Reply Brief — Green Tree Financial Corp. v. Bazzle

[U

No. 02-634” APRS 2005

IN THE

Supreme Court of the United States

GREEN TREE FINANCIAL CorRP. A/K/A GREEN TREE

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

CORP. N/K/A CONSECO FINANCE CORP.,

Petitioner,

V.

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

Capacity On Behalf Of A Class And For All Others Similarly

Situated; DANIEL B. LACKEY, GEORGE BUGGS AND FLORINE

BuGGs, In A Representative Capacity On Behalf Of A Class

And For All Others Similarly Situated,

Respondents.

On Writ of Certiorari to the

Supreme Court of South Carolina

REPLY BRIEF OF PETITIONER

WILBURN BREWER, JR. CARTER G. PHILLIPS*

ROBERT C. BYRD PAUL J. ZIDLICKY

NEXSEN PRUET JACOBS & C. KEVIN MARSHALL

POLLARD & ROBINSON, LLP VIRGINIA M. VANDER JAGT

P.O. Box 486 SIDLEY AUSTIN BROWN &

Charleston, SC 29402 WoOobD LLP

(843) 577-9440 1501 K Street, NW.

Washington, D.C. 20005

HERBERT W. HAMILTON (202) 736-8000

KENNEDY COVINGTON

LOBDELL & HICKMAN, L.L.P. ALAN S. KAPLINSKY

P.O. Box 11429 MARK J. LEVIN

Rock Hill, SC 29731-1429 BALLARD SPAHR ANDREWS

(803) 329-7600 & INGERSOLL, LLP

1735 Market Street, 51st Floor

Philadelphia, PA 19103-7599

(215) 665-8500

Counsel for Petitioner

April 15, 2003 * Counsel of Record

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 - WASHINGTON, D. C. 20001

sae oe

—-

TABLE OF CONTENTS

CARE Ie FFU UUI D oevccncssccsssnsescsesssscercccsssesees

REPLY BRIEF OF PETITIONERS ......... Mamdabadesainiedd.

IMPOSITION OF CLASS ARBITRATION

“WITHOUT ANY CONTRACTUAL OR STAT-

UTORY DIRECTIVE TO DO SO” VIOLATES

THE FAA’S REQUIREMENT THAT ARBIT-

RATION AGREEMENTS BE ENFORCED “IN

ACCORDANCE WITH THEIR TERMS”...

A. This Court’s Cases Make Clear That The FAA

Requires That Agreements To Arbitrate Be

Enforced “In Accordance With Their Terms” . .

B. The Decision Below Violated The FAA By

Imposing Class Arbitration On The Parties’

Agreement Without Any “Contractual Direc-

a EE ne a

ARBITRATOR DISCRETION CANNOT RES-

CUE THE DECISION BELOW BECAUSE

CLASS ARBITRATION WAS IMPOSED ON

THE ARBITRATOR, WHO HAD NO DISCRE-

TION TO EXCEED HIS CONTRACTUAL

A. The Imposition Of Class Arbitration Was Not

A Discretionary Exercise Of Arbitral Powers

Under The Arbitration Agreements ..................

B. The Arbitrator’s Contractual Power To Bind

The Bazzles And Lackey Did Not Extend To

The Parties To Thousands Of Other Contracts...

SEER SR SR Fe OO a OR

(1)

13

14

15

il

TABLE OF AUTHORITIES

CASES Page

A.T. Conner vy. Alvarez, 328 S E.2d 334 (SC.

BOBS). ......000::0000000000ezenensnnneseeneneenennnnannnnnnnn 9

AT&T Techs., Inc. vy. Communications Workers of

Am., 473 U.S. 643 CIGBED.....00ccrssssssueeele 16

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S.

yt) re 5, 6, 10, 13

Blakeley v. Rabon, 221 § E.2d 767 (S.C. 1976)..... 9

C.A.N. Enters., Inc. v. South Carolina Health &

Human Servs. kin. Comm'n, 373 S.E.2d 584

(B.C. BGBE).....0.:20000000c0e+eeenseesenseaninenennnnnn 9,10

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

Cie. 1905)... .0snc0000002000sconssennnunnseiennnnnan 8

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

(i. -) Pr l

Doctor's Assocs., Inc. vy. Casarotto, 517 U.S. 681

(|) 6

EEOC vy. Waffle House, Inc., 534 US. 279

(BGS) .......0:00000000se0nsersnaeenunneenenennnnnnnn passim

Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d

vote Te A, enn 19

Episcopal Hous. Corp. v. Federal Ins. Co., 255

SE.2d 451 (SC. 1979). ccc cece 8

First Options of Chi., Inc. vy. Kaplan, 514 US.

FSS CIDP)... ....000+2+00000eeessennnnnnunennnennenninnnnnnnnn passim

Gilmer v. Interstate/Johnson Lane Corp., 500

U.&. 2B (EDDA )........0000ss0sesesereneiennnninaeenann 7

Gilstrap v. Culpepper, 320 S.E.2d 445 (S.C.

