Petitioners Brief — Green Tree Financial Corp. v. Bazzle

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No. 02-634

INTHE.

Supreme Court of the Cited States

GREEN TREE FINANCIAL CORP) A/K/A GREEN TREI

ACCEPTANCE CORP. A/K/A GREEN TREE FINANCIAL SERVICES

CORP) N/K/A CONSECO FINANCE CORP ,

Petitioner,

LYNN W. BAZZLE AND BURT A BAZZiF, 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 Writ of Certiorari to the

Supreme Court of South Carolina

BRIEF OF PETITIONER

WILBURN BREWER, JR CARTERG PHILLIPS*

ROBERT C BYRD PAUL J. ZIDLICKY

NEXSEN PRUET JACOBS & C KEVIN MARSHAI !

POLLARD & ROBINSON, LLP VIRGINIA M. VANDER JAG!

PO. Box 486 SIDLFY AUSTIN BROWN &

Charleston, SC 29402 Woop LLP

(843) 577-9440 1501 K Street. N W

Washington, DC 20005

HERBERT W HAMILTON (202) 736-8000

KENNEDY COVINGTON

LOBDELL & HICKMAN. LLP ALAN S. KAPLINSKY

PO Box 11429 MARK J LEVIN

Rock Hill, SC 29731-1429 BALI ARD SPAHR ANDREWS

(803) 329-7600 & INGERSOLL, LLP

1735 Market Street, SIst Floor

Philadelphia. PA 19103-7599

(215) 665-8500

(ounsel for Petitioner

February 24, 2003 * Counsel of Record

(NE SE A RR A Te ae ce

Wit SON-EPES PrintinG Co. In (202) 789-0096 WASHINGTON. D C 20001

QUESTION PRESENTED

Whether the Federal Arbitration Act, 9 USC § | ef seq

prohibits class-action procedures from being superimposed

onto an arbitration agreement that does not provide for class-

action arbitration

(1)

LIST OF PARTIES AND AFFILIATES

The parties to the proceedings are listed in the caption of

the decision of the Supreme Court of South Carolina Pet

App. la

Pursuant to Rule 29 6 of the Rules of this Court, Petitioner

Green Tree Financial Corp is now known as Conseco

Finance Corp. Petitioner is a wholly-owned subsidiary of

Conseco, Inc., an Indiana corporation whose stock ts publicly

traded No publicly owned company owns ten percent of

more of the stock of Conseco, Inc

TABLE OF CONTENTS

QUESTION PRESENTED

LIST OF PARTIES AND AFFILIATES

TABLE OF AUTHORITIES

OPINIONS BELOW

JUR'SDICTION

RELEVANT STATUTORY PROVISIONS

STATEMENT OF THE CASE

SUMMARY OF ARGUMENT

ARGUMENT

THE DECISION BELOW SHOULD BE RE-

VERSED BECAUSE IT VIOLATED THE

FEDERAL ARBITRATION ACT’S CORE RE-

QUIREMENT THAT ARBITRATION AGREE-

MENTS BE “RIGOROUSLY” ENFORCED

ACCORDING TO THEIR WRITTEN TERMS

A. Section 2 Of The FAA Requires That Written

Arbitration Agreements Be Enforced Accord-

ing To Their Terms

B Sections 3 And 4 Of The FAA Do Not Permit

State Courts To Rewrite Or Modify The Terms

Of Parties’ Private Arbitration Agreements

THE IMPOSITION OF CLASS ARBITRATION

ONTO THE AGREEMENTS AT ISSUE.

WHICH DO NOT PROVIDE FOR CLASS

ARBITRATION, VIOLATED THE FAA

(itt)

Page

TABLE OF CONTENTS—continued

A The South Carolina Supreme Court's Decision

Violated The FAA By Allowing Courts To

Impose Their Views Of Equity And Efficiency

Onto The Parties’ Arbitration Agreements

B The Trial Court’s Imposition Of Class Arbitra-

tion Onto The Parties’ Agreements In Vio-

lation Of The FAA Infected The Arbitrations

C In All Events, Class Arbitration Cannot Be

Reconciled With The Terms Of The

Arbitration Agreements In This Case

| The Terms Of The Arbitration Agreements

Preclude Class-Wide Arbitration

2 Waffle House Confirms That Class Arbitra-

tion Cannot Be Imposed Onto The Parties’

Agreements

CONCLUSION

Page

TABLE OF AUTHORITIES

CASES Page

Allied-Bruce lerminix Cos. vy Dobson, 513 US

265 (1995) passim

AL&T Llechs., Inc. vy Communications Workers of

Am., 475 US 643 (1986) 38

Amchem Prods., Inc. vy. Windsor, 521 US $91

(1997) 41, 42

Champ v Siegel lrading Co., 55 F 3d 269 (7th

Cir 1995) 29

Circuit City Stores, Inc. vy Adams, 532 US 105

(2001) §, 20, 28, 33, 40

Dean Witter Reynolds Inc. v_ Byrd, 470 US. 213

(1985) passim

Dickler vy Shearson Lehman Hutton, Inc., 596

A 2d 860 (Pa Super Ct 1991) 40

Doctor's Assocs., Inc. vy Casarotto, 517 US 681

(1996) passim

EKELOC v Waffle House, Inc., 534 US 279

(2002) passim

Lijer Mfg., Inc. vy Kowin Dev. Corp., 14 F 3d

1250 (7th Cir 1994) 43

First Options of Chi, Inc. vy Kaplan, §14 US

938 (1995) passim

General lel. Co. of Southwest vy falcon, 457

US 147 (1982) 4]

Gilmer v_ Interstate Johnson Lane Corp., 500

US 20(1991) passim

Government of U.K. v Boeing Co., 998 F 2d 68

(2d Cir. 1993) 29

Hansberry v. Lee, 311 US 32 (1940) 4]

Howsam v_ Dean Witter Reynolds, Inc., 123 8 Ct

588 (2002) 22

Keating v. Superior Court, 645 P 2d 1192 (Cal

1982), rev'd im part, Southland Corp. v

Keating, 465 US 1 (1984) ° 40

TABLE OF AUTHORITIES—continued

Page

Lackey v Green lree bin. Corp., 498 § E 2d 898

(SC Ct App 1998) 12

Landreth limber Co. v. Landreth, 471 US 681

(1985) 19

Mastrobuono vy Shearson Lehman Hutton, Inc.,

§$14U 8 §2(1995) §, 22. 23, 39, 44

Mitsubishi Motors Corp. vy Soler Chrysler-

Plymouth, Inc., 473 US 614 (1985) §, 20, 24, 25

Moses H. Cone Mem'l Hosp. v- Mercury Constr

Corp., 460 US. 1 (1983) 6, 19, 24, 27, 32

Mullane vy Central Hanover Bank & Trust Co.,

339 US 306(1950) 4)

Munoz vy Green Tree Fin. Corp., 542 § E 2d 360

(SC 2001) 30

NCR Corp. v. Sac-Co., Inc., 43 F 3d 1076 (6th

Cir 1995) 43

New Hampshire vy. Maine, 532 US 742 (2001 37

Oruz v_ kibreboard Corp., 527 US. 815 (1999) 40

Pacific Reinsurance Mgmt. Corp. v Ohio

Reinsurance Corp., 935 F 2d 1019 (9th Cir

1991) 4B

Perry v Thomas, 482 US 483 (1987) 20, 25, 27, 28

Phillips Petroleum Co. vy Shutts, 472 US 797

(1985) 40, 41

Scherk vy Alberto Culver Co., 417 US 506

(1974) 19, 23

Southland Corp. v. Keating, 465 US 1 (1984) | passim

'/mted States v. Utah, 199 US 414(1905) 39

Volt Info. Scis., Inc. vy Board of Irs. of Leland

Stanford Jumor Univ., 489 US 468 (1989) passim

STATUTES

9USC §§ 1-16 2

§2 passim

Vil

TABLE OF AUTHORITIES — continued

9USC §3

§ 10

SC Code Ann. § 15-48-20(a)

§ 37-10-102(a)

§ 37-10-105

RULES

Fed R Civ P 23

Fed R Civ P 42

LEGISLATIVE HISTORY

HR Rep No. 68-96 (1924)

OTHER AUTHORITIES

12 Am. Jur Contracts

Restatement (Second) of Contract law (1981)

5S James Wm. Moore et al. Moore's lederal

Practice (MB) (3d ed June 2002)

18 James Wm Moore et al, Moore's /ederal

Practice (MB) (3d ed June 2002)

A‘

IN TH

Supreme Court of the Cited States

No 02-634

GREEN TREE FINANCIAL CORP. A/K/A GREEN TRE!

ACCEPTANCE CORP. A/K/A GREEN TREP FINANCIAL SERVICES

CORP. N/K/A CONSECO FINANCE CORP ,

Petitioner,

LYNN W. BAZZLE AND BURT A. BAZZ1LE, In A Representative

Capacity On Behalf Of A Class And For All Others Similarly

Situated, DANIEL B- LACKEY, GEORGE BUGGS AND FLORINI

BUGGS, In A Representative Capacity On Behalf Of A Class

And For All Others Similarly Situated.

Respondents

On Writ of Certiorari to the

Supreme Court of South Carolina

BRIEF OF PETITIONER

OPINIONS BELOW

The opinion of the Supreme Court of South Carolina ts

published at 569 S E 2d 349 (SC. 2002) and appears in the

Appendix of the Petition for Certiorari (“Pet App’) at la-

26a The South Carolina Court of Common Pleas’ Order

confirming the arbitral award and denying Green Tree's

motion to vacate in Bazzle v Green Tree Financial Corp. 1s

unpublished and appears at Pet App 27a-35a The South

Carolina Court of Common Pleas’ Order confirming the final

award in arbitration and denying Green Tree's motion to

vacate in Lackey vy Green Tree tinancial Corp. 1s

unpublished and appears at Pet. App. 36a-54a__ The final

order and arbitral award in arbitration in Bazz/e appears at

Pet. App. 55a-81a, and the final order and arbitral award in

Lackey appears at Pet. App. 82a-109a.

JURISDICTION

The Supreme Court of South Carolina entered its final

judgment on August 26, 2002. The petition for a writ of

certiorari was filed on October 23, 2002, and was granted on

January 10, 2003. This Court has jurisdiction pursuant to 28

USC. § 1257(a).

RELEVANT STATUTORY PROVISIONS

The statutes relevant to this case are contained in the

Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, which

mandates enforcement of written agreements to settle by

arbitration controversies arising out of contracts evidencing

transactions involving commerce. In particular, Section 2 of

the FAA, 9 USC. § 2, provides that such “written”

arbitration agreements “shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in

equity for the revocation of any contract.” /d. The relevant

provisions of these statutes are reproduced in the statutory

addendum to this brief.

STATEMENT OF THE CASE

The question presented in this case is whether a simple two-

party arbitration proceeding can be converted, over one of the

parties’ objections, into a class-action arbitration, where the

parties expressly have agreed that the proceeding will be

governed by the FAA and have included no provision to

allow for class-wide arbitration. As explained below, the

clear answer is no.

ne gees —

SS EE tedle 3,

A vee sti,

In its decision below, the Supreme Court of South Carolina

rejected Green Tree’s challenge under the FAA to two

interrelated class-action arbitration awards, which require

Green Tree to pay nearly $27 million in statutory damages,

attorney's fees and costs to two classes consisting of a total of

more than 3,700 individuals) Green Tree challenged those

arbitral awards because the written arbitration agreement

underlying them does not provide for class-action arbitration,

and the FAA does not permit class-action mechanisms to be

superimposed onto private arbitration agreements absent the

parties’ consent.

