# Amicus Curiae Brief — Green Tree Financial Corp. v. Bazzle

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2003
- **Citation:** 539 U.S. 444

## Text

FFICT
|_ ©

GREEN TREE FINANCIAL Corp. A/K/A GREEN TREE
ACCEPTANCE Corp. A/K/A GREEN TREE FINANCIAL SERVICES
CorpP. N/K/A CONSECO FINANCE CORP.,

Petitioner,

V.

LYNN W. BAZZLE AND BurRT A. BAZZLE, IN A
REPRESENTATIVE CAPACITY ON BEHALF OF A CLASS AND FOR
ALL OTHERS SIMILARLY SITUATED; DANIEL B. LACKEY,
GEORGE BUGGS AND FLORINE BUGGS, IN A REPRESENTATIVE
CAPACITY ON BEHALF OF A CLASS AND FOR ALL OTHERS
SIMILARLY SITUATED,

Respondents.

On Petition for a Writ of Certiorari to the
Supreme Court of South Carolina

BRIEF FOR AMERICAN BANKERS ASSOCIATION,
AMERICAN FINANCIAL SERVICES ASSOCIATION,
AND CONSUMER BANKERS ASSOCIATION
AS AMICI CURIAE IN SUPPORT OF PETITION
FOR A WRIT OF CERTIORARI

Louis R. COHEN
Counsel of Record
CHRISTOPHER R. LIPSETT
Eric J. MOGILNICKI
MICHAEL D. LEFFEL
WILMER, CUTLER & PICKERING
2445 M Street, N.W.
Washington, D.C. 20037
(202) 663-6000

Counsel for Amici Curiae

NOVEMBER 25, 2002

Whether the Federal Arbitration Act, 9 U.S.C. §§ 1-16,
prohibits class-action procedures from being superimposed
onto an arbitration agreement that does not provide for class-

action arbitration.

| QUESTION PRESENTED

(i)

TABLE OF CONTENTS

Page
QUESTION PRESENTED ............sccsssesessesreneeneneenentenenenennens i
Ge ee CP CROUEED enreerneesnsnemmen iv
STATEMENT OF INTEREST OF AMICI CURIAE. ........... 2
SUREMARY OF ARGUMENT cccccccccccccscccscssccssccscsoscosscscseees 3
GGG cme 5

1. THIS COURT SHOULD GRANT THE WRIT

BECAUSE FORCED CLASS ARBITRATION

IS CONTRARY TO THE FAA AND FUN-
KR A 5

A. The FAA Requires Courts To Enforce the
Arbitration Agreement As Written. ..............00eee 5

B. Forced Class Arbitration Is Unfair to Ab-
sent Class Plaintiffs and to Defendants. ................. 8

1. Forced “Class Arbitrations” May Not

Be Binding on Absent Plaintiff
“SD GOTO. ceneneneemeemeen 9

2. Forced Class Arbitration Is Unfair to
ED, ccnnnenenememnnmsenmene 11

Il. FORCED CLASS ARBITRATION IS AN
ATTACK ON ARBITRATION ITSELF. ................... 12

A. Forced Class Arbitration Threatens the Vi-
ability of Arbitration Agreements in Con-
SG, cqnnsnssnnemen 13

B. Parties May Not Be Able To Avoid the Is-
sues in This Case by Drafting Around
RIED, censsssnssnansesescsssnssnencssannssscsnsssnsnsessnssnsnusnssnessese 15

CRIUCRAMIUEITS cexscececccczecesscocesccnnsecnssscnsecessessnssnessscsansseeesees 17

iv

TABLE OF AUTHORITIES
CASES
Page(s)
ACORN vy. Household International, Inc., 211 F.
Supp. 2d 1160 (N.D. Cal. 2002)........cesesseserereeeeeseennees 15
Ainsworth v. Skurnick, 960 F.2d 939 (11th Cir.
DI cccocccccccsvcesessssnscsnssesesnssnenssensnansenesssessnseseesssnesesesensts 12
Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265
a 5,7, 13
Baron v. Best Buy Co., No. 99-14028, slip op. (1 1th
0 _, ) eee 16
Blue Cross v. Superior Court, 78 Cal. Rptr. 2d 779
(Ct. App. 1998)........ssessereereererenssssssssesessssensssrsnsenens 6, 14
Bowen vy. First Family Financial Services, Inc., 233
F.3d 1331 (1 tthe Cie. DODD) ..cccccccccccccccscccsccccccccsccccsssesees 16
Castano v. American Tobacco Co., 84 F.3d 734 =
0), 14
Champ v. Siegel Trading Co., 55 F.3d 269 (7th Cir.
GO 5,6
Circuit City Stores, Inc. v. Adams, 532 U.S. 105
| 5,7
Comb v. Paypal, Inc., 218 F. Supp. 2d 1165 (N.D
EEE, 15
Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d
860 (Pa. Super. Ct. 1991) .......cccccceeeneeeeeeeeenseeneennsnenes 6, 14
Doctor’ s Associates, Inc. v. Casarotto, 517 U.S. 681
|, 17
Dominium Austin Partners, LL v. Emerson, 248
x by lt Le & |) ) 6
First Options of Chicago, Inc. v. Kaplan, 514 U.S.
| , , -) 7
Flexible Manufacturing Systems Pty. Lid. v. Super
Products Corp., 86 F.3d 96 (7th Cir, 1996) .......-.0eeeee 12

Gammaro v. Thorp Consumer Discount Co., 828 F.

