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

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JAN 13 2003

No. 02-215

IN THE

Supreme Court of the United States

PACIFICARE HEALTH SYSTEMS, INC., ET 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 PUBLIC CITIZEN, INC., AS AMICUS

CURIAE IN SUPPORT OF RESPONDENTS

ScoTT L. NELSON

Counsel of Record

BRIAN WOLFMAN

PUBLIC CITIZEN LITIGATION GROUP

1600 20th Street, N.W.

Washington, D.C. 20009

(202) 588-7724

Attorneys for Amici Curiae

January 13, 2003

— _- —-- - -__..

IBEST AVAILABLE COPY

i

QUESTION PRESENTED

Whether it would violate public policy to require a party

to arbitrate a RICO claim under an arbitration agreement that

does not allow the arbitrators to grant the remedies provided

by statute for such a claim.

il

TABLE OF CONTENTS

QUESTION PRESENTED..........cccrcsccscoscorseserseccecsevsesscrserscsees i

TABLE OF AUTHORITIES .............0c0ccsccscsereesscecceseeseereeees iil

INTEREST OF AMICUS CURIAE ........:cccccscssessereeeneenneneees l

SUMMARY OF ARGUMENT ..........::cssssesseseeseesereesensnenennes 2

PIRI crceevscvnssssesesvssesevicorssecvsceecenevesennsenecsocsocsenessessosces 3

I. WAIVERS OF SUBSTANTIVE STATUTORY

REMEDIES IN PREDISPUTE ARBITRA-

TION AGREEMENTS ARE UNENFORCE-

A. Prospective Waivers of Substantive Rights

and Remedies Under Federal Statutes Such

as RICO Violate Public Policy ..........cccescesseeeeeeeeeeeees 3

B. This Court’s Decisions Do Not Allow Arbi-

tration Agreements to Waive Substantive

NaI sscasnnsisanonceetenedemnnemnevennenessassensoeses 8

C. The Nation’s Leading Arbitration Organiza-

tions Increasingly Reject Efforts to Limit

Substantive Rights and Remedies in Arbitra-

SE <suidaitedddiesbediinenbindtninpnichaseennseveecenetocsevenpensecscsoeses 10

II. IT IS FOR THE COURTS TO DETERMINE

THE ENFORCEABILITY OF ARBITRATION

AGREEMENTS THAT PURPORT TO

WAIVE SUBSTANTIVE RIGHTS ..........::eccesceseseeneeeees 12

Nae Soneresecescsonseneseveseesecescecnscncevensesvecseosoossnssessnsssee 16

ill

TABLE OF AUTHORITIES

Page(s)

CASES

Alexander v. Gardner-Denver Co.,

EE 5-6

Barrentine v. Arkansas-Best Freight System,

ES SII ccenecenietecenrericertnnenscuenanemenenscncemnent 6

Brooklyn Savings Bank v. O'Neil,

ae 5

Cange v. Stotler & Co.,

IY TINT cnrsnstncnepesuscsnnmenermnsaniiosmnetneds 7

Cole v. Burns Ini'l Sec. Servs.,

eR eae 7

EEOC vy. Waffle House, Inc.,

Eee 9-10, 12, 16

Eisenberg v. Advance Relocation & Storage,

FT le 7

Evans v. Jeff D., 475 U.S. 717 (1986)........cccccccesseeseerseeeeees >?

First Options of Chicago, Inc. v..Kaplan,

8 EE ES 13

Gilmer v. Interstate/Johnson Lane Corp.,

eee 9,10

Graver Tank & Mfg. Co. v. Linde Air Products

OE ee 4

Green Tree Financial Corp.-Alabama v.

Randolph, 531 U.S. 79 (2000) .......cccccccecseeeceeeeeneeeees 15-16

Howsam v. Dean Witter Reynolds, Inc.,

Ss ITT rccnttcnsncetecentantneentonecesess 12, 13, 14, 15

Kendall v. Watkins, 998 F.2d 848

ea 7

iV

Martino v. Michigan Window Cleaning Co.,

BT es CR ae cenutnttatiniennstimemnininl 6

McCaskill v. SCI Management Corp.,

ee Oe ere en a GE cemnen 7

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) ...........0000+ 3, 8, 10, 12

New York v. Hill, 528 U.S. 110 (2000) .0.........cccccccsceeceeeeeeeenees 5

Parker v. DeKalb Chrysler Plymouth,

673 F.24 1178 (1 1G Cae. 1962) ....ccccccccccccessccsesccsessecsees 7-8

Prima Paint Corp. v. Flood & Conklin Mfg.