There is no dispute that the arbitration agreement

underlying the South Carolina Supreme Court’s judgment

does not provide for class-wide arbitration. Rather, the

arbitration agreement provides for resolution of “{alll

disputes, claims or controversies” arising from “this contract”

“by binding arbitration by one arbitrator selected by us with

consent of you.” Pet. App. 110a. The arbitration agreement

thus authorizes an arbitrator, chosen by the parties to the

contract, to resolve bilateral disputes between those two

contractually defined parties: (1) “you,” ie, the buyer

obtaining the loan, and (2) “us,” i.e., the seller or its assign

Green Tree. /d. Respondents, for their part, agree that, at a

minimum, the “arbitration agreement” does not “speak{] to

the question of class arbitration{].” Brief in Opposition

(“Opp.”) 12; id. at S (same). Notwithstanding this contractual

language, the South Carolina Supreme Court ruled that class

arbitration could be imposed judicially onto the parties’

agreement without regard to their contractual intent “if it

would serve efficiency and equity, and would not result in

prejudice.” Pet. App. 22a That reformation of the contract

to promote policy preferences of a court cannot be reconciled

with the requirements of the FAA.

As this Court has explained on repeated occasions, the FAA

was designed “to ‘ensur[e] that private agreements to arbitrate

are enforced according to their terms.” Doctor's Assocs.,

Inc. v. Casarotto, 517 U.S. 681, 688 (1996) (alteration in

original) (quoting Volt Info. Scis., Inc. v. Board of Irs. of

Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989))

That mandate requires both state and federal courts to enforce

written arbitration agreements and thus prevents them from

rewriting such private agreements to suit the courts’ policy

views of efficiency or equity. Indeed, the FAA “requires that

[courts] rigorously enforce agreements to arbitrate, even if the

result is ‘piecemeal’ litigation.” Dean Witter Reynolds Inc. v.

Byrd, 470 U.S. 213, 221 (1985). Where, as here, a private

arbitration agreement does not provide for class-wide

arbitration, the FAA prohibits class-action arbitration from

being imposed onto the parties’ agreement, as was done here,

based upon a court’s own views of “efficiency” or “equity.”

See KEOC v. Waffle House, Inc., 534 U.S. 279, 294 (2002)

(“we do not __. reach a result inconsistent with the plain text

of the contract, simply because the policy favoring arbitration

is implicated”). The notion that courts are free to intrude

upon the contractual aspects of an arbitration agreement by

imposing their own views of public policy onto a private

arbitration agreement simply cannot be squared with the

FAA. Accordingly, the decision below must be reversed.

Statutory Background

Section 2 of the FAA provides that written arbitration

agreements subject to the FAA “shall be valid, irrevocable,

and enforceable, save upon such grounds as exist at law or in

equity for the revocation of any contract.” 9US.C.§2. As

this Court has explained, Congress’s goal in enacting Section

2 of the FAA was to overcome deep-seated judicial hostility

to arbitration and thereby allow private parties to choose to

resolve their disputes through arbitration rather than litigation.

See, e.g., Volt Info. Scis., Inc. v. Board of Trs. of Leland

Stanford Junior Univ., 489 U.S. 468, 478 (1989), Dean

Witter, 470 US. at 219-20. Specifically, the FAA permits

private parties to trade the judicial procedures that otherwise

would apply to resolve their disputes in court for the

ABTS ies |

informality, simplicity and speed of the arbitral process. See

Gilmer v. Interstate Johnson Lane Corp., 500 U.S. 20, 31

(1991), Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Inc., 473 U.S. 614, 628 (1985). Moreover, because judicial

hostility to arbitration had existed in both federal and state

courts, this Court concluded almost 20 years ago, and more

recently has reaffirmed, that Section 2 of the FAA, which the

Court has ruled to be the “substantive” provision of the FAA,

applies both in state and federal courts. Southland Corp. v

Keating, 465 U.S. 1, 12-15 (1984); see Allied-Bruce Terminix

Cos. v. Dobson, 513 US. 265, 272 (1995) (reaffirming

Southland), cf. Circuit City Stores, Inc. vy. Adams, 532 U.S

105, 121-22 (2001).

Essential to Congress’s goal of ensuring the enforcement of

parties’ written agreements to arbitrate is the principle that

such agreements may not be rewritten by courts. Rather, state

and federal courts must “‘rigorously enforce’ such

agreements according to their terms.” Volt, 489 U.S. at 479

(quoting Dean Witter, 470 U.S. at 221). Indeed, this Court

repeatedly has explained that “the central purpose of the

Federal Arbitration Act [is] to ensure ‘that private agreements

to arbitrate are enforced according to their terms.””

Mastrobuono vy. Shearson Lehman Hutton, Inc., 514 U.S. §2,

53-54 (1995) (quoting Volt, 489 U.S. at 479), see also

Doctor's Assocs., 517 U.S. at 688 (enforcement of agreement

according to terms is “the very purpose of the Act”); Volt, 489

U.S. at 476 (“the federal policy is simply to ensure the

enforceability, according to their terms, of private agreements

to arbitrate”).

Because “‘[a]rbitration under the [FAA] is a matter of

consent, not coercion,” Waffle House, 534 U.S. at 294

(second alteration in original) (quoting Volt, 489 U.S. at 479),

courts must “look first to whether the parties agreed to

arbitrate a dispute, not to general policy goals, to determine

the scope of the agreement,” id In the same way that an

arbitration agreement “cannot bind a nonparty,” id, the FAA

“does not expand the range of claims subject to arbitration

beyond what is provided for in the agreement,” id. at 293 n.9

As a result, courts must “respect the terms of the [arbitration]

agreement without regard to the federal policy favoring

arbitration.” /d. at 294 n9

As this Court has noted, arbitration “‘is usually cheaper and

faster than litigation.” Allied-Bruce, 513 U.S. at 280

(quoting H.R. Rep. No. 97-542, at 13 (1982)); see also Dean

Witter, 470 U.S. at 220; First Options of Chi., Inc. v. Kaplan,

514 U.S. 938, 947 (1995). But the “basic objective” under

the FAA “is not to resolve disputes in the quickest manner

possible, no matter what the parties’ wishes, but to ensure that

commercial arbitration agreements, like other contracts, are

enforced according to their terms and according to the

intentions of the parties.” /d at 947 (citations and internal

quotation marks omitted). Indeed, the FAA “requires

piecemeal resolution when necessary to give effect to an

arbitration agreement. . . . notwithstanding the presence of

other persons who are parties to the underlying dispute but

not to the arbitration agreement.” Moses H. Cone Mem'l

Hosp. v. Mercury Constr. Corp., 460 US. 1, 20 (1983)

(footnote omitted).

Factual Background

The Bazzle Proceedings. In 1995, Lynn and Burt Bazzle

executed a retail installment contract and security agreement

(“Bazzles’ Contract”) to finance home improvements

including the installation of windows. A copy of that contract

is reproduced in the Joint Appendix (“J.A.”) at 33-34. At the

top of the first page, the Bazzles’ Contract identifies Lynn

and Burt Bazzle as the only two “Buyer[s}” and defines the

terms “‘You’ and ‘your’” to mean “each Buyer above and

guarantor, jointly and severally.” /d. at 33 (emphasis added).

Similarly, just below the printed Seller’s name, the Bazzles’

Contract defines “‘We’ and ‘us’” to mean “the Seller above,

its successors and assigns.” /d. On the bottom of the same

]

page, the Bazzles’ Contract provides that the Seller has

assigned its rights to Green Tree Financial Corp. /d.

The Bazzles’ Contract further explains that the Bazzles

would use the $15,136 extension of credit to finance the

“installation of .. . windows” and, in turn, that the Bazzles

were providing a security interest in those goods and the real

property where the improvements were to be made. J. A. 33

(capitalization omitted). The agreement specified that “You,”

i.e., the Bazzles, “may obtain property insurance from anyone

that is acceptable to us.” /d. Above the signature block, the

Bazzles’ Contract cautions: “Do not sign this contract before

you read it... ,” id, and “This contract shall become

effective only when signed and executed by the buyer and

seller, and shall apply to and inure to the benefit of and bind

the heirs, executors, administrators, successors and assigns of

both parties to this contract.” /d Directly above their

signatures, the Bazzles’ Contract states in large typeface

“BUYER ACKNOWLEDGES RECEIPT OF A COPY OF

THIS RETAIL INSTALLMENT CONTRACT.” ld

Similarly, just below their signatures, the Bazzles’ Contract

provides’ “YOU ALSO AGREE TO THE TERMS ON THE

REVERSE SIDE OF THIS CONTRACT.” /d.

On the reverse side, the Bazzles’ Contract includes an

arbitration clause. The arbitration clause states, in pertinent

part:

ARBITRATION—AIl disputes, claims, or controversies

arising from or relating to this contract or the

relationships which result from this contract, or the

validity of this arbitration clause or the entire contract,

shall be resolved by binding arbitration by one arbitrator

selected by us with consent of you. This arbitration

contract is made pursuant to a transaction in interstate

commerce, and shall be governed by the Federal

Arbitration Act at 9 U.S.C. section 1. Judgment upon

the award rendered may be entered in any court having

jurisdiction. The parties agree and understand that they

choose arbitration instead of litigation to resolve

disputes. The parties agree and understand that they

have a right or opportunity to litigate disputes through a

court, but that they prefer to resolve their disputes

through arbitration, except as provided herein. THE

PARTIES VOLUNTARILY AND KNOWINGLY

WAIVE ANY RIGHT THEY HAVE TO A JURY

TRIAL, EITHER PURSUANT TO ARBITRATION

UNDER THIS CLAUSE OR PURSUANT TO COURT

ACTION BY US (AS PROVIDED HEREIN). The

parties agree and understand that all disputes arising

under case law, statutory law, and all other laws

including, but not limited to, all contract, tort, and

property disputes, will be subject to binding arbitration

in accord with this contract. The parties agree and

understand that the arbitrator shall have all powers

provided by the law and the contract. These powers

shall include all legal and equitable remedies, including,

but not limited to, money damages, declaratory relief,

and injunctive relief.

Pet App. 110a. A copy of the arbitration clause is

reproduced in full at Pet. App. 110a-11 1a.

The agreement imposes several constraints on the

arbitration that it authorizes. First, the written agreement

identifies the matters that will be subject to arbitration: “All

disputes, claims, or controversies arising from or relating to

this contract or the relationships which result from this

contract, or the validity of this arbitration clause or the entire

contract.” Pet. App. 110a (emphasis added). Second, the

arbitration agreement identifies the parties who have agreed

to arbitrate (“you” and “us”), and the manner in which those

parties would choose an arbitrator to resolve disputes arising

out of “this contract” (i.e., “one arbitrator selected by us with

consent of you”). /d Further, the arbitration agreement

specifies that it “shall be governed by the Federal Arbitration

Act.” /d Although the arbitrator is given “all powers

provided by the law and the contract,” those powers

necessarily are limited to resolving and providing relief with

respect to “disputes, claims, or controversies arising from or

relating to this contract or the relationships which result from

this contract” /d (emphasis added) By limiting the

arbitrator's authority to resolving disputes, claims, or

controversies “arising from or relating to” the Bazzles’

Contract, the agreement withholds authority to resolve

disputes arising from or relating to other contracts involving

other individuals who are not parties to the Bazzles’ Contract

Notwithstanding their express agreement to arbitrate, on

March 25, 1997, the Bazzles filed an individual action against

Green Tree in South Carolina state court alleging violations

of the attorney and insurance-agent notice preference

provisions of South Carolina law. See SC. Code Ann §§ 37-

10-102(a), -105. The Bazzles alleged that Defendants did not

“advise Plaintiffs of their right to select counsel and/or an

insurance agent.” Rec. on Appeal at 1369. Plaintiffs sought

“actual and punitive damages, statutory damages and

penalties, treble damages, attorneys’ fees, costs and expenses,

and whatever further relief the Court deems just and proper ”

Id. at 1374

About a month later, on April 21, 1997, the Bazzles

decided to expand their case by filing an amended class-

action complaint and, at the same time, they filed a motion for

class certification Green Tree moved to stay the court

proceedings (including the motion for class certification) and

requested an order compelling arbitration Green Tree

explained that an order compelling arbitration, if granted,

would preclude class-action treatment Rec on Appeal at

1448. On December 5, 1997, the trial court granted the

Bazzles’ motion for class certification (thereby denying

Green Tree's motion for a stay of all proceedings) and entered

an order compelling arbitration Pet App 3a'

After the trial court entered an order appointing an

arbitrator, the class-action arbitration proceedings that the

trial court had ordered were administered solely by the

arbitrator On July 24, 2000, the arbitrator issued an award

against Green Tree on behalf of a class of 1,899 individuals

The merits of the arbitration concerned whether the Bazzles

were provided with notice of their right to choose their own

attorney or insurance agent in connection with the Bazzles’

Contract Green Tree did not require the Bazzles to use an

attorney or insurance agent in connection with the transaction.