Supp. 673 (D. Minn. 1993).........cseenseeseeseeneerereennnnenenes 6

Vv

TABLE OF AUTHORITIES—Continued

Page(s)
General Telephone Co. v. Falcon, 457 U.S. 147

(a 14
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

| 7, 16
Hale v. First USA Bank, N.A., No. OOCTV5406JGK,

2001 WL 687371 (S.D.N.Y. June 19, 2001) ...........000 16
Hansberry v. Lee, 311 U.S. 32 (1940).....ccccccccseeeseereeeeeeees 8, 10
In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293 (7th

ae Ce cecrrccsensenenstnsvenenensscenmrenenssensrennssemsesssseeenemnneien 12
Johnson v. West Suburban Bank, 225 F.3d 366 (3d

Ce, Fe cancsecenssnssassessnsmensevemanssmnsssamesnvsensmscsevssncessses 16

Keating v. Superior Court, 645 P.2d 1192 (Cal.
1982), rev'd in part on other grounds sub nom.
Southland Corp. v. Keating, 465 U.S. | (1984) ........ 6, 14
Leonard v. Terminix International Co., L.P., No.
1010555, 2002 WL 31341084 (Ala. Oct. 18,

GI wxcxsscscccscocscscevesessscssesssessssnsssevssncespesssssessessoosccssosesess 16
Lozada v. Dale Baker Oldsmobile, Inc., 91 F. Supp.
2d 1087 (W.D. Mich. 2000) .........ccccccceseeseseeneeneeeenennenens 16

Lloyd v. MBNA America Bank, N.A., No. Civ.A. 00-
109-SLR, 2001 WL 194300 (D. Del. Feb. 22,

Lytle v. CitiFinancial Services, Inc., No. 42 EDA
2001, 2002 WL 31388882 (Pa. Super. Ct. Oct.

a SEI cn srnseriansaneumnsnemnemenpmamnseanesnememenenmmnnneeenenenees 16
Marsh v. First USA Bank, N.A., 103 F. Supp. 2d 909

OG 16
Martin v. Wilks, 490 U.S. 755 (1989).........ccccccccccseeeseeeseeeneeees 8
Mastrobuono v. Shearson Lehman Hutton, Inc., 514

EEE 6

McCarthy v. Providential Corp., No. C 94-0627
FMS, 1994 WL 387852 (N.D. Cal. July 19,

vi

TABLE OF AUTHORITIES—C ontinued

Page(s)
Med Center Cars, Inc. v. Smith, 727 So. 2d 9 (Ala.
| 6
Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999).....ccccceeeeees 8
Pennoyer v. Neff, 95 U.S. 714 (1877) (MeM.) .......-eeeeeeeeeeees 8
Perry v. Thomas, 482 U.S. 483 (1987) ......csseeeeeeereeeeenees 6, 17
Press Enterprise Co. v. Superior Court, 464 U.S.
SOE (IDBS) ccccccccsccccscscsccecssssseserscsvesscsessossssssssnsssssssssoserss 10
Randolph v. Green Tree Financial Corp—Alabama,
244 F.3d 814 (1 1th Cir. 2001)... ccccccsseeeereeeeeeeeennnees 16
Raytheon Co. v. Automated Business Systems, Inc.,
882 F.2d 6 (Ist Cir. 1989) ............ccsrssrrrsssersrsserseseesers 1]
Remmey v. Paine Webber, Inc., 32 F.3d 143 (4th
| | ne 15
Rodriquez de Quijas v. Shearson/American Express,
Inc., 490 U.S. 477 (1989) ......ecrrccssscocsscscevecseesceressscesensoes 7
Sagal v. First USA Bank, N.A., 69 F. Supp. 2d 627
(D. Del. 1999), aff'd, 254 F.3d 1078 (3d Cir.
y | 16
Shearson/American Express, Inc. v. McMahon, 482
U.S. FAD (IGBT7) ccccrccccccsccccsscsscssccesccsesesscesessssesssssscsesscess 16
Sobel v. Hertz, Warner & Co., 469 F.2d 1211 (2d
| (| EE 11
Southland Corp. v. Keating, 465 U.S. 1 (1984)... 6, 17
Stein v. Geonerco, Inc., 17 P.3d 1266 (Wash. Ct.
App. 2001 )..........rssrssserssrseersrssnsensensenseossossssssssssssssssensenss 6
Szetela v. Discover Bank, 118 Cal. Rptr. 2d 862 (Ct.
App. 2002) ....0..00--rrecececressecssccecssecsesseesscsoenssrsossessssoossecees 16
Ting v. AT&T, 182 F. Supp. 2d 902 (N.D. Cal.
2002), appeal filed, No. 02-15416. (9th Cir.
Ee 16
United States Parole Commission v. Geraghty, 445
U.S. BBB (IDB) ...ccccccccccccccecceecceseseveccvscccosssocsassovsssososoooss 11
United Steelworkers of America v. Enterprise Wheel
& Car Corp., 363 U.S. 593 (1960).....cccccccceseeeeereeneees 9,11

vil
TABLE OF AUTHORITIES—Continued

Page(s)
Volt Information Sciences, Inc. v. Board of Trustees,
GED UB. SEB (UGG ccccssescssesccccsscsssesssssenscsnsssesssessssseeed 6,7
Zawikowski v. Beneficial National Bank, No.
98C2178, 1999 WL 35304 (N.D. Ill. Jan. 11,

DR cccssessenssessscssensocenecsensscesssncsscsunasmnenssnasnessnsesensansssesees 16
STATUTES AND RULES
Federal Arbitration Act, 9 U.S.C. §§ 1-16......:.:ccccecceeeeees 3,5
D UBL. © BD cccccsccsesseccsscssscssesescscesseseessnescsvssusessesssssssesss 12
FOG, BR. Cov. F TB cccsssccsssccssssessncevsesesnsssnnssesnenssocsnsseeses seeveld, 12
LEGISLATIVE AUTHORITIES
H.R. Rep. No. 97-542 (1982) .......ssscsseseseersersersenneensens 5, 13
S. Rep. No. 68-536 (1924).............0.000cvecssssseserrsesssesssnssensoeess 13