Gag Fe Ck Se crenntnatnnibiinnmenant Dinaies 13, 16

Redel’s Inc. v. General Electric Co.,

a erintctncinernntntritmaniareetiniionsl 8

Rodriguez de Quijas v. Shearson/American Ex-

press, Inc., 490 U.S. 477 (1989) ......ecrecsesneeeeneenesneneenennenes 6

Shearson/American Express, Inc. v. McMahon,

Sy ee Se irtirttentionncnitninceinitinnticnmannnananesl 6,9

Town of Newton v. Rumery,

I I 5

United States v. Mezzanatto,

I > Gee inntsertacennscniesenenpsancmeintiamniammainitaias 5

United States v. Olano, 507 U.S. 725 (1993)........cceceeceeseeeenees 5

Vermont Agency of Natural Resources v. United

States ex rel. Stevens, 529 U.S. 765 (2000) ..........cccceeeseees 4

Vimar Seguros y Reaseguros S.A. v. M/V Sky

a, SES GB. Fp Se crite 9

Virginia v. American Booksellers Assn.,

GS Gils Ca Ce iteiesatimemnntneatiinieimnnel 4

Vv

Volt Information Sciences, Inc., v. Board of

Trustees of the Leland Stanford Junior Uni-

versity, 489 U.S. 468 (1989) ..........cccccceseersneeereeneeenennnens 13

Wilko v. Swan, 346 U.S. 427 (1953) .......ccccccccceeceeeseenensenenenees 6

STATUTES

Tf) 8

et | a 15

2b) tenshtniatenenenditiee 14

MISCELLANEOUS

American Arbitration Association, Supplemen-

tary Procedures for Consumer-Related Dis-

putes, Rule C-7(c), Effective March 1, 2002

(available at WWW.adI.0TQ) ...........-0cceeereecereereneeneenennnes 10

Constitution of the New York Stock Exchange,

JAMS, Policy on Consumer Arbitrations Pursu-

ant to Pre-Dispute Clauses, Minimum Stan-

WWW.jAMSAdr.COM) ........00ccecceessersesenseersenseeesensenennees 10-11

NASD Code of Arbitration Procedure, Rule

10214 (available at www.nasdadr.com)..........-..--++-+: 11-12

NASD Code of Arbitration Procedure, Rule

10215 (available at www.nasdadr.com)................+++: 11-12

NASD Rule 3110(f) (available at www.

WE UID cccassnsececccsnsscccnssessssnnesneansnmnenecsssnnsedinensssaseansessese 11

SEC Release No. 34-39371; File No. SR-

NASD-97-47 (Nov. 26, 1997) (available at

www.sec.gov/rules/sro/masd9747 Xt) .......ceerereereeeeenes 12

INTEREST OF AMICI CURIAE'

Amicus curiae Public Citizen, Inc., is a non-profit advo-

cacy group with more than 135,000 members nationwide. It

appears before Congress, administrative agencies, and the

courts on a wide range of iss2s. Among Public Citizen’s

principal concerns is the protection of the rights of consum-

ers and employees, particularly in their dealings with large

corporations. Increasingly, consumers are forced, as a condi-

tion of routine transactions such as obtaining credit cards,

long distance telephone service, and insurance, to enter into

form arbitration agreements, the terms of which are typically

non-negotiable from the standpoint of the individual con-

sumer. Similarly, more and more employees are compelled to

agree to arbitration of employment disputes as a condition of

employment. For employees who are not represented by un-

ions in a collective bargaining environment, those arbitration

agreements are generally not subject to meaningful negotia-

tion either. And, because of the ubiquity of arbitration

agreements in the securities industry, the millions of small

investors whose savings for retirement and their children’s

education are invested in the stock market are also, for the

most part, parties to agreements with arbitration clauses that

they had no opportunity to negotiate.

Thus, many citizens are effectively forced to rely on arbi-

tration rather than the judicial system, at least in the first in-

stance, for the vindication of their rights—including not only

common-law rights but also nghts under a variety of federal

Statutes intended to protect them against discrimination,

fraud, and other forms of commercial overreaching. It is

therefore essential, if the objectives of such laws are to be

' Letters of consent from both parties to the filing of this brief have

been filed with the Clerk. This brief was not authcred, in whole or in part,

by counsel for a party, and no person or entity other than amicus curiae,

its members, or its counse] made a monetary contribution to the prepara-

tion or submission of this brief.

2

fulfilled, to ensure that arbitration agreements, if they are to

be enforced, provide full protection to nghts granted by law.