Although Plaintiffs were authorized to recover “actual

damages” if they could show that they had been injured, the

arbitrator acknowledged that “Plaintiffs as a class did not

attempt to show actual damages” Pet App 69a He

nevertheless imposed a class-wide “penalty” upon Green Tree

of between $5,000 and $7,500 “per transaction,” which

resulted in a total award of $10,935,000 in statutory damages

Id. at Tha.

The arbitrator also awarded Plaintiffs an additional

$3,645,000 in attorney’s fees based upon not only their

prosecution of the arbitration, but also, among other things,

their lobbying efforts during the 1997 South Carolina

legislative session Pet. App. 77a, 79a The arbitrator

rejected Green Tree’s showing that “[i]f every hour submitted

by the Plaintiffs is allowed, a $3,000,000 attorneys fee award

would result in an hourly rate exceeding $900.00 per hour.”

Rec. on Appeal at 2126. Moreover, the arbitrator ordered that

funds awarded to class members that remained unclaimed

' On March 17, 1998, the trial court denied Green Tree's motion to

reconsider the order granting class certification. Green Tree filed an

appeal challenging the tnal court's order certifying a class for arbitration,

but the appeal was dismissed by the court of appeals as interlocutory. Pet.

App. 28a.

would not be returned to Green Tree, but instead would be

tendered to charitable groups chosen by plaintiffs’ counsel

“75% of such funds to the South Carolina School of Law, 9%

to the South Carolina Habitat for Humanity, 8% to the

Shriner's Hospital and 8% to Global Outreach” Pet App

79a

The Bazzles filed a motion to confirm the award in the state

trial court, and Green Tree sought to vacate the award Green

Tree showed that the class-action arbitration had been ordered

by the trial court even though the arbitration agreement did

not provide for class-action arbitration The Bazzles, for their

part, argued that “this Court determined in this matter that the

matter could proceed as a class action” and that the

“Arbitrator received the case as a class action” JA 31.

Thus, the Bazzles expressly argued that “Green Tree

incorrectly implies that the arbitrator determined the matter

could proceed as a class action.” /d. (capitalization omitted)

Indeed, they made clear that, “to the extent that Judge Ervin

[the arbitrator] made such a decision, if any, in this case or the

Lackey case, it was a reaffirmation and/or adoption of this

Court’s prior determination” /d at 32 n2. The trial court

confirmed the arbitral award and denied Green Tree’s motion

to vacate, and, in doing so, explained that the court had

ordered class arbitration, had “previously ruled on Green

Tree’s motion for reconsideration of class certification,” and

saw “no basis to address the issue again.” Pet. App. 34a.

The Lackey Proceedings. Daniel Lackey (and George and

Florine Buggs) also entered into consumer installment

contracts and security agreements with Green Tree for the

purchase of manufactured homes.) JA 35-36 (Lackey

Contract) These agreements contained an arbitration clause

that is in all relevant respects identical to the arbitration

agreement in the Bazzle proceeding Pet. App. 19a n.18

Indeed, according to the South Carolina Supreme Court, the

arbitration agreements in the Bazzles’ Contract and the

Lackey Contract “are identical except for one word. The

Bazzle clause says the arbitrator will be selected by Green

Tree ‘with the consent of you,’ and the Lackey clause says

‘with the consent of Buyer/s/°” Id

Notwithstanding their agreements to arbitrate, on May 28,

1996, Lackey and the Buggses commenced a class action

lawsuit against Green Tree in state court, also alleging

violations of the attorney and insurance-agent notice

preference provisions of South Carolina law. Green Tree

filed a motion to compel arbitration, but the trial court ruled

that Green Tree’s arbitration agreement was unenforceable

Pet App. Sa-6a Green Tree appealed, and the court of

appeals reversed, holding that the arbitration agreement

should be enforced. See Lackey v. Green Tree Fin. Corp.,

498 SE.2d 898, 905 (SC. Ct App. 1998) Thereafter,

Thomas Ervin, the same arbitrator who was presiding over the

Bazzle proceeding, was appointed as arbitrator in the Lackey

proceeding

The Lackey plaintiffs expressly argued, based upon the

decision of the trial court in the Bazz/e proceeding, that the

arbitration should proceed as a class action. Specifically, the

Lackey plaintiffs contended that class-action arbitration

should proceed because

[ijn a similar action pending against the Defendant in

Dorchester County, Bazzle vy. Green Tree Financial

Corporation et al., Civil Action Number 97-CP-18-258,

the issue of a class action proceeding in arbitration was

thoroughly presented in hearings before The Honorable

Patrick R. Watts, Special Circuit Judge. The court found

that a class action could proceed in arbitration.

Rec. on Appeal at 516. Green Tree explained that the

arbitrator had no authority to order class arbitration. J.A. 15-

16. The Lackey parties’ arguments were accepted, and, as a

result, the arbitrator followed the approach that had been

imposed upon him by the trial court in /‘azz/le, certified a

class-wide arbitration, and approved a class notice that was

sent to class members /d at 17-23

On the merits, the arbitrator concluded that Green Tree had

violated the attorney and insurance-agent notice preference

requirements of South Carolina law Pet App 9la_ As in

Bazzle, the arbitrator acknowledged that “plaintiffs as a class

did net attempt to show actual damages,” id at 96a, but he

nevertheless imposed a “penalty” of “$5,000 per transaction,”

for a total of $9,200,000 in statutory damages to the 1,840

class members, id at 98a The arbitrator also required Green

Tree to pay $3,066,666 in attorney's fees (and $18,252 in

costs), and, as in Bazzle, relied upon plaintiffs’ counsel's

lobbying efforts to justify a fee award that would compensate

plaintiffs’ counsel at a rate in excess of $900.00 per hour. /d

at 106a-107a Finally, as in Bazzle, the arbitrator concluded

that any unclaimed funds would not be returned to Green

Tree, but instead would be distributed to charitable

organizations chosen by plaintiffs’ counsel. /d at 107a.

Green Tree moved in state trial court to vacate the arbitral

award, explaining that the award should be set aside because

“the power of an arbitrator . . . is limited by the parties’

arbitration agreement” and the arbitrator lacked authority to

impose class arbitration on the parties. Rec. on Appeal at 408

(citing, inter alia, Mastrobuono, 514 US. at 57). The trial

court, however, denied Green Tree’s motion and confirmed

the arbitral award, ruling, among other things, that Green Tree

“was afforded exactly the proceeding in binding arbitration

that it sought.” Pet. App. 45a. Green Tree appealed.

Decision of the Supreme Court of South Carolina

The Supreme Court of South Carolina assumed jurisdiction

over the Bazzle and Lackey appeals and consolidated the

proceedings. Pet. App. 2a. The court below first ruled that

both arbitration agreements were “governed by the FAA.” /d

at lla&n9. The South Carolina Supreme Court recognized,

however, that “[s]everal federal circuits have precluded class-

wide arbitration when the arbitration agreement is silent,”

whereas “the California courts have permitted class-wide

arbitration on a case by case basis when the arbitration

agreement is silent” /d at Ila, 12a The court further

explained that “(t]he United States Supreme Court has not

addressed the FAA’s impact on class-wide arbitration” and

therefore “there is no binding precedent that [the South

Carolina Supreme Court] is obligated [to] follow.” /d at lla

Although the arbitration agreements in these cases, by their

terms, limit arbitration to “‘disputes, claims, or controversies

arising from or relating to this contract, or the relationships

which result from this contract,’” the court below concluded,

without any elaboration, that “this language does not limit the

arbitration to non-class arbitration.” Pet. App. 19a. The court

ruled, without any explanation, that this language “creates an

ambiguity” that the court would construe against Green Tree

to conclude that “Green Tree’s arbitration clause was silent

regarding class-wide arbitration.” /d.

Given its determination that the agreement was “silent” as

to the availability of class-action arbitration, the court below

explained that it previously had “held that a state court may

order consolidation of claims subject to mandatory arbitration

without any contractual or statutory directive to do so.” Pet

App. 21a (relying upon Episcopal Hous. Corp. v. Federal Ins.

Co., 255 S$ E.2d 451, 452 (S.C. 1979));, see id. at 18a-19a.

The court reasoned that because it “permits consolidation of

appropriate claims where the arbitration agreement is

silent” —i.e., where there is no “contractual . . . directive to do

so” —“it follows that [it] would permit class-wide arbitration,

as ordering class-wide arbitration calls for considerably less

intrusion upon the contractual aspects of the relationship.” /d.

at 21a (internal quotation marks omitted).

Based upon this reasoning, the court below “adopt[ed] the

approach taken by the California courts” and held “that class-

wide arbitration may be ordered when the arbitration

agreement is silent if it would serve efficiency and equity, and

would not result in prejudice” Pet App. 22a Although the

Bazzles initially had filed suit individually and although the

arbitral awards in these cases gave each class member a

minimum recovery of $5,000 to $7,500, plus attorney's fees

and costs, the court suggested that, absent class-wide

arbitration, “parties with nominal individual claims would

be left with no avenue for relief” /d The court further

reasoned that class arbitration was appropriate because

“hearing such claims (involving identical issues against one

defendant) individually, in court or before an arbitrator, does

not serve the interest of judicial economy.” /d Because the

court concluded that the imposition of class-action procedures

onto a “silent” arbitration agreement was a permissible, albeit

discretionary, option, it upheld the arbitral awards in both

Bazzle and Lackey. Id. at 23a.

SUMMARY OF ARGUMENT

The decision and judgment of the South Carolina Supreme

Court should be reversed because it violates the FAA’s core

principle that arbitration agreements must be enforced as

written and may not be rewritten by courts to further their

own notions of public policy. See 9 USC. § 2. The court

below violated the FAA by ruling that class-wide arbitration

could be imposed without regard to the written terms of the

parties’ arbitration agreements

This Court’s decisions make clear that the FAA was

designed to overcome judicial hostility to arbitration by

mandating that arbitration agreements be enforced rigorously

in accordance with their terms. See, e.g, Volt, 489 US. at

478. Arbitration must be based upon “‘consent, not

coercion.’” Waffle House, 534 U S. at 294 (quoting Volt, 489

U.S. at 479). Moreover, the requirement that courts enforce

written arbitration agreements is reflected in Section 2 of the

FAA, which applies both in state and federal court

Southland, 465 U.S. at 10 (holding that Section 2 of FAA

applies in state court); Allied-Bruce, 513 US. at 272 (“we

find it inappropriate to reconsider what is by now well-

established law’).

This core requirement reflected in Section 2 does not

depend, as Respondents suggest, Opp. 14, on whether

Sections 3 and 4 of the FAA also apply by force of law to

state court proceedings. Indeed, at the same time that this

Court has declined to resolve whether Sections 3 and 4 of the

FAA apply in state courts, it consistently has made clear that

the FAA requires rigorous enforcement of the written terms

of arbitration agreements in all cases whether arising in state

or federal court. In all events, even if Sections 3 and 4 of the

FAA did not apply to state court proceedings by force of law,

they would apply in this case by contract because the parties

agreed expressly that their arbitration agreement “shall be

governed by the [FAA].” Pet. App. 110a; see Volt, 489 US.

at 478-79 (explaining that parties can choose the procedures

governing their arbitration). Accordingly, there can be no

question that the courts below were not authorized to modify

or rewrite the parties’ arbitration agreements to conform to

their own notions of efficient dispute resolution. Instead,

those courts were obligated to enforce those agreements in

accordance with their written terms. See 9 U.S.C. § 2.

The decision below cannot be reconciled with the

requirements of the FAA. The approach adopted by the court

below permits courts to impose their own views regarding

arbitration without regard to the parties’ expressed intent.