ADMINISTRATIVE AGENCY MATERIALS

SEC, Order Approving Proposed Rule Change Re-
lating to the Exclusion of Class Actions from
Arbitration Proceedings, 57 Fed. Reg. 52,659
bay. 4, BT). cascccscccvsscvscecssscsessccsssssssssssssvssnessensssoseeseses 15

BOOKS, ARTICLES & TREATISES

Class Wide Arbitration: Efficient Adjudication or
Procedural Quagmire?, 67 Va. L. Rev. 789

CDGTBE ) cccnncsncccssscsssnssscssssvsceveccessesesssssnessensnenssnsssenessssoseesss 14
Henry J. Friendly, Federal Jurisdiction: A General

Vigw 13D (1GT3S) ncccccecceccrsccresccesonssccssncssscssssssscssscoososeooses 12
Steven A. Meyerowitz, The Arbitration Alternative,

71 A.B.A. 5. TB (IDBS) .ccccccccceccscccsocssesssscssccssscsssnscsessooss 11
Herbert Newberg & Alba Conte, Newberg on Class

Actions (34 €d. 1992).......cccccccosscesseccsessesesesesesereeess 10, 14

Judith Resnik, Money Matters: Judicial Market \n-
terventions Creating Subsidies and Awarding
Fees and Costs in Individual and Aggregate
Litigation, 148 U. Pa. L. Rev. 2119 (2000).........::cceeeee 9

Vili

TABLE OF AUTHORITIES—Continued

Page(s)
Jean R. Sternlight, As Mandatory Binding Arbitra-
tion Meets the Class Action, Will the Class Ac-
tion Survive?, 42 Wm. & Mary L. Rev. |
CID cocencaccccssenstncsensstactntntsenneernemmnumaaeianenmastnnensets 10

-———_——-

In the Supreme Court of the United States

No, 02-634

GREEN TREE FINANCIAL CorpP. A/K/A GREEN TREE
ACCEPTANCE CorpP. A/K/A GREEN TREE FINANCIAL SERVICES
CorpP. N/K/A CONSECO FINANCE CORP.,

Petitioner,
Vv.

LYNN W. BAZZLE AND BURT A. BAZZLE, IN A
REPRESENTATIVE CAPACITY ON BEHALF OF A CLASS AND FOR
ALL OTHERS SIMILARLY SITUATED; DANIEL B. LACKEY,
GEORGE BUGGS AND FLORINE BUGGS, IN A REPRESENTATIVE
CAPACITY ON BEHALF OF A CLASS AND FOR ALL OTHERS
SIMILARLY SITUATED,

Respondents.

On Petition for a Writ of Certiorari to the
Supreme Court of South Carolina

BRIEF FOR AMERICAN BANKERS ASSOCIATION,
AMERICAN FINANCIAL SERVICES ASSOCIATION,
AND CONSUMER BANKERS ASSOCIATION
AS AMICI CURIAE IN SUPPORT OF PETITION
FOR A WRIT OF CERTIORARI

This amici curiae brief! is submitted in support of the
petitioner, Green Tree Financial Corp. a/k/a Green Tree Ac-
ceptance Corp. a/k/a Green Tree Financial Services Corp.

' Pursuant to Supreme Court Rule 37.6, amici state that the brief
was prepared in its entirety by amici curiae and their counsel. No mone-
tary contribution toward the preparation or submission of this brief was
made by any person other than amici curiae, their members, and their
counsel.

>)
—

n/k/a Conseco Finance Corp. By letters filed with the Clerk
of the Court, petitioner and respondents have consented to
the filing of this brief.

STATEMENT OF INTEREST OF AMICI CURIAE

The American Bankers Association (“ABA”) is the prin-
cipal national trade association of the banking industry in the
United States. Its members are located in all fifty states and
the District of Columbia and include banks of all types and
sizes—money center banks, regional banks and community
banks. ABA members hold approximately ninety percent of
the domestic assets of United States banks The ABA fre-
quently appears in litigation as an amicus curiae where the
issues raised are of widespread importance to banks or con-
sumers of banking services. Many ABA member banks pro-
vide in their consumer loan agreements and deposit contracts
for arbitration of disputes. Some of those agreements are si-
lent as to class-action procedures, and others expressly state
that class arbitrations are not permitted.

The American Financial Services Association (“AFSA”)
was organized in 1916 and represents more than 300 compa-
nies that engage in lending and sales financing amounting to
approximately twenty percent of all consumer credit in the
United States. These companies range from independently-
owned consumer finance offices to the nation’s largest finan-
cial-services, retail, and automobile sales finance companies.
AFSA’s membership includes national and state banks that
operate multi-state consumer credit programs. Some AFSA
members include arbitration agreements in their consumer
loan documents.

The Consumer Bankers Association (“CBA”) was
founded in 1919 to provide a progressive voice for the retail
banking industry. CBA members hold more than 900 bank
and thrift charters, with total assets of more than $2.9 trillion,
and are leaders in the areas of consumer, auto, home equity
and education finance, bank sales of investment products,
small business services and community development. Some

3

CBA members include arbitration agreements in their con-
sumer loan documents and deposit contracts.

SUMMARY OF ARGUMENT

Amici agree with petitioner that the Court should grant
the writ to resolve the split between the majority view that
arbitration agreements should be enforced as written, and the
minority view that a type of class action procedure can be
imposed on parties who have not agreed to it. Amici write to
stress the importance of correcting the error of the Supreme
Court of South Carolina, because of the undesirable conse-
quences of forced class arbitrations. Amici make three main
points,

1. The whole theory of the Federal Arbitration Act (the
“FAA” or “Act’), 9 U.S.C. §§ 1-16, is that firms and indi-
viduals have the right to bargain about the mechanism they
will use to resolve future disputes, and their bargains should
be enforced. The basis for arbitration is private contracts.
The enforceability of private contracts, on this and other sub-
jects, is of course at the heart of our legal system, and the Act
was adopted because judicial hostility to arbitration was
wrongfully rendering this kind of private contract effectively
unenforceable. Imposing an obligation to arbitrate in a pro-
cedure to which a person did not agree, or including parties
that such person did not agree to include, violates the most
basic terms of the Act.

