICO’s deterrent aims that it has authorized

the Attorney General to seek such relief. See 18 U.S.C

§ 1964(c); United States v. Bonnano, 879 F.2d 20, 26 (2d

Cir. 1989) (concluding that “Congress did not intend to au-

thorize treble damage actions by the United States pursuant

to 1964(c)”).?

9 Indeed, if any congressional “policy” has been contravened in these

proceedings, it is the policy forbidding parties to circumvent otherwise

enforceable arbitration agreements through strategic pleading exercises.

See 9 U.S.C. § 2. Respondents have effectively thwarted the FAA’s pol-

icy favoring arbitration by asserting boilerplate conspiracy and aiding-

and-abetting claims against nonsignatories to the arbitration agreements.

Respondent Dr. Breen, for example, entered into contracts containing

arbitration clauses with Blue Cross of California, Healthnet, and peti-

In any event, whatever incidental effect enforcement of

RICO’s treble-damages provision might have on the public

interest does not render that provision unwaivable, for it sim-

ply “is not true that any private right that also benefits society

cannot be waived.” New York v. Hill, 528 U.S. 110, 117

(2000) (emphasis in original). The vindication of every statu-

tory nght ordinarily confers at least some benefit on the pub-

lic, but those incidental effects do not overcome “the back-

ground presumption of waivability” (Mezzanatto, 513 U.S.

at 206) applicable to rights enacted for the benefit of private

parties. Society’s interest in enforcement of RICO’s treble

damages provision simply is not “part of the unalterable

statutory policy” of RICO (Hill, 528 U.S. at 117) (quotation

and citation omitted)—as McMahon expressly and emphati-

cally held. That is why the statutory entitlement to treble

damages can be waived in federal court, and why a fortiori it

can be waived in an agreement to arbitrate. See 9 U.S.C. § 2;

Casarotto, 517 U.S. at 687. Like any other agreement en-

forceable in federal court, the parties’ arbitration agreements

should have been enforced “according to their terms.” First

Options, 514 U.S. at 947. The court of appeals’ failure to do

so warrants reversal.

C. Respondents’ RICO Claims Must Be Arbi-

trated Even If The Remedial Waivers Are

Unenforceable.

In any event, even assuming that the remedial waivers in

the parties’ arbitration agreements are unenforceable, re-

spondents would still be required to arbitrate their RICO

claims. The principles of severance applicable to contracts

[Footmote continued from previous page]

tioner PacifiCare. Yet by asserting RICO conspiracy and aiding-and-

fendants’ alleged breach of their contractual obligations to Breen, Breen

is permitted to litigate RICO claims against all three defendants, effec-

tively depriving ail three defendants of the principal benefit of their re-

resolution of their business disputes with physicians.

governed by the FAA would require the limitations provi-

sions to be severed from the rest of the arbitration agreement.

The parties thus would remain obliged to arbitrate the RICO

claims, but the arbitrator would be empowered to award

treble damages.

The FAA “creates a body of federal substantive law of

arbitrability, applicable to any arbitration agreement within

the meaning of the Act.” Moses H. Cone Mem’! Hosp., 460

U.S. at 24-25. That body of federal arbitrability law requires

application of “the ordinary state-law principles that govern

the formation of contracts” (First Options, 514 U.S. at 944),

but with due regard for the “liberal”—indeed, the “emphatic”

(Mitsubishi, 473 U.S. at 631)—‘federal policy favoring arbi-

tration agreements.” Moses H. Cone Mem’! Hosp., 460 U.S.

at 24.

Those principles require, in the event the remedial limi-

tations are deemed unenforceable, that the offending provi-

sions be severed either in accordance with the applicable

state’s contract law (see Gannon v. Circuit City Stores, Inc.,

262 F.3d 677, 680-82 (8th Cir. 2001) (concluding that, under

Missouri law, provisions barring award of punitive damages

were severable)), or—if state law would not provide for sev-

erance in the circumstances—by operation of the federal

common law of arbitrability, which demands that arbitration

agreements be construed liberally in favor of arbitrability.

See First Options, 514 U.S. at 945. Indeed, a state law that

did not authorize severance likely would be preempted by the

force of the FAA’s command to give effect to the parties’

unambiguous selection of an arbitral forum. See Southland

Corp., 465 U.S at 16 (“Congress intended to foreclose state

[law] attempts to undercut the enforceability of arbitration

agreements”).

The district court and court of appeals held—apparently

as a matter of federal common law—that an arbitration

agreement that contains a purportedly invalid limitation on

punitive damages renders the agreement to arbitrate itself un-

enforceable. That rule is predicated on the Eleventh Circuit’s

belief that to enforce arbitration agreements notwithstanding

such infirmities would create incentives “to include unlawful

provisions in . . . arbitration agreements.” Perez v. Globe

Airport Sec. Servs., Inc., 253 F.3d 1280, 1287 (11th Cir.

2001). But taken to its logical conclusion, the Eleventh Cir-

cuit’s severance rule would require invalidation of arbitration

agreements whenever those agreements contained any unen-

forceable terms. That result cannot possibly be reconciled

with this Court’s oft-repeated command to construe agree-

ments in favor of arbitrability, particularly when—as is true

here—the agreements leave no room to doubt that the parties

intended to resolve “any disputes” (Pet. App. 62-63) through

arbitration. The invalidation of the parties’ remedial waivers

would do nothing to vitiate the parties’ unmistakable election

of an arbitral over a judicial forum, and to honor that contrac-

tual intent requires arbitral resolution of the RICO claims

even if the remedial waivers are deemed invalid.

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted.

Of Counsel: MIGUEL A. ESTRADA

Counsel of Record

JAN S. og ANDREW S. TULUMELLO

QUENTIN GIBSON, DUNN & CRUTCHER LLP

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