The South Carolina Supreme Court ruled that class arbitration

could be imposed upon the parties without any contractual

directive to do so if, in the court’s view, class arbitration

would “serve efficiency and equity, and would not result in

prejudice.” Pet. App. 22a. Under the FAA, courts have no

authority or discretion to supplement the parties’ arbitration

agreement without the “consent” of the parties as expressed in

their private agreement. Under the FAA, “parties are

generally free to structure their arbitration agreements as they

see fit.” Volt, 489 U.S. at 479. Asa result, efforts to rewrite

a ee

or modify arbitration agreements are nothing more than

another variation of the old judicial hostility to arbitration that

the FAA was designed to eliminate. See, e.g., id at 478,

Waffle House, 534 U.S at 293.

Here, the imposition of class arbitration onto the parties’

agreement violated the FAA and infected the arbitration

proceedings. The court below substituted its own coercion

for the parties’ consent, by fundamentally rewriting and

transforming the arbitration agreements to which the parties

had agreed. Instead of an informal, bilateral arbitration

limited to resolving disputes between the two contractually

defined parties, “you” and “us,” and a contractually defined

method for choosing the arbitrator for each such dispute, the

class arbitrations imposed here required Green Tree to defend

against the claims of thousands of other individuals who were

not parties to the Bazzle and Lackey Contracts and who never

even requested arbitration. Cf Waffle House, 534 U.S. at 294

(“It goes without saying that a contract cannot bind a

nonparty.”). Similarly, imposition of class arbitration

expanded the scope of the arbitration to include not only

claims arising from or relating to “this Contract,” but also

disputes arising from or relating to thousands of other

contracts.

Finally, the practical problems associated with class

arbitration warrant careful scrutiny of any private dispute-

resolution agreement before class arbitration is imposed onto

it. A class arbitration implicates the due-process rights of

non-representative members and therefore should not be

lightly inferred absent an express indication that the parties to

the arbitration agreement (and all class members) were aware

that their disputes could be resolved through class arbitration.

Here, the parties’ intent is expressly to the contrary, because

the imposition of class arbitration expanded the parties’

agreement beyond recognition by sweeping thousands of

additional parties into the Bazz/e and Lackey arbitrations even

though they were not parties to the specific contracts that

authorized the arbitrations in the first instance

In short, the decision below, which authorizes that revision

of the parties’ agreement to arbitrate, should be reversed

because it violates the FAA’s core requirement “‘that private

agreements to arbitrate [must be] enforced according to their

terms.” Doctor's Assocs., 517 U.S. at 688 (quoting Volt, 489

US. at 479).

ARGUMENT

I. THE DECISION BELOW SHOULD BE RE-

VERSED BECAUSE IT VIOLATED THE FED-

ERAL ARBITRATION ACT’S CORE REQUIRE-

MENT THAT ARBITRATION AGREEMENTS BE

“RIGOROUSLY” ENFORCED ACCORDING TO

THEIR WRITTEN TERMS.

The South Carolina Supreme Court, in this case, held that

under the Federal Arbitration Act (“FAA”) class-arbitration

could be imposed “without any contractual . . . directive to do

so.” Pet. App. 21a. The Court’s rationale was that this result

promoted the court’s view of “efficiency and equity” and

“judicial economy.” /d. at 22a. This holding is in direct

conflict with the FAA’s primary mandate that courts must

enforce the written terms of arbitration agreements and may

not rewrite or modify those agreements to suit the court’s

views of public policy. That mandate, which is rooted in

Section 2 of the FAA, 9 U.S.C. § 2, applies in both state and

federal courts and unquestionably applies here to arbitration

agreements whose terms expressly provide that the arbitration

clause “shall be governed by the Federal Arbitration Act.”

Pet. App. 110a. Measured against these standards, the

decision below must be reversed because the South Carolina

Supreme Court concluded that the FAA does not, in fact,

prohibit courts from rewriting or modifying arbitration

agreements instead of enforcing their writien terms.

’

A. Section 2 Of The FAA Requires That Written

Arbitration Agreements Be Enforced According

To Their Terms.

1. “‘[T]}he starting point in every case involving

construction of a statute is the language itself” Landreth

limber Co. v. Landreth, 471 U.S. 681, 685 (1985) (quoting

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756

(1975) (Powell, J., concurring)). Here, Section 2 of the FAA

provides, in relevant part, that a “written provision in... a

contract evidencing a transaction involving commerce to

settle by arbitration a controversy thereafter arising out of

such contract or transaction, or the refusal to perform the

whole or any part thereof... shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in

equity for the revocation of any contract.” 9 USC. § 2.

Through Section 2, Congress mandated that written

arbitration agreements must be “enforce{d],” just like any

other contract would be.

Section 2 “is the primary substantive provision of the Act.”

Moses H. Cone, 460 US. at 24; see also Gilmer, 500 U.S. at

24-25. It “create[s] a body of federal substantive law of

arbitrability, applicable to any arbitration agreement within

the coverage of the Act.” Moses H. Cone, 460 US. at 24.

Moreover, “[i]n enacting § 2 of the [FAA], Congress declared

a national policy favoring arbitration and withdrew the power

of the states to require a judicial forum for the resolution of

claims which the contracting parties agreed to resolve by

arbitration.” Southland, 465 U.S. at 10.

Congress, by “mandat[ing] the enforcement of arbitration

agreements,” id, implemented a national policy to address

long-standing judicial hostility to such agreements and to

permit private parties to choose how they would resolve their

disputes. See, e.g., Scherk v. Alberto Culver Co., 417 US.

506, 510-11 & n4 (1974). Congress recognized the

“desirability of arbitration as an alternative to the

complications of litigation,” id. at 511 (internal quotation

marks omitted), and thus, through Section 2, permitted private

parties to “‘trade[] the procedures and opportunity for review

of the courtroom for the simplicity, informality, and

expedition of arbitration,” Gilmer, 500 US. at 31 (quoting

Mitsubishi Motors, 473 U.S. at 628)

Because the long-standing judicial hostility to arbitration

agreements had existed in both state and federal courts, and

because the text of Section 2 does not limit the section’s

scope to federal courts, this Court concluded almost 20 years

ago, in Southland, that Section 2 applies in both state and

federal courts. Southland, 465 US. at 12-15; Perry v.

Thomas, 482 U.S. 483, 489 (1987). The Court recently has

reaffirmed that Section 2 of the FAA applies in state courts.

Allied-Bruce, 513 U.S. at 272; see Circuit City Stores, 532

U.S. at 121-22. Respondents do not challenge Southland, and

instead agree, as they must, that Section 2 of the FAA

preempts conflicting state law. Opp. 14 (citing Volt, 489 US.

at 477). Indeed, this Court has held in numerous cases that

Section 2 of the FAA preempts contrary state law in state-

court cases.”

2. Section 2 of the FAA prohibits state and federal courts

from rewriting private arbitration agreements to suit their own

subjective notions of efficiency or judicial economy. This

Court has made clear that Section 2 of the FAA requires

courts to “rigorously enforce agreements to arbitrate,” Dean

Witter, 470 U.S. at 221, and that this requirement includes the

mandate to enforce “such agreements according to their

terms,” Volt, 489 U.S. at 479; see also Perry, 482 U.S. at 490-

91 (citing cases). This Court’s decisions in Dean Witter and

Volt are instructive. In Dean Witter, the Court explained that

“agreements to arbitrate must be enforced, absent a ground

> See Doctor's Assocs., Inc. vy. Casarotto, 517 U.S. 681, 683 (1996),

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 272, 281 (1995),

Perry v. Thomas, 482 U.S. 483, 491 (1987), Southland Corp. v. Keating,

465 US. 1, 10 (1984).

for revocation of the contractual agreement.” 470 US. at

218. In doing so, the Court rejected the suggestion that “the

overriding goal of the Arbitration Act was to promote the

expeditious resolution of claims,” id. at 219, instead making

clear that the FAA “was motivated, first and foremost, by a

congressional desire to enforce agreements into which the

parties had entered,” id. at 220. Thus, the Dean Witter Court

concluded that “[t]he pre-eminent concern of Congress in

passing the [FAA] was to enforce private agreements into

which parties had entered, and that concern requires that

[courts] rigorously enforce agreements to arbitrate, even if the

result is ‘piecemeal’ litigation.” /d. at 221.

Similarly, in Volt, the Court explained that the FAA, as

applied in a case arising in California state court, ensures that

“private arbitration agreements are enforced according to

their terms” and “pre-empts state laws which ‘require a

judicial forum for the resolution of claims which the

contracting parties agreed to resolve by arbitration.” 489

U.S. at 478 (quoting Southland, 465 U.S. at 10). Thus,

although Congress was aware that the FAA “would encourage

the expeditious resolution of disputes,” the Court explained

that Congress was motivated first and foremost by a “desire to

‘enforce agreements into which parties had entered”” /d. at

478 (quoting Dean Witter, 470 U.S. at 220). As a result, the

Volt Court concluded that the FAA “does not require parties

to arbitrate when they have not agreed to do so, nor does it

prevent parties who do agree to arbitrate from excluding

certain claims from the scope of their arbitration agreement.”

/d. (citation omitted). Rather, what the FAA requires is that

courts “rigorously enforce’” arbitration “agreements

according to their terms” and thereby “give effect to the

contractual rights and expectations of the parties.” /d. at 479

(quoting Dean Witter, 470 U.S. at 221).

Since Volt, the Court has made clear, repeatedly, that under

the FAA, federal and state courts must ensure that written

arbitration agreements are enforced in accordance with their

language Thus, in A/lied-Bruce, the Court explained that the

FAA was designed to require “courts to enforce [arbitration]

agreements into which parties had entered, and to place such

agreements upon the same footing as other contracts.” 513

U.S. at 271 (internal quotation marks and citation omitted)

(alteration in original). In Mastrobuono, the Court reiterated

that “the central purpose of the [FAA]” is “to ensure “that

private agreements to arbitrate are enforced according to their

terms.” 514 US. at 53-54 (quoting Volt, 489 U.S. at 479)

In First Options, the Court confirmed that “the basic

objective” of the FAA “is not to resolve disputes in the

quickest manner possible, no matter what the parties’ wishes,

but to ensure that commercial arbitration agreements, like

other contracts, are enforced according to their terms and

according to the intentions of the parties.” 514 U.S. at 947

(internal quotation marks and citations omitted). In Doctor's

Associates, the Court reaffirmed that the “very purpose of the

Act was to ‘ensur[e] that private agreements to arbitrate are

enforced according to their terms.” 517 US. at 688

(alteration in original). And, most recently, in Waffle House,

the Court explained that the “FAA directs courts to place

arbitration agreements on equal footing with other contracts”

and ensures “the enforcement of private contractual

arrangements.” 534 US. at 293, 294?

This unbroken line of authority makes clear that courts may

not, in furtherance of goals of efficiency or judicial economy,

rewrite, modify or attempt to improve upon the terms of a

written arbitration agreement governed by the FAA. A

contrary rule would render Section 2 largely meaningless,

because, if courts were permitted to modify or rewrite private

arbitration agreements to suit their views of “efficiency” or

“judicial economy,” then they could, in the guise of

> See also Howsam v. Dean Witter Reynolds, Inc., 123 S. Ct. 588, 593

(2003) (Thomas, J., concurring in judgment) (“[U}nder the [FAA] courts

must enforce private agreements to arbitrate just as they would ordinary

contracts: in accordance with their terms.” ).

~ y

in, £* .

“enforcing” an arbitration agreement, impose obligations and

requirements that the private parties to the agreement had not

imposed upon themselves. That result runs headlong against

the core principle that “‘[a}rbitration under the [FAA] is a

matter of consent, not coercion’” /d at 294 (second

alteration in original) (quoting Volt, 489 US. at 479)

The requirement that written arbitration agreements should

be enforced according to their terms also follows from

Section 2’s last clause, which requires that such agreements

be enforceable “save upon such grounds as exist at law or in

equity for the revocation of any contract.” 9U S.C. §2. As

this Court has explained, this provision places “arbitration

agreements ‘upon the same footing as other contracts.”

Scherk, 417 US. at 511 (quoting HR. Rep. No. 68-96, at 2

(1924)), see Volt, 489 U.S. at 474 (same). That is, under

Section 2, a State “may regulate __—__ arbitration clauses[]

under general contract law principles,” but it “may not .

decide that a contract .s fair enough to enforce all its basic

terms __. but not fair enough to enforce its arbitration clause.”