2. Forced class arbitrations are necessarily unfair to ab-
sent plaintiff “class” members and to defendants. First, it
obviously will be argued that it is unfair to bind absent class
members to the results of an arbitration, for the most basic of
reasons: they have not agreed to have their claims resolved
by this particular private decision maker. Without delving
deeply into the reasons for this, it is fair to say that all per-
sons within the courts’ respective jurisdictions are inherently
bound by the decisions of courts created by constitutions and
statutes to resolve disputes. But no person is bound by the
decisions of a private decision maker unless he has agreed to

4

be bound. This is not merely a matter of notice, the argument
goes: a person has no obligation to respond to such a notice,
or to give up any rights after receiving a notice, unless he has
agreed to the decision making procedure. Second, it is obvi-
ously also unfair to subject a defendant to a forced class arbi-
tration in which if he wins he defeats only the named plain-
tiffs but if he loses the rest of the “class” can latch on. That
is not what happens in true, judicial class actions, and this
kind of one-sided class procedure would obviously make ar-
bitration an unacceptable alternative for the party (such as a
lender) that stands to win only against an individual but to
lose to a “class.” Such parties would simply avoid arbitra-
tion.

3. The decision of the court below reflects the old judi-
cial hostility to arbitration in modern and more sophisticated
dress. Its premise is that parties cannot arbitrate their dis-
putes on an individual basis even if they have agreed to do
so. That premise is at odds with the FAA and this Court's
decisions. Moreover, even the courts favoring such an ap-
proach concede that it would require major ongoing court
involvement in each class arbitration, injecting courts inti-
mately and extensively into a process designed to avoid the
costs and delays of litigation. Other courts have held, more
directly, that arbitration agreements that fail to provide for
class arbitration are unconscionable—a direct expression of
the ancient hostility that this Court should, once again, make
clear the FAA has banished.

Amici urge this Court to grant the writ to resolve these
important issues and to ensure the continued viability of arbi-
tration in consumer contracts. .

5

ARGUMENT

I. THIS COURT SHOULD GRANT THE WRIT BE-
CAUSE FORCED CLASS ARBITRATION IS
CONTRARY TO THE FAA AND FUNDAMEN-
TALLY UNFAIR,

Amici strongly believe that arbitration in accordance
with the parties’ written agreement is a fair and effective way
to adjudicate disputes. As Congress found in 1982, “[t}he
advantages of arbitration are many: it is usually cheaper and
faster than litigation; it can have simpler procedural and evi-
dentiary rules; it normally minimizes hostility and is less dis-
ruptive of ongoing ... dealings among the parties ....”
H.R. Rep No. 97-542, at 13 (1982); see also Circuit City
Stores, Inc. v. Adams, 532 U.S. 105, 111-12, 122-23 (2001).
In particular, arbitration is “helpful to individuals ... com-
plaining about a product, who need a less expensive alterna-
tive to litigation.” Allied-Bruce Terminix Cos. v. Dobson,
513 U.S. 265, 280 (1995) (citation omitted). Forced class
arbitration, by contrast, forfeits these advantages and is unfair
to absent “class” plaintiffs and defendants.”

A. The FAA Requires Courts To Enforce the Arbi-

tration Agreement As Written.

The fundamental policy of the Federal Arbitration Act
(the “FAA” or “Act’’), 9 U.S.C. §§ 1-16, is that courts should
enforce private arbitration agreements in accordance with
their terms, just as they enforce any other private agreement.
The court below, however, joined the minority of courts in
imposing on the parties before it an arbitration procedure

? ' party who is deciding whether to agree to arbitration is making a
decision whether the benefits of arbitration outweigh its limitations.
Converting an agreement to arbitrate into a class arbitration, however,
radically alters this calculus. For a court “to read such a term into the
parties’ agreement would disrupt the negotiated risk/benefit allocation
and direct the parties to proceed with a different sort of arbitration.”
Champ v. Siegel Trading Co., 55 F.3d 269, 275 (7th Cir. 1995) (internal
quotations and brackets omitted).

6

wholly different from ie one to which they agreed.’ Such
courts would apparently impose on absent class members
various obligations in a proceeding they did not choose to
bring, before a decision maker not selected in accordance
with their arbitration agreements, in which they will not have
the rights of participation they bargained for; and imposing
on every one concerned an obligation to proceed together
with a large number of parties and claims that no one agreed
to include in the resolution of his, her or its disputes. The
majority of courts confronted with this issue have held that
arbitration agreements should be enforced based on their ac-
tual terms.”

Amici agree with petitioner that the Court should grant
the writ to resolve this split in authority. The fundamental
policy of the FAA, as this Court has repeatedly made plain, is
that “private agreements to arbitrate are [to be] enforced ac-
cording to their terms.” Volt Info. Scis., Inc. v. Board of Trs.,
489 U.S. 468, 479 (1989); see Mastrobuono v. Shearson
Lehman Hutton, Inc., 514 U.S. 52, 53-54 (1995); Perry v.
Thomas, 482 U.S. 483, 492-93 n.9 (1987). That directive is
not surprising because, after all, an arbitration clause is sim-
ply a contract between two parties to resolve their dispute in

’ See, e.g., Keating v. Superior Court, 645 P.2d 1192 (Cal. 1982),
rev'd in part on other grounds sub nom. Southland Corp. v. Keating, 465
U.S. 1 (1984); Blue Cross v. Superior Court, 78 Cal. Rptr. 2d 779 (Ct.
App. 1998); Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d 860 (Pa.
Super. Ct. 1991).