Arbitration clauses that discriminate against or deny full en-

forcement ct the legal rights of the parties—for example, by

denying remedies granted by federal law—are inimical to the

protections that Public Citizen has fought to establish for

consumers and employees. Because the arbitration clause the

petitioners seek to enforce in this case would have precisely

that effect, Public Citizen submits this amicus curiae brief in

support of the respondents.

SUMMARY OF ARGUMENT

The issue in this case is whether arbitration agreements

that purport to cover claims under RICO but expressly deny

arbitrators the power to award the form of relief provided for

in that statute—that is, treble damages—may be enforced to

compel arbitration of RICO treble damages claims. Both the

district court and the Eleventh Circuit correctly held that such

arbitration agreements violate public policy to the extent they

purport to compel arbitration of statutory claims but deny the

remedies provided by statute.

Enforcement of a predispute arbitration agreement that

bars remedies provided by federal statute would amount to

giving effect to a prospective waiver of substantive statutory

rights. Although most statutory rights may be waived under

appropriate circumstances (such as the knowing and volun-

tary settlement of claims based on past actions), prospective

waivers of substantive rights have generally been held to be

invalid by federal courts because they tend to encourage (or

underdeter) statutory violations and thus undermine the pub-

lic policies expressed in the statute.

For this reason, this Court has consistently and repeatedly

emphasized that the enforcement of arbitration agreements

presupposes that the parties will be able to obtain full vindi-

cation of their rights in the arbitration process, and it has ex-

pressly stated that it would not hesitate to find an arbitration

3

clause that purported to deny a party substantive rights guar-

anteed by federal law to be void as against public policy.

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 U.S. 614, 637 (1985). The same consideration has led the

nation’s leading arbitration organizations to provide ex-

pressly in their rules that, contrary to the arbitration agree-

ments at issue here, arbitrators must be free to provide all

forms of relief available under the law.

The limitation on remedies incorporated in the agree-

ments at issue is, accordingly, unenforceable. The remaining

questions are whether the courts, as opposed to the arbitra-

tors, have the power to say so, and when they may do so. The

answer to the first question is clearly yes: Declaring the va-

lidity of the arbitration agreement itself is traditionally the

role of the courts, and, indeed, the parties could not reasona-

bly have contemplated that the arbitrators themselves would

determine whether or not to disregard purported contractual

limitations on their authority. As to the timing of the enforce-

ability decision, the appropriate time is before the parties are

compelled to go forward under a flawed arbitration scheme—

particularly given that the nature of the arbitration process

and of judicial review of arbitration awards may render post-

arbitration review ineffective.

ARGUMENT

I. WAIVERS OF SUBSTANTIVE STATUTORY

REMEDIES IN PREDISPUTE ARBITRATION

AGREEMENTS ARE UNENFORCEABLE.

A. Prospective Waivers of Substantive Rights and

Remedies Under Federal Statutes Such as

RICO Violate Public Policy.

Although petitioners and their supporting amici seek to

avoid the issue in a number of ways, their argument, at bot-

tom, is that it is perfectly all right to enforce an agreement

under which a party prospectively waives the right to obtain

remedies for violations of federal law that have not yet oc-

curred.” In particular, they argue thet a party may be held to a

purely prospective waiver of RICO remedies. In other words,

petitioners assert that if, in the future, iicy subject others to

injuries resulting from a pattern of violations of federal

criminal laws such as mail and wire fraud and extortion, their

victims can be barred by contract from seeking the remedies

provided by federal law for such violations.

Petitioners rely on decisions of this Court that have sus-

tained waivers of statutory and even constitutional rights.

The cases, they assert, stand for the principle that nearly any

right may be waived under nearly any circumstance. But the

Court’s actual holdings have not been so broad. What the

Court’s holdings on waiver establish are two narrower,

common-sense principles. First, procedural rights, including

? Petitioners and their amici attempt to argue in the alternative that

this issue need not be reached because, they say, the agreements at issue,

which bar punitive and “extracontractual” damages, do not really bar

treble damages under RICO. Contrary to their suggestion, however, that

is not an issue that turns on the nature of RICO treble damages as a mat-

ter of federal law. Rather, it is a question of contractual interpretation:

What did the parties mean when they used the terms “punitive damages”

or “extracontractual damages” in their contracts? The petition for certio-

rari in this case did not ask the Court to resolve that factbound question of

state contract law and, in any event, it is not worthy of this Court’s con-

sideration. Moreover, it has been decided against petitioners by two lower

courts, and under this Court’s venerable “two-court rule,” those decisions

should not be disturbed here. See, e.g., Virginia v. American Booksellers

Assn., 484 U.S. 383, 395 (1988); Graver Tank & Mfg. Co. v. Linde Air

Products Co., 336 U.S. 271, 275 (1949). In any event, whether RICO

treble damages are “punitive” or not (cf Vermont Agency of Natural Re-

sources v. United States ex rel. Stevens, 529 U.S. 765, 784-85 (2000)

(treble damages under qui tam statute are “punitive”)), the remedies

available under RICO are certainly “extraconiractual” under any plausible

interpretation of the term: They are essentially tort remedies; a party's

entitlement to them is not based on contract; the pre-trebling amount is

not limited by legal doctrines that restrict damages for breach of contract;

and the trebling of the damages is not dependent on cyntractual authoriza-

tion.

rights of both civil and criminal procedure established by the

Constitution, may generally be waived, at least in the course

of a proceeding to which they would otherwise apply. See,

e.g., United States v. Mezzanatto, 513 U.S. 196 (1995) (hold-

ing that a defendant may waive the rule of evidence forbid-

ding admission of statements made in plea negotiations);

New York v. Hill, 528 U.S. 110 (2000) (holding that a defen-

dant may waive procedural rights under the Interstate

Agreement on Detainers). Second, most substantive rights

and remedies may be waived as part of the settlement of an

extant dispute, provided the waiver is knowing and volun-

tary. See Evans v. Jeff D., 475 U.S. 717 (1986) (upholding

waiver of right to attorney’s fee as part of settlement of civil

rights case); Town of Newton v. Rumery, 480 U.S. 386 (1987)

(waiver of civil rights claim in exchange for dropping crimi-

nal charges is enforceable if knowing and voluntary). There

are, of course, limits even to these propositions: Some proce-

dural rights may be unwaivable, see Hill, 528 U.S. at 116-17;

United States v. Olano, 507 U.S. 725, 741 (1993) (Kennedy,

J., concurring), and this Court has held that some substantive

statutory remedies may not be waived even retrospectively,

see Brookiyn Savings Bank v. O'Neil, 324 U.S. 697 (1945)

(right to double damages for FLSA violations).

Notably, the cases cited by the petitioners and their amici

do not uphold prospective waivers of substantive statutory

tights.’ That is no accident, for this Court and the lower

courts have generally been unwilling to tolerate such waiv-

ers. This Court has held, for example, that an employee’s

rights under Title VII and similar antidiscrimination laws

cannot be prospectively waived:

To begin, we think it clear that there can be no prospec-

tive waiver of an employee’s rights under Title VII. ...

* See, e.g., Hill, 528 U.S. at 115 (“This case does not involve a pur-

ported prospective waiver of all protection of the LAD’s time limits or of

the LAD generally, but merely agreement to a specified delay in trial.”).

Title VII’s strictures are absolute and represent a con-

gressional command that each employee be free from

discriminatory practices. ... [W]Jaiver of these nghts

would defeat the paramount congressional purpose be-

hind Title VII. In these circumstances, an employee’s

rights under Title VII are not susceptible of prospective

waiver.

Alexander v. Gardner-Denver Co., 415 U.S. 36, 51-52

(1974).

This principle is not limited to Title VII or antidiscrimi-

nation laws, but reflects a broader view that where a federal

statute imposes a duty or standard of conduct and creates

substantive rights and remedies to enforce that standard, pri-

vate parties may not enter into contracts that prospectively

exempt themselves from the statutory scheme. Thus, for ex-

ample, this Court has also held that parties may not, by con-

tract, free themselves from substantive obligations (and li-

abilities) under the Fair Labor Standards Act, see, e.g., Bar-

rentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728,

740-41 (1981); Martino v. Michigan Window Cleaning Co.,

327 U.S. 173 (1945), or the federal securities laws, see

Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,

230 (1987) (“[A] customer cannot negotiate a reduction in

commissions in exchange for a waiver of compliance [by a

broker] with the requirements of the Exchange Act, even if

the customer knowingly and voluntarily agreed to the bar-

gain.”); Wilko v. Swan, 346 U.S. 427, 434 (1953).*

Similarly, the lower federal courts have held unenforce-

able or invalid a variety of agreements that seek to relieve a

* Wilko’s holding that securities claims may not be subject to predis-

pute arbitration agreements at all has, of course, beer overruled, see Rod-

riguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477

(1989), but the Wilko Court’s condemnation of a contractual provision

that would have relieved a broker of liability under the securities laws for

any “representation or advice” (346 U.S. at 434) has not.