Allied-Bruce, 513 U.S. at 281, see Doctor's Assocs., 517 US

at 686-87. Thus, the “basic objective” of Section 2 of the

FAA is “to ensure that commercial arbitration agreements,

like other contracts, are enforced according to their terms and

according to the intentions of the parties.” First Options, 514

US. at 947 (citations and internal quotation marks omitted)

See Volt, 468 U.S. at 478 (FAA “simply requires courts to

enforce privately negotiated agreements to arbitrate, like other

contracts, in accordance with their terms”). Because the FAA

guarantees that arbitration under the FAA— including the

terms under which the arbitration occurs—‘‘is a matter of

consent, not coercion,’” Waffle House, 534 US. at 294, it is

the parties who determine whether—and how—to arbitrate.

See Mastrobuono, 514 U.S. at 57-58, Volt, 489 US. at 476,

478-49.

3. It follows that the FAA prohibits courts from rewriting

an arbitration agreement, without regard to the intent of the

parties, in an effort to promote the court’s own notions of

appropriate public policy. Indeed, one of the problems

Congress sought to resolve through the FAA was that States

often would permit arbitration only under statutory terms

dictated by state law, an approach that Congress considered to

be “inadequate[].” Southland, 465 US. at 14. Thus, a court’s

expressed desire to further efficiency or economy cannot,

consistent with Section 2 of the FAA, justify rewriting the

parties’ arbitration agreement. See Moses H. Cone, 460 US

at 20 (FAA “requires piecemeal resolution when necessary to

give effect to an arbitration agreement”), see also Dean

Witter, 470 US. at 221 (FAA requires that courts “rigorously

enforce agreements to arbitrate, even if the result is

‘piecemeal’ litigation”), First Options, 514 US. at 947

(FAA’s “basic objective _. . is not to resolve disputes in the

quickest manner possible _. . but to ensure that commercial

arbitration agreements, like other contracts, are enforced

according to their terms and according to the intentions of the

parties’) (internal quotation marks and citations omitted).

Just as the FAA prohibits rewriting the terms of an

enforceable contract in the name of efficiency, so also it

prohibits doing so in the name of equity or the protection of

special categories of individuals. For example, in Mitsubishi

Motors, the Court rejected an argument that courts should not

interpret arbitration agreements “to encompass claims arising

out of statutes designed to protect” a category of individuals

unless the agreements expressly “mention the statute giving

rise to the claims.” 473 US. at 625. The Court explained

that “as with any other contract, the parties’ intentions

control,” id at 626, and the FAA does not permit “distort[ing]

the process of contract interpretation” when claims

“implicating statutory rights” are involved, id at 627. A

court may not, consistent with the FAA, “color the lens

through which the arbitration clause is read.” /d at 628.

Allowing courts to rewrite arbitration agreements without

regard for the intent of the parties further ignores that the

FAA was enacted to “‘reverse the longstanding judicial

hostility to arbitration agreements.”” Waffle House, 534 US.

at 289 (quoting Gilmer, 500 U.S. at 24), see also HR. Rep.

No. 68-96, at | (1924) (FAA designed to “make the [other]

contracting party live up to his agreement”) Indeed, to allow

a Court to inject its own public policy views into an arbitration

agreement rather than enforcing the agreement in accordance

with its terms would open the door to “the old judicial

hostility” to arbitration agreements “in modern and more

sophisticated dress” Brief for Am. Bankers Ass'n et al. as

Amici Curiae in Support of Petition, at 4. Section 2 prohibits

such attacks, which seek to “‘undercut the enforceability of

arbitration agreements” Perry, 482 US. at 489 (quoting

Southland, 465 U.S. at 16). Allowing state courts to distort

the enforcement of the terms of arbitration agreements would

undermine “congressional intent to place arbitration

agreements” on an equal footing with other contracts just as

do state laws invalidating arbitration contracts. Southland,

465 US at l6nil.

B. Sections 3 And 4 Of The FAA Do Not Permit

State Courts To Rewrite Or Modify The Terms

Of Parties’ Private Arbitration Agreements.

Contrary to the suggestion of Respondents and the court

below, the applicability of these settled legal principles does

not depend on whether Sections 3 or 4 of the FAA apply to

* See also Allied-Bruce, 513 U.S. at 280-81 (declining to adopt separate

FAA standard with respect to consumer arbitration agreements), Gilmer v.

Interstate/Johnson Lane Corp , 500 U.S. 20, 27-28 (1991) (explaining that

FAA permits arbitration of “age-discrimination claims”).

state courts.” That argument wholly ignores that Section 2 of

the FAA, which unquestionably applies to state courts,

mandates that agreements to arbitrate be enforced as written

See 9 USC. § 2; Southland, 465 US. at 10, Allied-Bruce,

$13 U.S. at 272. Moreover, that argument is not relevant to

the substantive issue here whether state courts are permitted

to rewrite or modify arbitration agreements and thereby avoid

their substantive obligation to enforce the parties’ written

arbitration agreement as required by Section 2 of the FAA.

As shown below, the FAA precludes the analysis employed

by the South Carolina Supreme Court.

1. Nothing in Sections 3 or 4 of the FAA supports the

decision below to rewrite the parties’ agreement. Sections 3

and 4 of the FAA are provisions which require, respectively,

that a court grant a party’s motion for a stay of litigation

“until. . . arbitration has been had in accordance with the

terms of the agreement,” 9 USC § 3, and grant a party’s

motion for “an order directing the parties to proceed to

arbitration in accordance with the terms of the agreement,” id

§ 4. Further, Section 4 also sets forth a series of procedural

matters including (i) the required notice period for a motion to

compel arbitration, (ii) the application of the Federal Rules of

Civil Procedure to such a motion, and (iii) summary

procedures for resolving any dispute over “the making of the

arbitration agreement or the failure, neglect, or refusal to

perform the same.” /d Nothing in Sections 3 or 4, however,

modifies the substantive requirements of Section 2 of the

FAA or otherwise relieves a court of its obligation to enforce

arbitrations’), id at 14 (arguing that FAA imposes no “procedural

requirements on state courts” and that States therefore are “free to

determine whether, under state law, arbitrations may proceed on a class-

wide basis”), id at 10 (noting that court below questioned whether Section

4 of the FAA applied in state court).

a written arbitration agreement to which the FAA applies.

See id §2.

This Court frequently has noted that the applicability of

Sections 3 or 4 of the FAA to proceedings in state courts

remains an open question .° Nevertheless, since Southland,

the Court has never retreated from the conclusion that the

core requirement of the FAA—that written agreements to

arbitrate that are subject to the FAA must be enforced—

applies both in state and federal courts) F.g., Doctor's

Assocs., 517 U.S. at 688, Allied-Bruce, 513 U.S. at 272; Volt,

489 US. at 479, Perry, 482 US at 490 (FAA mandates that

agreements “be ‘rigorously enforce[d]’”) (alteration in

original) (quoting Dean Witter, 470 US. at 221). Indeed,

even though Southland itself expressly left open the question

whether Sections 3 and 4 of the FAA applied in state courts,

465 US. at 16 n.10, the Court nevertheless ruled that Section

2 of the FAA binds state courts.’

® For example, in Moses H. Cone Mem’! Hosp. v. Mercury Constr.

Corp., 460 U.S. 1 (1983), the Court stated that “state courts, as much as

federal courts, are obliged to grant stays of litigation under § 3 of the

Arbitration Act” but thought it “less clear... whether the same is true of

an order to compel arbitration under § 4 of the Act.” /d at 26. In

Southland, the Court explained, in holding that Section 2 applied to state

courts, that it was not holding that Sections 3 and 4 applied, and i added

that the Federal Rules of Civil Procedure “do not apply” in “proceedings

to compel arbitration.” 465 U.S. at 160.10. In Volt Info. Scis., Inc. v.

Board of Trs. of Leland Stanford Junior Univ., 489 U.S. 468 (1989), the

Court reiterated that the applicability of Sections 3 and 4 in state courts

remained an open question. /d. at 477 n.6.

” Nor does this case implicate or resurrect the issue whether a state

court must specifically “enforce{|” arbitration agreements under Section 2.

See generally Allied-Bruce, 513 U.S. at 294 (Thomas, J., dissenting),

Southland, 465 US. at 31-33 (O'Connor, J., dissenting). To the contrary,

even if Sections 3 or 4 of the FAA did not apply, South Carolina law itself

requires that arbitration agreements must be specifically performed S.C.

Code Ann. § 15-48-20(a) (“[o}n application of a party showing an

agreement... and the opposing party's refusal to arbitrate, the court shall

order the parties to proceed with arbitration”)

Similarly, interpreting the substantive provision of Section

2 to prohibit courts from rewriting or modifying private

agreements to arbitrate in no way conflicts with the matters

reflected in Sections 3 and 4 Any overlap between the

requirements of Section 2, on the one hand, and Sections 3

and 4, on the other, merely reflects that Congress sought to

ensure that arbitration agreements would be “‘rigorously

enforce[d],"” Perry, 482 US. at 490 (alteration in original)

(quoting Dean Witter, 470 US. at 221) “according to their

terms,” Volt, 489 US. at 479, notwithstanding the

““‘judiciary’s longstanding refusal to enforce agreements to

arbitrate,” id. at 478 (quoting Dean Witter, 470 US. at 219-

20). Moreover, it simply makes no sense to conclude that

Congress, by enacting Sections 3 and 4, sought, by negative

implication, to create a two-tiered system whereby arbitration

agreements in state “ourt may be modified based upon those

courts’ public policy preferences but the same agreements,

reviewed in federal court, must be enforced in accordance

with their terms.

Indeed, just two years ago, in Circuit City, this Court

rejected the argument that Section | of the FAA should be

interpreted in a manner that would “undo” the scope “of the

FAA’s coverage in § 2.” 532 US. at 122; see also Allied-

Bruce, 513 U.S. at 280. As the Court explained in Southland,

“{w]e are unwilling to attribute to Congress the intent... . to

create a right to enforce an arbitration contract and yet make

the right dependent for its enforcement on the particular

forum in which it is asserted” 465 US. at 15. Thus,

regardless of whether Sections 3 and 4 apply in state courts,

there can be no doubt that the FAA, through Section 2,

requires those courts to enforce arbitration agreements

according to their written terms.

2. The question whether Sections 3 and 4 of the FAA

apply by force of law to state courts is academic here for the

additional reason that the parties agreed that those provisions

would govern their arbitration agreement. This Court's

decision in Volt establishes that where “the parties have

agreed to abide by” certain “rules of arbitration, enforcing

those rules according to the terms of the agreement is fully

consistent with the goals of the FAA.” 489 U.S. at 479. Volt

explained that the FAA permits “the enforcement of

agreements to arbitrate under different rules than those set

forth in the Act itself.” /d_ It follows, a fortiori, that the FAA

also permits the parties to agree to arbitrate under the FAA

itself.

The arbitration agreement at issue here did just that, thereby

creating an additional, independent basis for concluding that

the courts below were required to enforce the parties’

agreement in accordance with its terms. Specifically, the

arbitration agreement provided’ “This arbitration contract is

made pursuant to a transaction in interstate commerce, and

shall be governed by the Federal Arbitration Act at 9 USC.

section |.” Pet. App. 110a; see id at llan9. There can be

no serious dispute on this point because even the court below

noted that the parties “agree the FAA applies. to the

arbitration agreements in both cases,” id at lla, and added

that it had “previously held Green Tree’s arbitration clause

was governed by the FAA,” id at Ila n9 (citing Munoz v.

Green lree Fin. Corp., 542 § E.2d 360 (S.C. 2001)). In turn,

the Munoz decision recognized that private parties’ agreement

that the “arbitration agreement ___ shall be governed by the

FAA” means that the “[a]rbitration agreement{], like other

* As such, the conclusion that the court below was obligated to enforce

the parties’ agreement in accordance with its terms is fully supported by

lower court cases which rely upon the language of Section 4 of the FAA

to prohibit consolidated or class arbitration absent contractual

authorization to do so. See, e.g, Champ v. Siegel Trading Co., 55 F.3d

269, 275 (7th Cir 1995) (holding that FAA does not permit a court to

order class-action arbitration where the arbitration agreement did not

expressly provide for such a procedure), Government of U.K. v. Boeing

Co., 998 F.2d 68, 74 (2d Cir. 1993) (holding that a “district court cannot

consolidate arbitration proceedings arising from separate agreements to

arbitrate, absent the parties’ agreement to allow such consolidation”).

contracts, [is] enforceable in accordance with [its] terms.”