. See, e.g., Dominium Austin Partners, 248 F.3d at 728; Champ, 55
F.3d at 275; McCarthy vy. Providential Corp., No. C 94-0627 FMS, 1994
WL 387852, at *8 (N.D. Cal. July 19, 1994) (a court “cannot compel ar-
bitration on a class basis where the agreement did not specifically provide
for it”); Gammaro v. Thorp Consumer Disc. Co., 828 F. Supp. 673, 674
(D. Minn. 1993) (“The Court must give effect to the agreement of the
parties, and this arbitration agreement makes no provision for class treat-
ments of disputes. Accordingly, the Court finds that it is without power
to order this matter to proceed to arbitration as a class action.”) (footnote
omitted); Stein v. Geonerco, Inc., 17 P.3d 1266, 1271 (Wash. Ct. App.
2001); Med Ctr. Cars, Inc. v. Smith, 727 So. 2d 9, 20 (Ala. 1998).

7

a particular way. First Options of Chicago, Inc. v. Kaplan,
514 U.S. 938, 943 (1995) (“[A]rbitration is simply a matter
of contract between the parties.”). As such, an arbitration
clause is enforced “like other contracts.” Volt Info. Scis., 489
U.S. at 478.

But early attempts to enforce arbitration agreements
were met with hostility by the courts, “a judicial disposition
inherited from then-longstanding English practice.” Circuit
City Stores, 532 U.S. at 111. Congress therefore passed the
FAA “to overcome courts’ refusals to enforce agreements to
arbitrate.” Allied-Bruce Terminix, 513 U.S. at 270 (citation
omitted); see also Gilmer v. Interstate/Johnson Lane Corp.,
500 U.S. 20, 28 (1991). In keeping with the FAA, this Court
has emphatically rejected “the old judicial hostility to arbitra-
tion.” Rodriquez de Quijas v. Shearson/American Express,
Inc., 490 U.S. 477, 480-81 (1989). “[G]eneralized attacks on
arbitration,” Gilmer, 500 U.S. at 30, and the “suspicion of
arbitration as a method of weakening the protections afforded
in the substantive law ... [have] fallen far out of step with
our current strong endorsement of the federal statutes favor-
ing this method of resolving disputes,” Rodriquez de Quijas,
490 U.S. at 481 (citation omitted).

Just such a suspicion of arbitration is what led to the re-
sult below. The court asserted that “parties with nominal in-
dividual claims” would have no effective “avenue for relief.”
Pet. App. 22a. It therefore imposed a private decision mak-
ing procedure to which neither those parties nor the absent
“class members” who would become involved had agreed.
As the majority of courts, including every federal court to
reach the issue, have held, when an arbitration agreement is
silent as to class arbitration, arbitration must proceed on an
individual basis and courts and arbitrators are powerless to
rewrite the parties’ agreement to compel class arbitration.”

’ See, e.g., cases cited supra n.4

8

B. Forced Class Arbitration Is Unfair to Absent
Class Plaintiffs and to Defendants.

The significance of the fact of forced class arbitration is
not merely that the parties’ agreement was not enforced
based on its terms: forced class arbitration also raises fun-
damental issues of fairness to the parties. Exactly who is
harmed by this form of action depends on whether any
“class” arbitration decision will be binding on absent class
members.

“It is a principle of general application in Anglo-
American jurisprudence that one is not bound by a judgment
__. in which he is not designated as a party or to which he
has not been made a party by service of process.” Hansherry
v. Lee, 311 U.S. 32, 40 (1940); see also Pennoyer v. Neff, 95
U.S. 714 (1877) (mem.). Class actions represent a narrow
exception to this “deep-rooted historic tradition.” Martin v.
Wilks, 490 U.S. 755, 762 (1989) (internal quotations omit-
ted); see Hansberry, 311 U.S. at 41. This Court has carefully
guarded the rights of absent class members, who have a pro-
tected property interest under the Due Process Clause. See
Hansberry, 311 U.S. at 42. Class actions are binding on ab-
sent class members only if due process has been afforded
them. See Ortiz v. Fibreboard Corp., 527 U.S. 815, 846
(1999); Martin, 490 U.S. at 762 n.2; see also Hansberry, 311
U.S. at 42. The requirement of due process is now embod-
ied, in federal judicial proceedings, in Federal Rule of Civil
Procedure 23, which was adopted pursuant to the Constitu-
tion and the laws of the United States and which determines
what is necessary, and generally sufficient, to protect the
rights of absent parties (and therefore to bind them). But it is
argued that there is no such basis for imposing requirements
that assure the rights of absent parties (or bind them) in an
arbitration conducted pursuant to a private agreement be-
tween one lender and one customer.

9

1. Forced “Class Arbitrations” May Not Be Bind-
ing on Absent Plaintiff “Class” Members.

Consumer advocates have argued that there is simply no
basis for binding absent plaintiff “class” members to the re-
sults of a forced “class arbitration.” Even if they have en-
tered into their own one-on-one arbitration agreements, they
have not, it is asserted, agreed to have their claims (if any)
resolved by a private decision maker chosen in somebody
else’s arbitration proceeding, or in a class format in which
their own participation will not be what they bargained for.

The core of this argument is that judicial class actions
are “state-enabled” mechanisms, see Judith Resnik, Money
Matters: Judicial Market Interventions Creating Subsidies
and Awarding Fees and Costs in Individual and Aggregate
Litigation, 148 U. Pa. L. Rev. 2119, 2144-48 (2000), and
both the class action device and the judges that oversee them
derive their legitimacy from our whole system of govern-
ment. Arbitrators, however, derive their legitimacy from the
parties’ private contract. Cf. United Steelworkers of Am. v.
Enter. Wheel & Car Corp., 363 U.S. 593, 597 (1960) (noting
that an arbitrator's “award is legitimate only so long as it
draws its essence from the” parties’ agreement). Unless in-
dividuals have agreed to have their claims decided in a class
arbitration in which they will not be direct participants, an
arbitrator cannot deal with their claims with either the gov-
ernmental legitimacy of a court deciding a class action or the
contractual legitimacy of an arbitrator deciding a single case.
Consumer advocates have stated quite clearly, that “arbitral
resolution of the claims of a plaintiff class cannot have pre-
clusive effect on absent class members since arbitrators have
no authority to bind absent parties.” See Brief Amicus Cu-
riae of Public Citizen at 23-24, Green Tree Fin. Corp—
Alabama y. Randolph, No. 99-1235 (U.S. 2000).