7

party prospectively from liabilities otherwise imposed by

federal law. The Seventh Circuit, in a decision holding unen-

forceable a contractual provision that would have anticipa-

torily excused a defendant from liability under the Commod-

ity Exchange Act, explained the underlying principle at work

in such cases (and why they differ from cases involving ret-

rospective waivers, such as Evans v. Jeff D.): “The waiver of

substantive statutory rights after the violation has occurred is

akin to a settlement of the dispute, but prospective waivers of

statutory rights tend to encourage violations of the law by

notifying the wrongdoer in advance that he or she can act

with impunity; therefore prospective waivers uniquely can

violate public policy.” Cange v. Stotler & Co., 826 F.2d 581,

594 n.11 (7th Cir. 1987).

Thus, the Second Circuit has held that “a firm cannot buy

from a worker an exemption from the substantive protections

of the anti-discrimination laws because workers do not have

such an exemption to sell, and any contractual term that pur-

ports to confer such an exemption is invalid.” Eisenberg v.

Advance Relocation & Storage, Inc., 237 F.3d 111, 117 (2d

Cir. 2000); accord, e.g., McCaskill v. SCI Management

Corp., 298 F.3d 677, 684-86 (7th Cir. 2002) (employee can-

not prospectively waive right to attorney’s fees under Title

VII) (concurring opinion); Cole v. Burns Int'l Sec. Servs.,

105 F.3d 1465, 1482 (D.C. Cir. 1997) (employees cannot

waive substantive protections of Title VII by agreeing to ar-

bitration clauses); Kendall v. Watkins, 998 F.2d 848, 851

(10th Cir. 1993) (employees may not waive Title VII nghts

that have not yet accrued).

Similarly, the Eleventh Circuit has held that borrowers

may not prospectively waive their substantive nghts under

the Truth in Lending Act, Parker v. DeKalb Chrysler Ply-

mouth, 673 F.2d 1178 (11th Cir. 1982).° Likewise, the Fifth

* Parker also highlights out that a prospective waiver of remedies for

future statutory violations will generally not be a “knowing” waiver, as

(Footnote continued)

8

Circuit, in a case later cited with approval by this Court, has

stated that enforcement of an agreement prospectively waiv-

ing remedies against future antitrust violations would be

“clearly against public policy.” Redel’s Inc. v. General Elec-

tric Co., 498 F.2d 95, 99 (Sth Cir. 1974) (cited in Mitsubishi

Motors v. Soler Chrysler-Plymouth, Inc., 473 U.S. at 637).

B. This Court’s Decisions Do Not Allow Arbitra-

tion Agreements to Waive Substantive Rights

and Remedies.

A predispute arbitration agreement necessarily involves a

prospective waiver of some rights—specifically, certain of

the procedural rights, such as the right to trial by jury, that

accompany litigation of a claim in a judicial forum. But that

prospective procedural waiver is effective (at least in cases

that arise out of transactions involving commerce) only be-

cause Congress has specifically so provided in the Federal

Arbitration Act, 9 U.S.C. § 2, which makes such contracts

enforceable. The enforceability of prospective agreements to

arbitrate, however, in no way implies the enforceability of

prospective limits on the substantive rights and remedies that

can be vindicated through arbitration. Indeed, as this Court

has repeatedly stated, the enforcement of an agreement to

arbitrate a particular claim is acceptable only because and to

the extent that the parties’ substantive rights can be fully vin-

dicated in arbitration.

Thus, while holding that antitrust claims are subject to

arbitration, the Court expressly stated that if the arbitration

agreement “operated ... as a prospective waiver of a party’s

right to pursue statutory remedies for antitrust violations, we

would have little hesitation in condemning the agreement as

against public policy.” Mitsubishi, 473 U.S. at 637 n.19. The

the person making the waiver may be unaware not only of the nature of

her statutory rights, but also of the future conduct that may infringe them.

See 673 F.2d at 1182.

Court repeated the point in exactly the same words in Vimar

Seguros y Reaseguros S.A. v. M/V Sky Reefer, 515 U.S. 528,

540 (1995), in holding that claims under the Carriage of

Goods by Sea Act were arbitrable. And in Gilmer v. Inter-

state/Johnson Lane Corp., 500 U.S. 20 (1991), while holding

claims under the Age Discrimination in Employment Act

were subject to arbitration, the Court emphasized that the

agreement to arbitrate did not involve the waiver of any sub-

stantive rights under the Act and that the rules of the arbitra-

tion did not limit the arbitrators’ power to grant the full range

of equitable and legal remedies to which the claimant might

be entitled. Jd. at 26, 30. Similarly, in McMahon, the Court

held securities and RICO claims arbitrable because arbitra-

tion of such claims does “not entail any consequential restric-

tion on substantive rights,” 482 U.S. at 232, and plaintiffs can

“effectively vindicate” both securities claims and RICO

treble damages claims in arbitration. /d. at 242.