Munoz v. Green Tree Fin. Corp., 542 S E.2d 360, 363-64

(S.C. 2001). Indeed, the decision below further recognized

the applicability of the FAA by applying Section 10 of the

FAA, 9 U.S.C. § 10, in reviewing the arbitra’ awards. Pet

App. 23a-24a.

Accordingly, the parties’ arbitration agreement expressly

provides that it “shall be governed by the Federal Arbitration

Act,” Pet. App. 110a, including Sections 3 and 4. These

provisions confirm that the court below was required to

enforce the parties’ private arbitration clause “in accordance

with the terms of the agreement.” 9 U.S.C. §§ 3, 4.

Il. THE IMPOSITION OF CLASS ARBITRATION

ONTO THE AGREEMENTS AT ISSUE, WHICH

DO NOT PROVIDE FOR CLASS ARBITRATION,

VIOLATED THE FAA.

The judgment of the South Carolina Supreme Court should

be reversed because the imposition of class arbitration onto

the arbitration agreements in this case is contrary to the

bedrock requirements of the FAA. Respondents cannot avoid

that result by arguing that the arbitrator exercised

“independent judgment” to conclude that class arbitration was

consistent with the arbitration agreements. Opp. 25. In the

Bazzle proceedings, the class arbitration was imposed on the

parties and the arbitrator by the South Carolina trial court, and

Respondents, throughout these proceedings, affirmatively

sought to intertwine Bazzle with the Lackey proceedings. In

all events, the awards must be set aside because the

imposition of class arbitration cannot be reconciled with the

arbitration agreements. The parties’ agreements do not

authorize the arbitrator to resolve (i) disputes involving

individuals other than the actual parties to the Bazzles’ or

Lackey Contracts, or (ii) disputes arising from or relating to

other contracts.

A. The South Carolina Supreme Court’s Decision

Violated The FAA By Allowing Courts To

Impose Their Views Of Equity And Efficiency

Onto The Parties’ Arbitration Agreements.

The judgment below cannot be reconciled with the FAA’s

requirement that courts must enforce the parties’ written

arbitration agreements and may not modify or rewrite those

agreements based upon the court’s own views of public

policy. Under the FAA, arbitration is a matter of “‘consent,

not coercion.” Waffle House, 534 U.S. at 294 (quoting Volt,

489 US. at 479). The decision below directly contravened

that bedrock principle by imposing class action arbitration

without regard for the parties’ contractual intent.

Rather than attempting to divine the intent of the parties,

the court below concluded that it was authorized to

supplement the arbitration agreement based upon its own

views of public policy. Indeed, the court held that “class-

wide arbitration may be ordered when the arbitration

agreeiment is silent if it would serve efficiency and equity, and

would not result in prejudice.” Pet. App. 22a (emphases

added). In reaching that result, the court below displayed a

hostility to private arbitration agreements by relying on prior

South Carolina precedent which held that “a state court may

order consolidation of claims subject to mandatory arbitration

without any contractual or statutory directive to do so.” Id. at

21a (citing Episcopal Hous., 255 S.E.2d at 452) (second

emphasis added). Because this case law “permit[ted]

consolidation of appropriate claims where the arbitration

agreement is silent”—i.e. where there is no “contractual . _ .

directive to do so”—the court below reasoned that “it follows

that [it] would permit class-wide arbitration, as ordering

class-wide arbitration calls for considerably less intrusion

upon the contractual aspects of the relationship” Id.

(internal quotation marks omitted) (emphasis added).

But the FAA does not permit any “intrusion upon the

contractual aspects of the relationship,” Pet. App. 22a,

because “‘[a]rbitration under the [FAA] is a matter of

consent, not coercion.” Waffle House, 534 US. at 294

(second alteration in original) (quoting Vo/r, 489 U.S. at 479).

Under the analysis of the court below, however, any

perceived “omission” or “silence” in an arbitration agreement

provides an invitation for the court to impose on the parties its

own notions of “efficiency and equity.” Pet. App. 22a, id.

(“hearing such claims (involving identical issues against one

defendant) individually, in court or before an arbitrator, does

not serve the interest of judicial economy”). That analysis is

precluded by the FAA. In particular, although courts in

litigation, armed with the coercive power of the state, may

consolidate cases or approve class actions even when litigants

object, e.g., Fed. R. Civ. P. 23; id. 42, the FAA prohibits them

from doing likewise in arbitration, in which all power derives

from parties’ contractual consent.

Put another way, the FAA does not permit courts to

transform private arbitration into litigation “After all, the

basic objective in this area [arbitration] is not to resolve

disputes in the quickest manner possible, no matter what the

parties’ wishes,” /irst Options, 514 U.S. at 947 (citation

omitted), but to “ensur[e] that private arbitration agreements

are enforced according to their terms,” Volt, 489 US. at 478.

Indeed, the FAA demands “rigorous[{]” enforcement of

arbitration agreements, Dean Witter, 470 US. at 221,

including “piecemeal resolution when necessary to give effect

to an arbitration agreement,” Moses H. Cone, 460 US. at 20.

Here, the effect of imposing a class-action arbitration is to

convert a simple two-party dispute about a specific state

statutory requirement into a massive proceeding with millions

of dollars at stake and the full trappings of the process under

Rule 23. No one can doubt that the parties to an arbitration

could agree to proceed in such fashion. But in this case they

did not, and it is flatly inconsistent with both the FAA’s

requirement of fidelity to the contract’s language and the

FAA’s policy of providing a more efficient resolution of the

particular dispute being arbitrated to transform a bilateral

dispute into a complex class action.

Nor does the FAA require parties to include in their

arbitration agreement a comprehensive, point-by-point

catalog of the matters that the parties expressly do not want

courts to impose on their agreement. But that is the practical

effect of the decision below. Requiring the parties to an

arbitration agreement to anticipate every possible revision

that a court might want to impose would frustrate the goals of

the FAA by increasing the costs associated with arbitration

and impairing the ability of parties to enter into simple,

straightforward arbitration agreements. These additional

costs and burdens can be avoided if the FAA is applied to

require “courts to enforce privately negotiated agreements to

arbitrate, like other contracts, in accordance with their terms.”

Volt, 489 US. at 478.

Finally, the court below concluded that imposition of class-

action arbitration was justified because the “parties with

nominal individual claims .. . would be left with no avenue

for relief.” Pet. App. 22a. As this Court noted in Allied

Bruce, however, “arbitration’s advantages often would seem

helpful to individuals, say, complaining about a product, who

need a less expensive alternative to litigation” 513 US. at

280. More recently, this Court has reconfirmed that

“[a]rbitration agreements allow parties to avoid the costs of

litigation, a benefit that may be of particular importance”

where a case “involves smaller sums.” Circuit City, 532 US.

at 123. Moreover, the court ignored that the arbitral awards

in these cases gave each class member a minimum recovery

of $5,000 to $7,500, plus their costs and significant attorney’s

fees. As this Court has explained, such claims fall within the

heartland of arbitral dispute resolution Allied-Bruce, 513

U.S. at 280 (noting that “one-third of [the American

Arbitration Association’s}] claims involve amounts below

$10,000, while another third involve claims of $10,000 to

$50,000”). Indeed, the Bazzles initially filed suit

individually, seeking recovery of “actual and _ punitive

damages, statutory damages and penalties, treble damages,

attorneys’ fees, costs and expenses.” Rec. on Appeal at 1374.

They did not require the action to be brought as a class to

justify coming forward to seek a remedy

In sum, the decision below cannot be reconciled with the

FAA’s requirement that courts must enforce written

arbitration agreements and may not rewrite them. See 9

USC. § 2. In lieu of enforcing the terms of the parties’

agreement, the court below instead concluded that South

Carolina law authorized an “‘intrusion upon the contractual

aspects of the relationship,’” Pet. App. 21a, if that intrusion,

in the court’s view, would “serve efficiency and equity” as

well as “judicial economy.” /d. at 22a. By distorting the

parties’ agreement to suit its own policy preferences, the court

below violated the FAA by resurrecting the very judicial

hostility to private arbitration that the FAA was enacted more

than 75 years ago to eliminate.

B. The T~ial Court’s Imposition Of Class Arbitra-

tion Onto The Parties’ Agreements In Violation

Of The FAA Infected The Arbitrations.

As shown above, the imposition of class arbitration without

“any contractual directive to do so” plainly violates the

requirements of the FAA. Respondents cannot avoid

application of that principle here by arguing that that “the

Arbitrator decided that this case should proceed as a class

arbitration.” Opp. 25. More specifically, according to

Respondents, “this case was not a situation of the South

Carolina courts imposing their views on arbitration, but rather

the Arbitrator making the decision to proceed with a class

arbitration.” /d. That argument should be rejected because it

ignores the course of the proceedings in these two interrelated

arbitrations.

In the Bazzle proceedings, the decision to impose class

arbitration on the parties (and the arbitrator) unquestionably

was made by the court. On December 5, 1997, the trial court

both ordered arbitration to proceed and entered “an order

granting class certification” Pet. App. 3a. Thereafter, on

January 7, 1998, the trial court “ordered that the class action

in arbitration proceed on an opt-out basis.” /d at 4a. Only

after class arbitration had been ordered did the South Carolina

trial court appoint Thomas Ervin to preside over the class

arbitration that it had previously ordered. /d. Respondents

recognized these facts when they argued to the trial court

below that “this Court determined in this matter that the

matter could proceed as a class action.” J.A. 31. Indeed, they

argued that “to the extent that Judge Ervin [the arbitrator]

made such a decision, if any, in this case or the Lackey case, it

was a reaffirmation and/or adoption of this Court’s prior

determination.” /d. at 32 n.2.

That decision to impose class arbitration violates the FAA

because, as Respondents acknowledge here, “[nJeither the

arbitration provision nor any other document prepared by

Green Tree makes any reference to class actions.” Opp. 5.

Because the trial court in the Bazz/e proceeding imposed class

arbitration on the parties’ private arbitration agreement

without any contractual directive to do so, this case does not

implicate the policies that underlie deference to arbitrator

decisions regarding the merits of a dispute that the parties

have agreed to arbitrate. Any such deference is predicated on

the notion that “by agreeing to arbitrate, a party ‘trades the

procedures and opportunity for review of the courtroom for

the simplicity, informality, and expedition of arbitration.””

Gilmer, 500 U.S. at 31 (quoting Mitsubishi Motors, 473 US.

at 628). Such deference cannot apply where, as here, the trial

court imposed class arbitration onto Green Tree even though

the arbitration agreement does not provide for class

arbitration and its language focuses solely on a specific

dispute arising between the parties to the contract and no

others.” Accordingly, the arbitral award entered in the Bazz/le

arbitration must be set aside because that proceeding was

infected from the outset by a clear violation of the FAA’s

requirement that courts may not impose their public policy

choices onto the course of an arbitration proceeding absent a

contractual directive to do so. See9 U S.C. § 2.

Nor can the impact of that FAA violation be limited to the

Bazzle proceeding. As Respondents recognize, the two

proceedings were intimately related to one another because

the same arbitrator decided both the Bazzle and Lackey

arbitrations, and because both arbitrations were born of

“identical arbitration clauses.” Opp. 25 n6. Indeed, below,

Respondents affirmatively argued, successfully, that the class

arbitration ordered by the court in Bazz/le should control

whether class arbitration should be imposed in Lackey. In

particular, after the trial court had ordered class arbitration in

the Bazzle proceedings and appointed Thomas Ervin to serve

as the arbitrator who would implement the court’s class

arbitration, Respondents, in the Lackey proceedings, asked the

same arbitrator to adopt the same approach ordered by the

Bazzle court and to impose class arbitration in Lackey.