The legitimacy problem is illustrated in this case by the
provision in the arbitration clause that specifically reserved
the selection of the arbitrator to the parties whose interests

10

were at stake. (“All disputes, claims, or controversies . . .
shall be resolved by binding arbitration by one arbitrator se-
lected by us with consent of you.” Pet. App. 110a.) Com-
mentators have objected that, in cases like this, “absent class
members will ultimately be bound by the ruling of an arbitra-
tor they had absolutely no role in selecting,” Jean R.
Sternlight, As Mandatory Binding Arbitration Meets the
Class Action, Will the Class Action Survive?, 42 Wm. &
Mary L. Rev. 1, 112 (2000),° but surely the true problem is
the opposite: arguably, they cannot be bound at all.

Moreover, unlike court proceedings, which are presump-
tively open, see, e.g., Press Enter. Co. v. Superior Court, 464
U.S. 501, 507 (1984), arbitration is a private dispute resolu-
tion mechanism, whose proceedings are not necessarily even
memorialized in a transcript. E.g., Sternlight, 42 Wm. &
Mary L. Rev. at 114. This is not a problem (and may be an
advantage) in resolving one-on-one disputes, but private pro-
ceedings are wholly unworkable where the rights of “absent
class members” are being decided. See Hansberry, 311 U.S.
at 41.

Another important objective of the protections afforded
in judicial class actions is to prevent “the fraudulent and col-
lusive sacrifice of the rights of absent parties.” Hansberry,
311 U.S. at 45; Herbert Newberg & Alba Cente, 2 Newberg
on Class Actions § 11.65 (3d ed. 1992). The key to prevent-
ing class representatives and defendants from engineering a
course of litigation or settlement that is unfair to absent per-
sons is the role of the trial judge. But because arbitrators
who are selected by only the present parties lack tenure, and
have no “jurisdiction” beyond what the parties have con-
ferred on them, they may be far less willing or able to protect

© As Professor Sternlight notes, “the arbitrator will have been se-
lected at least in part by the named plaintiffs or their attorneys, not by the
absent class members. Thus, it is difficult to see how such an arbitrator
would play the role of the court in checking possible self-dealing.” /d. at
113 (citations omitted).

absentees against collusion by the parties who appointed
them.

It is especially hard to see how a forced “class arbitra-
tion” could be settled with an assurance of fairness to all.
There are no established rules, either in law or the private
contracts in this case, for arbitrator approval of class settle-
ments or for participation by absent persons. For example, in
an arbitration any objectors would—unless the entire pro-
ceedings have been conducted in a way largely foreign to ar-
bitration—have no opportunity to scour the record to ensure
that the settlement is appropriate.’ In sum, it is all but im-
possible to imagine a court holding that the outcome of a
forced class arbitration, whether decision or settlement, was
binding on absent plaintiff “class” members—particularly if
defendants prevail.

2. Forced Class Arbitration Ils Unfair to Defen-
dants.

If forced class arbitration decisions are not binding on
absent plaintiff class members, then forced class arbitrations
are obviously fundamentally unfair to the defendant: if he
wins he defeats only the named plaintiffs but if he loses the
rest of the class may latch on. One of the functions of class
action procedures is at least roughly to level the playing field,
so that the stakes are the same on both sides. See United
States Parole Comm'n v. Geraghty, 445 U.S. 388, 402-03
(1980) (noting that one of the benefits of class actions is “the

” See Steven A. Meyerowitz, The Arbitration Alternative, 71 A.B.A.
J. 78, 80 (1985) (noting that in general, arbitrations are not open to the
public and there is no record of the proceedings kept), see also, ¢.g.,
United Steelworkers of Am., 363 U.S. at 598 (“{a}rbitrators have no obli-
gation ... to give their reasons for an award at all”); Raytheon Co. v.
Automated Bus. Sys., Inc., 882 F.2d 6, 8-9 (1st Cir. 1989) (holding that
arbitrators are not required to issue written opinions), Sobel v. Hertz,
Warner & Co., 469 F.2d 1211, 1214-15 (2d Cir. 1972) (same). By con-
trast, objectors in court are free to review the record to assist them in at-
tacking any settlement. See generally 2 Newberg on Class Actions
§§ 11.57-58 (discussing the rights of objectors to class settlements).

12

protection of the defendant from inconsistent obligations”).
A forced procedure that leaves a defendant with far more at
risk than the plaintiff will bring a swift end to many agree-
ments to arbitrate.

This point is illustrated in a related context. Under Fed-
eral Rule of Civil Procedure 23(f), a court’s decision to cer-
tify a case as a class action may be immediately appealed.
The rule was adopted to address the concern that “[a]n order
granting certification ... may force a defendant to settle
rather than incur the costs of defending a class action and run
the risk of potentially ruinous liability.” Fed. R. Civ. P. 23
(Advisory Committee Notes)." But a defendant in a forced
class arbitration faces a far worse threat: it has no offsetting
chance to win a class victory, and it typically has no avenue
for immediate appeal of the “class” determination and has
only limited judicial review after an arbitration award has
been entered. See 9 U.S.C. § 10; see also, e.g., Flexible M g.
Sys. Pty. Lid v. Super Prods. Corp., 86 F.3d 96 (711 Cir.
1996); Ainsworth v. Skurnick, 960 F.2d 939 (11th Cir. : 992).
Such a procedure is substantially less fair to a defendant than
either a class action in court or an individual arbitration.

ll. FORCED CLASS ARBITRATION IS AN ATTACK

ON ARBITRATION ITSELF.