The Court summarized the teachings of these cases just

last Term in EEOC v. Waffle House, Inc., 534 U.S. 279

(2002). There, while holding that an individual employee’s

agreement to arbitrate disputes could not bar the EEOC from

exercising its statutory power to file a lawsuit based on the

employee’s grievances, the Court explained the rationale

of—and limits on—its prior holdings that statutory claims

may be subject to arbitration. The Court’s language leaves no

doubt that prospective waivers of substantive statutory rights

are not enforceable merely because they are contained in ar-

bitration agreements:

We have held that federal statutory claims may be the

subject of arbitration agreements that are enforceable

pursuant to the FAA because the agreement only de-

termines the choice of forum. “In these cases we recog-

nized that ‘[b]y agreeing to arbitrate a statutory claim, a

party does not forgo the substantive rights afforded by

the statute; it only submits to their resolution in an arbi-

tral, rather than a judicial, forum.”

10

Id. at 296 n.10 (quoting Mitsubishi, 473 U.S. at 628, and

Gilmer, 500 U.S. at 26). The Court emphasized that an arbi-

tration clause is “effectively a forum selection clause” rather

than a waiver of statutory remedies, and it emphasized that

any attempt to find a substantive waiver in an arbitration

agreement “obscure[s] this crucial distinction and [runs]

afoul of our precedent.” Jd. at 295, 296 n.10.

C. The Nation’s Leading Arbitration Organiza-

tions Increasingly Reject Efforts to Limit Sub-

stantive Rights and Remedies in Arbitration.

Petitioners and the amici who support them suggest that

arbitration will somehow be crippled if enforcement of arbi-

tration agreements that waive substantive statutory rights and

remedies is denied. As explained above, that submission con-

flicts with the public policy against enforcement of such

waivers and the limits this Court has placed on the accept-

ability of arbitration agreements in such cases as Waffle

House and Mitsubishi. In addition, petitioners’ contention

runs counter to the growing recognition by leading organiza-

tions that actually administer arbitration agreements that the

enforcement of such waivers of substantive rights is unfair

and inappropriate.

The American Arbitration Association, for example, re-

cently amended its rules to provide expressly that the reme-

dies an arbitrator may grant in consumer arbitration cannot

be limited: The Association’s Rule C-7(c) states that an “ar-

bitrator may grant any remedy, relief or outcome that the par-

ties could have received in court.” American Arbitration As-

sociation, Supplementary Procedures for Consumer-Related

Disputes, Effective March 1, 2002 (available at

www.adr.org). Similarly, JAMS, another leading arbitration

organization, has adopted a “Policy on Consumer Arbitra-

tions Pursuant to Pre-Dispute Clauses,” which provides, in

relevant part:

ll

Minimum Standards Of Procedural Fairness

JAMS will administer arbitrations pursuant to pre-

dispute arbitration clauses between companies and in-

dividual consumers only if the contract arbitration

clause and specified applicable rules comply with the

following minimum standards of fairness.

*_* *

Remedies that would otherwise be available to the con-

sumer under applicable federal, state or local laws must

remain available under the arbitration clause, unless the

consumer retains the right to pursue the unavailable

remedies in court.°

The New York Stock Exchange and the National Asso-

ciation of Securities Dealers, both of which offer securities

arbitration under rules approved by the SEC, also foreclose

limits on remedies by providing that their members may not

use predispute arbitration agreements with customers that

“include any condition which ... limits the ability of a party

to file any claim in arbitration or limits the ability of the arbi-

trators to make any award.”’ As a result, securities arbitra-

tions conducted by the NASD and NYSE regularly include

claims for punitive damages, statutory treble damages, and

similar remedies. The NASD has also adopted special rules

for the arbitration of employment discrimination disputes,

which provide that in arbitration of such claims, “(t]he arbi-

trator(s) shall be empowered to award any relief that would

be available in court under the law,” including attorney’s fees

“as part of the remedy in accordance with applicable law.”

* The JAMS policy is available on its website, www jamsadr.com.