Specifically, in the Lackey matter, Respondents argued to

the arbitrator that class-action arbitration should be imposed

because:

[I}n a similar action pending against the Defendant in

Dorchester County, Bazzle v. Green Tree Financial

Corporation et al., Civil Action Number 97-CP-18-258,

the issue of a class action proceeding in arbitration was

* Contrary to the claims of the South Carolina Supreme Court below,

Pet. App. 23a, and of Respondents, Opp. 25-28, review, as here, of an

arbitrator's authority pursuant to Section 10(a)(4) of the FAA is not the

same as review of the merits of an arbitrator's award. See First Options of

Chi., Inc. v. Kaplan, 514 U.S. 938, 942 (1995) (separately discussing

Section 10 of FAA and “‘manifest disregard’ of law” review as bases for

vacating award).

thoroughly presented in hearings before The Honorable

Patrick R. Watts, Special Circuit Judge The court found

that a class action could proceed in arbitration

Rec. on Appeal at 516. Later, Respondents argued to the

court below that “to the extent that Judge Ervin made such a

decision, if any, in the Lackey case, it was a reaffirmation

and/or adoption of [the Bazz/e] Court's prior determination.”

JA. at 32n2.

Respondents may not now change positions by asserting in

this Court that the arbitrator in Lackey made an independent

determination untainted by the trial court’s violation of the

FAA. See New Hampshire. v. Maine, 532 US. 742, 749

(2001) (explaining that judicial estoppel “generally prevents

a party from prevailing in one phase of a case on an argument

and then relying on a contradictory argument to prevail in

another phase’”) (quoting Pegram v. Herdrich, 530 US. 211,

227 n8& (2000)), see also 18 James Wm. Moore et al,

Moore's Federal Practice (MB) § 134.30 (3d ed. June 2002)

(“The doctrine of judicial estoppel prevents a party from

asserting a claim in a legal proceeding that is inconsistent

with a claim taken by that party in a previous proceeding”)

In all events, even if the arbitrator also reviewed the

arbitration clause, it is inconceivable that, after being ordered

by a court to conduct a class-wide arbitration in Bazzle, he

would then, in a related arbitration proceeding involving an

indistinguishable arbitration clause, independently decide not

to impose class arbitration. Indeed, there was no effort by the

arbitrator to reconcile class arbitration with the express

limitations in the contract

In short, the judgment below must be set aside precisely

because this was a case of the South Carolina courts, without

contractual directive to do so, impermissibly “imposing their

views on arbitration.” Opp. 25.

C. In All Events, Class Arbitration Cannot Be

Reconciled With The Terms Of The Arbitration

Agreements In This Case.

The Federal Arbitration Act provides that a court may

vacate the award of an arbitrator, inter alia, “where the

arbitrators exceeded their powers.” 9 USC. § 10(a)(4), see

First Options, 514 U.S. at 942 (summarizing bases for setting

aside arbitrator's award) ‘1: is Court has been clear that

“arbitrators derive their autsority to resolve disputes only

because the parties have agreed in advance to submit such

grievances to arbitration.” AT&T Techs. Inc. vy

Communications Workers of Am., 475 US. 643, 648-49

(1986) (citing Gateway Coal Co. v. United Mine Workers of

Am., 414 US 368, 374 (1974)) Applying these standards,

even if the arbitral proceedings had not been tainted from the

outset by the trial court’s imposition of class-wide arbitration,

the judgment below still must be reversed, because the

conduct of class arbitration significantly exceeds the authority

granted to the arbitrator and fundamentally transforms the

scope of the arbitration agreements in manifest disregard of

the parties’ intent.

1. The Terms Of The Arbitration Agreements

Preclude Class-Wide Arbitration.

As this Court has explained, “by agreeing to arbitrate, a

party ‘trades the procedures ___ of the courtroom for the

simplicity, informality and expedition of arbitration.”

Gilmer, 500 U S. at 31 (quoting Mitsubishi Motors, 473 US

at 628) To be sure, the FAA leaves parties “free to structure

their arbitration agreements as they see fit,” Volt, 489 US. at

479, and “does not require parties to arbitrate when they have

not agreed to do so, nor does it prevent parties who do agree

to arbitrate from excluding certain claims from the scope of

their arbitration agreement,” id. at 478 (citation omitted) At

bottom, “‘arbitration is a matter of contract and a party cannot

be required to submit to arbitration any dispute which he has

not agreed so to submit."” AT&T Techs., 475 US. at 648

oe , —

2 ae a is ES ET SOT

(quoting Steelworkers vy Warrior & Gulf Navigation ( "o., 363

US. 574, 582 (1960)).

Class-wide arbitration is fundamentally inconsistent with

the arbitration agreements in this case’ As Respondents

acknowledge, “[nJeither the arbitration provision nor any

other document prepared by Green Tree makes any reference

to class actions.” Opp. 5. Instead, the agreements provide

that “disputes, claims or controversies arising from or relating

to this contract or the relationships which result from this

contract... shall be resolved by binding arbitration by one

arbitrator selected by us with consent of you.” Pet. App

110a. “This contract” refers, of course, to the specific

contract entered into by the buyer and seller in these

agreements. In light of this context, it is not surprising that

the arbitration agreement is structured to provide for bilateral

arbitration between two contractually defined parties. “you”

and “us.” /d Both of these contractually defined parties are

reserved a role in the selection of the single arbitrator—.e.,

“selected by us with consent of you”—who will resolve their

dispute. /d Moreover, the scope of that bilateral arbitration

agreement is limited to resolving disputes “arising from or

relating to this contract”—/.e., disputes arising from or

relating to the contract between “you” and “us.” /d.

Class arbitration, by contrast, cannot be reconciled with the

decision of the parties to arbitrate in general or with the terms

of the parties’ agreement.''’ As a general matter, class

'° The court below stated, without any analysis or elaboration, that this

“language does not limit the arbitration to non-class arbitrauon” and “[ajt

best, it creates an ambiguity.” Pet. App. 19a. The court below never

identified why this language was ambiguous or tned to reconcile its

reading with the specific terms of the agreement.

'' See Mastrobuono vy. Shearson Lehman Hutton, Inc., 514 U.S. 52, 59

(1995) (relying upon Restatement (Second) of Contracts § 202(2) (1979)

for the principle that “[a] wnting is interpreted as a whole”), United States

v Utah, 199 US. 414, 423 (1905) (‘The elementary canon of

interpretation is, not that particular words may be 1solatedly considered,

arbitration is not the type of dispute-resolution proceeding

that one would contemplate adopting to provide “a less

expensive alternative to litigation” or a means of avoiding the

““delay and expense of litigation.” A/lied-Bruce, 513 US at

280, see Circuit City, 532 US at 123. Indeed, the agreement

states that “[t]he parties agree and understand that they have a

right or opportunity to litigate disputes through a court, but

that they prefer to resolve their disputes through arbitration ”

Pet. App. 110a_ It makes little sense to presume that the

parties sought to avoid court litigation, but then authorized the

arbitrator to recreate the most complex, expensive and time-

consuming aspects of litigation within their private arbitral

process. See, e.g., Phillips Petroleum Co. v. Shutts, 472 US

797, 811-12 (1985) (explaining that in a class action, absent

class members must be afforded notice, an opportunity to be

heard and to participate in the litigation, and a chance to opt

out), Ortiz v. Fibreboard Corp., 527 U.S. 815, 833 (1999)

(describing pre-requisites to proposed class-action

settlement).'?

but that the whole contract must be brought into view and interpreted with

reference to the nature of the obligations between the parties, and the

intention which they have manifested in forming them’”).

'? Indeed, even the minority of courts that appear to allow class-action

arbitration agree on the necessity of significant court involvement to

protect the rights of absent class members. Keating vy. Superior Court,

645 P.2d 1192, 1209 (Cal. 1982) (stating that the court, not arbitrators,

would conduct class certifications in arbitrations, would monitor

representation and approve proposed settlements), rev ‘d in part, Southland

Corp. v. Keating, 465 U.S. 1 (1984), Dickler v. Shearson Lehman Hutton,

Inc., 596 A.2d 860, 866 (Pa. Super. Ct. 1991) (stating that in a class action

arbitration, the trial court would have to certify the class, supervise the

notice, and “probably have to have final review in order to imsure that

class representatives adequately provide for absent class members’), cf 5

James Wm. Moore et al., Moore's Federal Practice (MB) § 23.25|3){d}

(3d ed. June 2002) (“Because absent parties will be bound by the

judgment in a class action, courts are required to undertake a continuing

examination of the adequacy of representation at all stages of the

litugation ”) (internal citation omitted).

Indeed, forced class arbitration creates a bizarre and

dangerous hybrid that imposes the expense and delay of court

litigation without the necessary due-process safeguards of

court involvement and review in proceedings where class

representatives purport to act on behalf of other individuals.

Thus, for example, under Federal Rule of Civil Procedure

23(b)(3), class certification can be authorized only if, after

undertaking a “rigorous analysis,” a court “finds” that the

prerequisites for class certification have been met and the

class action may be managed without impairing any party’s

substantive rights See General Tel. Co. of Southwest v.

Falcon, 457 US. 147, 161 (1982).

Unlike class actions prosecuted in federal or state courts,

class arbitrations lack the essential protections mandated in

the courts. In court, absent parties cannot be bound by a

judgment unless their due-process rights are adequately

protected through judicial oversight. See Hansberry v. Lee,

311 US. 32, 41-42 (1940), see also Shutts, 472 US. at 808.

That oversight begins, as mentioned above, with a “rigorous”

analysis whether the class certification standards have been

met, continues to ensure that there is notice “reasonably

calculated ____ to apprise interested parties of the pendency of

the action and afford them an opportunity to present their

objection,” Mullane v. Central Hanover Bank & Trust Co.,

339 US. 306, 314-15 (1950), and concludes with oversight of

the voluntary dismissal or compromise of a class action,

Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997),

Ortiz, 527 US. at 848." In contrast, arbitration lacks such

'* For example, under Federal Rule of Civil Procedure 23, parties

seeking class certification must demonstrate that they meet several

requirements, namely, numerosity, commonality, typicality, and adequacy

of representation. Fed. R. Civ. P. 23(a), see also Amchem Prods., Inc. v.

Windsor, 521 US. 591, 625-28 (1997) (holding that adequacy was not

demonstrated because of the diverse groups of plaintiffs) The parties

seeking certification must then show that the action 1s maintainable under

the rules that limit the realm of lawsuits that can be brought as class

safeguards because “by agreeing to arbitrate, a party ‘trades

the procedures and opportunity for review of the courtroom

for the simplicity, informality, and expedition of arbitration ’”

Gilmer, 500 U.S. at 31 (quoting Mitsubishi Motors, 473 US.

at 628) As a result, class arbitration raises difficult legal and

practical questions that should not be addressed unless there

is compelling evidence to conclude that the parties actually

chose this means of resolving not only their own disputes but

also those of other individuals '*

The unlikely conclusion that the parties authorized class-

action arbitration here is foreclosed by the language of their

arbitration agreements) On the one hand, a class action

allows a class representative to litigate claims on behalf of

himself as well as numerous additional individuals who are

not parties to the litigation. See Fed R. Civ P. 23. For

instance, in the proceedings below, the Bazzles and Lackey

litigated not only the specific disputes arising from their

respective contracts, but also litigated, on behalf of 3,700

other individuals, disputes arising under or relating to 3,700

other contracts. That wholesale expansion of the arbitration

agreements runs contrary to the terms of the agreements,

which limit the scope of each arbitration proceeding to

disputes between “you” and “us,” and limit the subject matter

to disputes arising from or relating to “this contract” between

actions. See, e.g, Fed. R. Civ. P. 23(b)(1)-(3). Under Rule 23(b)(3), for

instance, the action must meet two more requirements’) Common questions

must predominate, and class resolution must be a supenor method for the

fair and efficient adjudication of the controversy. /d. 23(b)(3), Amchem,

521 U.S. at 623-25 (finding that the predominance requirement was not

met in an asbestos case under Rule 23(b)(3)).

'*12 Am. Jur. Contracts § 251 (“An agreement capable of an

interpretation which will make it valid or legal will be given such

interpretation if the agreement is ambiguous.”), Restatement (Second) of

Contract Law § 203(a) (1981) (stating preference in contract interpretation

that “an interpretation which gives a reasonable, lawful, and effective

meaning to all the terms is preferred to an interpretation which leaves a

part unreasonable, unlawful, or of no effect”)

“you” and “us.” Pet. App. 110a. One of the core ways in

which an arbitrator can exceed his authority is to purport to

bind in arbitration parties who have not agreed to be bound.