The decision below reflects a modern and more sophisti-
cated form of the old judicial hostility toward arbitration.
Uncorrected, it will bring a swift end to arbitration agree-
ments in consumer contracts.”

* See also Henry J. Friendly, Federal Jurisdiction: A General View
120 (1973) (discussing the problem of “blackmail settlements” involved
in large scale nuwiltistate class actions); cf. In re Rhone-Poulenc Rorer
Inc., 51 F.3d 1293, 1294, 1298 (7th Cir 1995) (granting the “extraordi-
nary” relief of mandamus to review district court decision on class certi-
fication because of “pressure to settle” even in case where previous simi-
lar suits had been won by defendant).

* The problems discussed in this part are even more serious than the
split of authority between the majority and minority views. A lender or

13

A. Forced Class Arbitration Threatens the Viability
of Arbitration Agreements in Consumer Con-
tracts.

Parties enter into arbitration agreements to avoid the ex-
pense and delay of litigation. As the Senate Report stated,
“{t}he desire to avoid the delay and expense of litigation per-
sists. The desire grows with time and as delays and expenses
increase.” S. Rep. No. 68-536, at 3 (1924).'” Over the latter
part of the twentieth century, arbitration evolved to provide a
quick, inexpensive, and fair alternative to litigation. H.R.
Rep. No. 97-542, at 13 (1982) (“The advantages of arbitra-
tion are many: it is usually cheaper and faster than litigation;
it can have simpler procedural and evidentiary rules; it nor-
mally minimizes hostility . . . ; [and] it is often more flexible
in regard to scheduling ....”); see also Allied-Bruce Ter-
minix, 513 U.S. at 280 (“Indeed, arbitration’s advantages of-
ten would seem helpful to individuals, . . . complaining about
a product, who need a less expensive alternative to litiga-
tion.”).

Courts, however, have remained hostile. One form of
that hostility, illustrated in this case, is to impose class pro-
cedures. Then, in an attempt to appear to deal with the obvi-
ous issues of fairness, courts and commentators suggest sig-
nificant judicial oversight and interference in the arbitration
process. For example, in this Bazzle case, the trial court, not
the arbitrator, considered the class certification motion and
ordered certification of the class. Pet. App. 3a. The result is
to replace the arbitration the parties agreed to with a con-

other firm does not know where a customer will reside in the future or
initiate proceedings. If any jurisdictions force “class arbitrations,” every
contract that provides for arbitration carries some risk of these unaccepta-
bly one-sided proceedings.

” The Report went on to document the fact that arbitration typically
takes weeks where litigation typically takes years; that the costs of arbi-
tration are “trifling” compared to the expense of litigation; and that the
participants in arbitration—“winners and losers alike”—are broadly satis-
fied with the arbitration process. /d.

14

glomerate proceeding that is more to the courts’ liking. Even
courts that compel forced class arbitration concede that
“{wjithout doubt a judicially ordered classwide arbitration
would entail a greater degree of judicial involvement than is
normally associated with arbitration.” Keating v. Superior
Court, 645 P.2d 1192, 1209 (Cal. 1982), rev'd in part on
other grounds sub nom. Southland Corp. v. Keating, 465
U.S. 1 (1984); see also Blue Cross v. Superior Court, 78 Cal.
Rptr. 2d 779, 786-87 (Ct. App. 1998); Dickler v. Shearson
Lehman Hutton, Inc., 596 A.2d 860, 866 (Pa. Super. Ct.
1991). Indeed, these courts have gone so far as to acknowl-
edge that it will be difficult for courts “to avoid judicial in-
trusion upon the merits of the dispute, or upon the conduct of
the proceedings themselves and to minimize complexity,
costs, or delay.” Keating, 645 P.2d at 1209 (citing Class
Wide Arbitration: Efficient Adjudication or Procedural
Quagmire?, 67 Va. L. Rev. 789 (1981)). Courts may be
forced, as the court in Bazzle below did, “to make initial de-
terminations regarding certification and notice to the class.”
Id. Alternatively, the Court may decide it must review such
decisions made initially by the arbitrator. In either event, if
court involvement is required to determine whether a class
should be certified, “it may be necessary for the court to
probe behind the pleadings before coming to rest on the certi-
fication question.” Gen. Tel. Co. v. Falcon, 457 U.S. 147,
160 (1982). This will require the courts to make decisions on
certification based on the courts understanding of “the
claims, defenses, relevant facts, and applicable substantive
law.” Castano v. Am. Tobacco Co., 84 F.3d 734, 744 (Sth
Cir. 1996). Moreover, any such “careful court monitoring”
would likely have to continue throughout the litigation. |
Newberg on Class Actions § 1.13. Courts may also be re-
quired to “exercise a measure of external supervision” over
dismissals and settlements in forced class arbitrations.
Keating, 645 P.2d at 1209.

At best, these conglomerate proceedings would defeat
the very purposes arbitration was designed to serve. This

15

form of judicial intervention, and multiplication of proceed-
ings, is exactly what the FAA was intended to prevent and
runs contrary to the simplifying purpose of agreeing to pri-
vate arbitration instead of judicial resolution of disputes. As
the Fourth Circuit noted in another context, such judicial par-
ticipation would “reduce arbitral proceedings to the status of
preliminary hearings. Parties would cease to utilize a process
that no longer had finality.” Remmey v. Paine Webber, Inc.,
32 F.3d 143, 146 (4th Cir. 1994). So it is here."