’ Constitution of the New York Stock Exchange, Inc., Article [X,

Rule 636(d) (available at www.nyse.com/arbitration); NASD Rule

3110(f) (available at www.nasd.org).

12

NASD Code of Arbitration Procedure, Rules 10214, 10215

(available at www.nasdadr. com).*

Any suggestion that enforcement of agreements purport-

ing to waive substantive rights and remedies is essential to

the vindication of the interests arbitration is supposed to

serve is flatly contradicted by these standards and rules,

which have been put in place by some of the nation’s leading

sponsors of arbitration. Rather, the policies of these organiza-

tions reflect a recognition of the same principle asserted by

this Court in Waffle House and Mitsubishi: that it is unfair

and wrong to permit arbitration agreements to be used to give

effect to prospective waivers of substantive rights created by

law.

Il. IT IS FOR THE COURTS TO DETERMINE

THE ENFORCEABILITY OF ARBITRATION

AGREEMENTS THAT PURPORT TO WAIVE

SUBSTANTIVE RIGHTS.

Petitioners and their supporting amici urge that even if

the contractual terms prohibiting arbitrators from granting

respondents the remedies provided by statute for a RICO vio-

lation are unenforceable, the issue of the validity of that limit

on the arbitrators’ authority should be decided in the first in-

stance by the arbitrators. That argument runs counter not only

to decades of this Court’s precedents, but, even more point-

edly, to this Court’s latest word on the subject, Howsam v.

Dean Witter Reynolds, Inc., 123 S. Ct. 588 (2002).

* The NASD also recognized the unfairness of limiting the availabil-

ity of substantive remedies in arbitration when it proposed new rules gov-

erning the standards for issuance of punitive damages in NASD arbitra-

tions. The NASD’s proposed rules reflect the view that “it is not appro-

pnate or feasible to eliminate the availability of punitive damages in arbi-

tration so long as public customers are required by most member firms to

sign predispute arbitration agreements.” SEC Release No. 34-39371; File

No. SR-NASD-97-47 (Nov. 26, 1997) (available at www.sec.gov/

rules/sro/nasd9747 txt).

13

As the Court noted in Howsam, it has long been the rule

that “(t]he question whether the parties have submitted a par-

ticular dispute to arbitration, i.e., the ‘question of arbitrabil-

ity,”” is generally an issue for judicial resolution. 123 S. Ct.

at 591 (emphasis by the Court; citation omitted). Analyti-

cally, the question of arbitrability has two components: (1)

whether the parties have a valid arbitration agreement; and

(2) whether that agreement applies to the particular claim at

issue. Although both questions are presumptively for the

courts to resolve, this Court has held that the parties can un-

der some circumstances agree that the second question is for

the arbitrator to decide; and if they have so agreed, a court

may compel them to submit to the arbitrator the question

whether a particular dispute is subject to arbitration. See First

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

Logically, however, the first component is necessarily one

for the court, for if the parties have no valid agreement to ar-

bitrate, they cannot lawfully be compelled to do so.” Thus,

this Court has held that the question whether an arbitration

agreement is unenforceable because it was induced by fraud

is an antecedent question for a court to resolve. See Prima

Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-

04 (1967). More generally, as the Court put it in Howsam, “a

gateway dispute about whether the parties are bound by a

given arbitration clause raises a ‘question of arbitrability’ for

a court to decide.” 123 S. Ct. at 592.

That is precisely the type of dispute involved in this case:

The question is whether the respondents are bound by the

arbitration clauses at issue, or whether they are unenforceable

as to the RICO claims because they purport to waive substan-

* See, e.g, Volt Information Sciences, Inc., v. Board of Trustees of the

Leland Stanford Junior University, 489 U.S. 468, 478 (1989) (“[Tjhe

FAA does not require parties to arbitrate when they have not agreed to do

a,

14

tive nghts that are otherwise available under RICO. Howsam

dictates that such a dispute is for a Court to resolve.

Moreover, Howsam makes clear that the expectations of

the parties are critical to the determination of whether an is-

sue about whether a dispute is subject to arbitration is one for

a court or an arbitrator to determine. As the Court put it, a

“question of arbitrability” presents a “gateway question” for

a court to resolve “where contracting parties would likely

have expected a court to have decided the gateway matter,

where they are not likely to have thought that they had

agreed that an arbitrator would do so, and, consequently,

where reference of the gateway dispute to the court avoids

the risk of forcing parties to arbitrate a matter that they may

well not have agreed to arbitrate.” /d.