See, e.g, First Options, 514 U.S. at 942 (affirming vacatur of

arbitrator's decision as applied to parties who had not

personally signed an arbitration agreement).'° Here, class

action arbitration exceeds an arbitrator’s authority under the

express terms of the arbitration agreements

Nor is that expansion of the arbitrator’s authority somehow

remedied by an “opt-out” provision that allows non-class

representatives to avoid arbitration by opting out of the class.

Pet. App. 4a. To the contrary, the opt-out provision further

frustrates the parties’ intent by rewriting the mechanism by

which they will choose an arbitrator’ Under the agreement,

each arbitrator is “selected by us with consent of you.” /d at

110a. The opt-out provision allows a single arbitrator to deny

Green Tree its right to select, in the first instance, the

individual who would have authority to resolve the disputes

arising from or relating to each specific contract

For the same reason, imposition of class arbitration is not

an incidental arbitral power granted to the arbitrator under the

parties’ agreement. Here, the agreement limits the arbitrator’s

'° The courts of appeals also have regularly vacated arbitral awards

when the arbitrator attempted to arbitrate the claims of parties not

included in the arbitration agreement before him. See, e.g, NCR Corp. v.

Sac-Co., Inc., 43 F.3d 1076 (6th Cir. 1995) (affirming vacatur of

arbitrator's punitive damages award because arbitrator awarded the

damages to others who had signed an agreement with defendant but had

not brought arbitration proceeding against defendant), Fler Mfy., Inc. v.

Kowin Dev. Corp, 14 F.3d 1250, 1256 (7th Cir 1994) (vacating

arbitrator's damages award when it was based on losses suffered by an

entity that did not bring arbitration proceeding against defendant;

arbitration “cannot be construed to delegate to the arbitrator the power to

arbitrate disputes between Eljer and a third party”), Pacific Reinsurance

Mgmt. Corp. y. Ohio Reinsurance Corp., 935 F.2d 1019, 1026-27 (9th

Cir. 1991) (arbitrators do not have power to add new parties to arbitration

proceedings without the consent of all parties)

authority to disputes between the parties to the contract

“arising from or relating to this contract.” Pet. App. 110a.

Although the granting of that authority to the arbitrator is

entirely consistent with an arbitrator's decision to schedule

hearings, permit or limit discovery, or issue a scheduling

order, imposition of class arbitration is fundamentally

different because it would expand the arbitrator's authority

both to individuals who are not parties to the Bazzle or

Lackey Contracts and to disputes that arise not from “this

contract” but from other contracts. /d at 110a. As this Court

explained in Mastrobuono, an arbitration agreement “should

be read to give effect to all its provisions and to render them

consistent with each other.” 514 US. at 63.

2. Waffle House Confirms That Class Arbitra-

tion Cannot Be Imposed Onto The Parties’

Agreements.

Nor can class arbitration be imposed onto the parties’

agreements based upon generalized presumptions in favor of

arbitration. See Opp. 15. This Court’s decision in Waffle

House is instructive. There, the Court explained that the

“FAA directs courts to place arbitration agreements on equal

footing with other contracts, but it ‘does not require parties to

arbitrate when they have not agreed to do so.”” 534 US. at

293 (quoting Volt, 489 U.S. at 478). In Waffle House, the

lower court ruled that the EEOC could not seek victim-

specific relief in a lawsuit under the Americans with

Disabilities Act because the employee (Baker) on whose

behalf the EEOC was proceeding had signed an arbitration

agreement with Waffle House. /d at 284. This Court

reversed, explaining that under the FAA, “we look first to

whether the parties agreed to arbitrate a dispute, not to

general policy goals, to determine the scope of the

agreement.” /d. at 294. The Court underscored that courts

cannot “override the clear intent of the parties, or reach a

result inconsistent with the plain text of the contract, simply

because the policy favoring arbitration is implicated.” /d.

Applying these principles, the Court explained that the

arbitration agreement in no way limited the EEOC’s lawsuit

because “[i]t goes without saying that a contract cannot bind a

nonparty.” /d.

This case is no different. Here, as in Waffle House, “there

is no ambiguity” in the contract, id, because the non-

representative class members are not parties to the arbitration

agreement or contract through which the arbitrator was

chosen in the Bazz/le or Lackey proceedings. Just as the

arbitration agreement between Baker and Waffle House could

not bind the EEOC (even though the EEOC sought relief on

behalf of Baker), here too the arbitration agreement cannot

bind the non-representative class members who are not parties

to the specific arbitration agreements upon which the Bazzle

and Lackey proceedings were predicated.

Under the FAA, “[i]t goes without saying that a contract

cannot bind a nonparty.” /d. Here, the agreement states that

the parties (i.e., “you” and “us”) agree to “binding arbitration

in accord with this contract.” Pet. App. 110a. Neither Green

Tree nor the non-representative class members have agreed,

however, to the imposition of class arbitration that would

transform the bilateral contract between “you” and “us” into a

multilateral contract including a _ multilateral dispute

resolution mechanism between Green Tree, on the one hand,

and more than 3,700 individuals on the other. Simply put, the

imposition cf class arbitration plainly exceeded the

arbitrator's (and a fortiori the court’s) power by transforming

the parties’ bilateral contract dispute provision into a

mechanism for resolving disputes arising from other contracts

and other parties.

CONCLUSION

For these reasons, the judgment of the South Carolina

Supreme Court should be reversed.

WILBURN BREWER, JR.

ROBERT C. BYRD

NEXSEN PRUET JACOBS &

POLLARD & ROBINSON, LLP

P.O. Box 486

Charleston, SC 29402

(843) 577-9440

HERBERT W. HAMILTON

KENNEDY COVINGTON

LOBDELL & HICKMAN, L.L.P.

P.O. Box 11429

Rock Hill, SC 29731-1429

(803) 329-7600

Respectfully submitted,

CARTER G. PHILLIPS*

PAUL J. ZIDLICKY

C. KEVIN MARSHALL

VIRGINIA M. VANDER JAGT

SIDLEY AUSTIN BROWN &

WoOobD LLP

1501 K Street, NW.

Washington, D.C. 20005

(202) 736-8000

ALAN S. KAPLINSKY

MARK J. LEVIN

BALLARD SPAHR ANDREWS

& INGERSOLL, LLP

1735 Market Street

5 lst Floor

Philadelphia, PA 19103-7599

(215) 665-8500

Counsel for Petitioner

February 24, 2003

* Counsel of Record

ADDENDA

RELEVANT STATUTES

9 U.S.C. §2

Validity, irrevocability, and enforcement of

agreements to arbitrate

A written provision in any maritime transaction or a

contract evidencing a transaction involving commerce to

settle by arbitration a controversy thereafter arising out of

such contract or transaction, or the refusal to perform the

whole or any part thereof, or an agreement in writing to

submit to arbitration an existing controversy arising out of

such a contract, transaction, or refusal, shall be valid,

irrevocable, and enforceable, save upon such grounds as exist

at law or in equity for the revocation of any contract

(July 30, 1947, c. 392, 61 Stat. 670.)

9 U.S.C. §3

Stay of proceedings where issue therein

referable to arbitration

If any suit or proceeding be brought in any of the courts of

the United States upon any issue referable to arbitration under

an agreement in writing for such arbitration, the court in

which such suit is pending, upon being satisfied that the issue

involved in such suit or proceeding is referable to arbitration

under such an agreement, shall on application of one of the

parties stay the trial of the action until such arbitration has

been had in accordance with the terms of the agreement,

providing the applicant for the stay is not in default in

proceeding with such arbitration

(July 30, 1947, c. 392, 61 Stat 670.)

9 U.S.C. § 4

Failure to arbitrate under agreement, petition to

United States court having jurisdiction for order to

compel arbitration, notice and service thereof,

hearing and determination

A party aggrieved by the alleged failure, neglect, or refusal

of another to arbitrate under a written agreement for

arbitration may petition any United States district court

which, save for such agreement, would have jurisdiction

under Title 28, in a civil action or in admiralty of the subject

matter of a suit arising out of the controversy between the

parties, for an order directing that such arbitration proceed in

the manner provided for in such agreement. Five days’ notice

in writing of such application shall be served upon the party

in default. Service thereof shall be made in the manner

provided by the Federal Rules of Civil Procedure. The court

shall hear the parties, and upon being satisfied that the

making of the agreement 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. The hearing and

proceedings, under such agreement, shall be within the

district in which the petition for an order directing such

arbitration is filed. If the making of the arbitration agreement

or the failure, neglect, or refusal to perform the same be in

issue, the court shall proceed summarily to the trial thereof. If

no jury trial be demanded by the party alleged to be in

default, or if the matter in dispute is within admiralty

jurisdiction, the court shall hear and determine such issue

Where such an issue is raised, the party alleged to be in

default may, except in cases of admiralty, on or before the

return day of the notice of application, demand a jury trial of

such issue, and upon such demand the court shall make an

order referring the issue or issues to a jury in the manner

provided by the Federal Rules of Civil Procedure, or may

spectally call a jury for that purpose. If the jury find that no

agreement in writing for arbitration was made or that there is

no default in proceeding thereunder, the proceeding shall be

dismissed. If the jury find that an agreement for arbitration

was made in writing and that there is a default in proceeding

thereunder, the court shall make an order summarily directing

the parties to proceed with the arbitration in accordance with

the terms thereof

(July 30, 1947, c. 392, 61 Stat. 671, Sept. 3, 1954, c. 1263, §

19, 68 Stat. 1233 )

9 U.S.C. § 9

Award of arbitrators, confirmation, jurisdiction, procedure

If the parties in their agreement have agreed that a

judgment of the court shall be entered upon the award made

pursuant to the arbitration, and shall specify the court, then at

any time within one year after the award is made any party to

the arbitration may apply to the court so specified for an order

confirming the award, and thereupon the court must grant

such an order unless the award is vacated, modified, or

corrected as prescribed in sections 10 and 11 of this title. If no

court is specified in the agreement of the parties, then such

application may be made to the United States court in and for

the district within which such award was made. Notice of the

application shall be served upon the adverse party, and

thereupon the court shall have jurisdiction of such party as

though he had appeared generally in the proceeding. If the

adverse party is a resident of the district within which the

award was made, such service shall be made upon the adverse

party or his attorney as prescribed by law for service of notice

of motion in an action in the same court. If the adverse party

shall be a nonresident, then the notice of the application shall

be served by the marshal of any district within which the

adverse party may be found in like manner as other process of

the court.

(July 30, 1947, c 392, 61 Stat. 672.)

9 U.S.C. § 10

Same, vacation, grounds, rehearing

(a) In any of the following cases the United States court in

and for the district wherein the award was made may

make an order vacating the award upon the application of

any party to the arbitrat.on—

(1) where the award was procured by corruption, fraud,

or undue means,

(2) where there was evident partiality or corruption in

the arbitrators, or either of them,

(3) where the arbitrators were guilty of misconduct in

refusing to postpone the hearing, upon sufficient

cause shown, or in refusing to hear evidence

pertinent and material to the controversy, or of any

other misbehavior by which the rights of any party

have been prejudiced, or

(4) where the arbitrators exceeded their powers, or so

imperfectly executed them that a mutual, final, and

definite award upon the subject matter submitted was

not made.

(b) If an award is vacated and the time within which the

agreement required the award to be made has not expired,

the court may, in its discretion, direct a rehearing by the

arbitrators.

award was made that was issued pursuant to section 580

of title 5 may make an order vacating the award upon the

application of a person, other than a party to the

arbitration, who is adversely affected or aggrieved by the

award, if the use of arbitration or the award is clearly

inconsistent with the factors set forth in section 572 of

title 5.

(July 30, 1947, c. 392, 61 Stat. 672, Nov. 15, 1990, Pub. L.

101-552, § 5, 104 Stat. 2745, Aug. 26, 1992, Pub. L. 102-354,

§ 5(b)(4), 106 Stat. 946; May 7, 2002, Pub. L. 107-169, § 1,

116 Stat. 132.)

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.