Most important, parties simply will not offer or agree to
an arbitration agreement if that agreement can cause them to
be forced into a proceeding that is both unfair and clumsy.
This may be what some courts who are hostile to arbitration
hope, but it is contrary to federal policy embodied in the
FAA.

B. Parties May Not Be Able To Avoid the Issues in
This Case by Drafting Around Them.

Finally, we note that parties cannot necessarily avoid the
threat of forced class arbitration by stating even more explic-
itly in their agreements that arbitration will not be done on a
class basis. The court below suggested (Pet. App. 22a n.21)
that it might reject an arbitration agreement containing such a
bar as unconscionable. Some other courts have already done
so. Their hostility to arbitration could hardly be more clear.
See, e.g., Comb v. Paypal, Inc., 218 F. Supp. 2d 1165, 1175-
76 (N.D. Cal. 2002); ACORN v. Household Int'l, Inc., 211 F.
Supp. 2d 1160, 1171, 1174 (N.D. Cal. 2002); Ting v. AT&T,

'! These types of concerns led the securities industry to reject class
arbitration, because, as the Securities and Exchange Commission con-
cluded: “Over the years of the evolution of class action litigation, the
courts have developed the procedures and expertise for managing class
actions. Duplication of the often complex procedural safeguards neces-
sary for these hybrid lawsuits is unnecessary [in arbitration].” SEC, Or-
der Approving Proposed Rule Change Relating to the Exclusion of Class
Actions from Arbitration Proceedings, 57 Fed. Reg. 52,659, 52,661 (Nov.
4, 1992).

16

182 F. Supp. 2d 902, 931 (N.D. Cal. 2002), appeal filed, No.
02-15416 (9th Cir. 2002); see also, e.g., Lozada v. Dale
Baker Oldsmobile, Inc., 9\ F. Supp. 2d 1087, 1104-05 (W.D.
Mich. 2000); Leonard v. Terminix Intl Co., L.P., No.
1010555, 2002 WL 31341084, at *8 (Ala. Oct. 18, 2002);
Lytle v. CitiFinancial Serys., Inc., No. 42 EDA 2001, 2002
WL 31388882, at *19 (Pa. Super. Ct. Oct. 24, 2002); Szetela
v. Discover Bank, 118 Cal. Rptr. 2d 862, 867-68 (Ct. App.
2002).'”

This Court has held that arbitration agreements are en-
forceable so long as the parties can effectively vindicate their
substantive rights. See, e.g., Shearson/American Express,
Inc. v. McMahon, 482 U.S. 220, 229-30 (1987); see also
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32
(1991) (rejecting a claim that “arbitration procedures cannot
adequately further the purposes of the ADEA because they
do not provide for ... class actions”). The combination of

'2 The majority rule is that arbitration agreements that prohibit class
arbitrations or class actions in favor of individual arbitration are fully
enforceable under the FAA. See, e.g., Randolph v. Green Tree Fin.
Corp.—Alabama, 244 F.3d 814 (11th Cir. 2001) (on remand from the
Supreme Court, holding that agreement to arbitrate TILA ci.ims is en-
forceable, ever though it precludes class actions); Johnson v. W. Subur-
ban Bank, 225 F.3d 366, 369 (3d Cir. 2000) (holding that TILA claims
are subject to binding arbitration); Baron v. Best Buy Co., No. 99-14028,
slip op. at 3 (11th Cir. June 1, 2001) (arbitration clause enforceable, “even
if class actions are not maintainable under the clause”) (emphasis added)
(citing Randolph, 244 F.3d at 818-19 and Bowen vy. First Family Fin.
Servs., Inc., 233 F.3d 1331, 1338 (11th Cir. 2000)); Marsh v. First USA
Bank, N.A., 103 F. Supp. 2d 909, 924 (N.D. Tex. 2000) (“While Plaintiffs
may not be able to utilize the procedural vehicle of a class action in arbi-
tration, they retain all of their substantive statutory rights ....”); Hale v.
First USA Bank, N.A., No. OOCIVS5406JGK, 2001 WL 687371, at *7
(S.D.N.Y. June 19, 2001) (citing authority); Sagal v. First USA Bank,
N.A., 69 F. Supp. 2d 627, 631-32 (D. Del. 1999), aff'd, 254 F.3d 1078
(3d Cir. 2001); Lloyd v. MBNA America Bank, N.A., No. Civ.A. 00-109-
SLR, 2001 WL 194300, at *3 (D. Del. Feb. 22, 2001); Zawikowski v.
Beneficial Nat'l Bank, No. 98C2178, 1999 WL 35304, at *2 (N.D. Ill.
Jan. 11, 1999),

Ae ae er ee ee

17

the cases cited above and the rulings in Bazz/e et al. is to
supply another condition: arbitration agreements must pro-
vide for class action arbitrations. This is precisely the sort of
condition to the enforcement of an arbitration agreement that
is forbidden under the FAA."*

CONCLUSION

For the foregoing reasons, the Court should grant the pe-
tition for a writ of certiorari.

Respectfully submitted,

LOUIS R. COHEN

Counsel of Record
CHRISTOPHER R. LIPSETT
ERIC J. MOGILNICKI
MICHAEL D. LEFFEL
WILMER, CUTLER & PICKERING
2445 M Street, N.W.
Washington, D.C. 20037
(202) 663-6000

Counsel for Amici Curiae

NOVEMBER 25, 2002

3 See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)
(holding that States are “precluded ... from singling out arbitration pro-
visions for suspect status”); Perry v. Thomas, 482 U.S. 483 (1987) (strik-
ing California statute prohibiting arbitration of wage collection actions);
Southland Corp. v. Keating, 465 U.S. 1, 13 (1984) (“[T]}he purpose of the
[FAA] was to assure those who desired arbitration and whose contracts
related to interstate commerce that their expectations would not be un-
dermined by . . . state courts or legislatures.”’) (alterations in original).

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0614%3A05. Public record. Not legal advice.