Here, the parties would not likely have thought that they

had agreed to allow the arbitrators to decide whether the con-

tractual limitations on their authority were enforceable. On

the contrary, the general expectation of parties to arbitration

agreements is that arbitrators will abide by limits on their au-

thority. Indeed, the Federal Arbitration Act expressly pro-

vides that one of the few grounds for vacating an arbitration

award is that the arbitrators “exceeded their powers” under

the parties’ arbitration agreement. See 9 U.S.C. § 10(a)(4).

The arbitration system simply does not contemplate that arbi-

trators will take it upon themselves to determine the validity

of the arbitration agreements from which they derive their

powers.

Moreover, the enforceability of a purported waiver of

statutory rights and remedies is a purely legal question that

arbitrators are in no way “comparatively better able” to re-

solve than a court. Howsam, 123 S. Ct. at 593. Indeed, it is an

issue that only a court (and in particular, this Court) can de-

finitively resolve, and nothing is to be gained by seeking the

opinion of a panel of arbitrators on the question. Nor is there

any point to permitting an arbitration to proceed under a pos-

sibly invalid agreement when the Court can avoid such a

15

waste of resources by deciding the enforceability issue at the

outset. Thus, in this case, Howsam’s holding that “a fair and

expeditious resolution of the underlying controversy” can

best be achieved by assigning issues to the “decisionmaker

with ... comparative expertise” points definitively to judicial

resolution of the enforceability issue. /d.

Moreover, the petitioners’ suggestion that the arbitrators’

resolution of the enforceability issue can be adequately re-

viewed by the courts in the context of a post-arbitration chal-

lenge to their award only underscores that the matter is one

for the courts, for at least two reasons. First, reliance on post-

arbitration review is problematic because of the very narrow

scope of judicial review of the merits of arbitrators’ deci-

sions. See 9 U.S.C. § 10. Second, arbitrators are not required

to provide opinions explaining their decisions. Thus, if the

arbitrators were to deny an award of treble damages, a re-

viewing court could well have no way of knowing whether

the reason was that the arbiirators had concluded that the

contractual prohibition on such remedies was enforceable, or

that the arbitrators had decided the award was not warranted

for some other, valid reason.

Finally, judicial resolution of the issue of enforceability

before the case is referred to arbitration is consistent with the

approach taken by this Court in Green Tree Financial Corp.-

Alabama v. Randolph, 531 U.S. 79 (2000). There, the Court

considered whether an arbitration agreement was unenforce-

able on the ground that it imposed unreasonable costs on a

plaintiff seeking to assert a claim under a federal statute. Al-

though the Court held that the plaintiff in that case had not

succeeded in showing that arbitration under the agreement

would be prohibitively expensive, the Court acknowledged

that an agreement that precluded a litigant from “effectively

vindicating her federal statutory rights in the arbitral forum”

would be unenforceable. /d. at 90. More importantly for pur-

poses of this case, the Court’s consideration of the claim of

unenforceability on its merits, before sending the case to ar-

16

bitration, confirms the common-sense proposition that de-

termining whether an arbitration agreement is enforceable is

necessarily antecedent to enforcing it. Petitioners’ position

does violence to that principle and should be rejected. '°

CONCLUSION

For the foregoing reasons, the judgment of the court of

appeals should be affirmed.

Respectfully submitted,

Scott L. Nelson

Counsel of Record

Brian Wolfman

Public Citizen Litigation Group

1600 20th Street, N.W.

Washington, D.C. 20009

(202) 588-1000

Attorneys for Amici Curiae

Date: January 13, 2003

As a final fallback argument, petitioners suggest that even if the

damages limitation is unenforceable, it should be “severed” and the re-

mainder of the arbitration clause enforced. The Petition for Certiorari,

however, did not say that petitioners would ask this Court to decide a

severability issue. Even if the issue were properly before the Court, and

even if it were assumed that a fundamental limitation on the powers of

the arbitrators could ever be severed from the arbitration agreement, the

question of the circumstances under which severance would be appropri-

ate would presumably be a matter of contract law. Petitioners’ assertion

that the FAA requires a presumption of severability regardless of what

otherwise applicable contract law principles would provide runs counter

to this Court’s recognition that the purpose of the FAA “was to make

arbitration agreements as enforceable as other contracts, but not more so.”

EEOC v. Waffle House, 534 U.S. at 294 (quoting Prima Paint, 388 U.S.

at 404 n.12). Even on their own theory of severability, petitioners provide

an insufficient analysis of relevant contract-law (and, for that matter,

choice-of-law) principles to establish the appropriateness of severance.