BDBS)...........+00000000eernnsesiedscsnneamennnnninnannnnn 2, 9, 10

Goode v. St. Stephens United Methodist Church,

494 S.E.2d 827 (S.C. Ct. App. 1997) 0000000... 11,17

Howsam v. Dean Witter Reynolds, Inc., 123 §. Ct.

SOB (2BGR)..........0020000000sseesnnssnunennnennenenan 6, 16, 19

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

S43 (19G4).......0.:000:0s0n0ssorccesesnsnneneeeenae 16

- i lt el Ee.

in

TABLE OF AUTHORITIES - continued

Page

Mastrobuono vy. Shearson Lehman Hutton, Inc.,

$14U S. 52(1995)..... passim

McPherson v. JE. Sirrine & Co., 33 S E.2d 501

(SC. 1945) 9

Myrtle Beach Lumber Co. v. _ Willoughby, 274

S$ E.2d 423(S.C. 1981). 13

New Hampshire v. Maine, $32 U.S. 742 (2001) 15

Parker v. Byrd, 420 S$ E.2d 850 (S.C. 1992). 9

Perry v. Thomas, 482 US. 483 (1987) 5, 6, 13

Scherk vy. Alberto Culver Co., 417 US. 506

(1974) .. - 6

Stokes v. Westinghouse Savannah River Co., 206

F 3d 420 (4th Cir 2000). 11,17

Touchberry v. City —, 367 SE.2d 149

ll ) 11,17

United Steelworkers of Am. v. Warrior & Gulf

Nav. Co., 363 U.S. 574 (1960)... i 16

Volt Info. Scis., Inc. v. Board of Trs of Leland

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

Zabinski v. Bright Acres Assocs., 553 § E.2d 110

a = 12

STATUTES

i icinsccsnsece a patina ae

ee passim

S.C. Code Ann. § 37-6-10l ef seq... 4

§ 37-10-10S(a). 4

SCHOLARLY AUTHORITIES

5 Margaret N. Kniffin, Corbin on Contracts (rev

Cees csens o)

11 Richard A. Lord, Williston on 2 Contracts (4th

EE | 9

REPLY BRIEF OF PETITIONERS

In its opening brief, Green Tree demonstrated that the

South Carolina Supreme Court’s decision to impose class-

wide arbitration upon the parties’ agreement to arbitrate

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

App. 2la, could not be reconciled with the Federal

Arbitration Act’s (“FAA’s”) requirement that state and

federal courts enforce arbitration agreements “according to

their terms,” Volt Information Sciences, Inc. vy. Board of

Trustees of Leland Stanford Jumor University, 489 US. 468,

476 (1989), accord Mastrobuono vy. Shearson Lehman

Hutton, Inc., 514 US. 52, 54 (1995) Further, the state

court’s ruling that an “intrusion upon the contractual aspects

of the relationship’” was justified by its own views of

“efficiency,” “equity” and “judicial economy,” Pet. App. 21a-

22a, was contrary to the core mandate of the FAA

“rigorously” to enforce agreements to arbitrate, Dean Witter

Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985) Finally,

Green Tree demonstrated that the improper imposition of

class arbitration onto the parties’ agreement infected the

arbitral proceedings and, in all events, that the expansion of

the arbitration agreements in the bilateral Bazzle and Lackey

contracts to encompass claims by thousands of third parties

arising from their separate contracts was well beyond the

arbitrator's power See 9U S.C. § 10(a)(4), EEOC v. Waffle

House, Inc., 534 U.S. 279, 294 (2002), First Options of Chi.,

Inc. v. Kaplan, 514 U.S. 938, 946 (1995).

Respondents call none of these conclusions into question.

As shown below, their arguments fail because, under the

FAA, a court may not impose class-arbitration or any other

judicial mandate onto a private arbitration agreement without

a contractual directive to do so. Respondents are correct that

““there is no federal [policy] favoring arbitration under a

certain set of procedural rules,” Resp. Br. 21 (quoting Volt,

489 US. at 476), but they omit that the Court in Volt

explained, in the same sentence, that there is a “federal

2

policy” under the FAA “to ensure the enforceability,

according to their terms, of private agreements to arbitrate.”

Volt, 489 US at 476, see Part |, infra’ Moreover, because

arbitration under the FAA is a matter of “consent and not

coercion,” an arbitrator exceeds his delegated powers, 9

USC. § 10(a)(4), if he purports to resolve — through class

arbitration, consolidation or otherwise — the claims of

thousands of other individuals without a contractual directive

to do so. Simply put, an arbitrator may not employ

procedural devices that extend his power beyond what the

contract specifies. See Part II, infra.

Before addressing Respondents’ arguments in full, it is

necessary to clarify the record in a number of respects. First,

Respondents principally argue that the court below “applied

ordinary state contract doctrine to hold that the arbitration

clause _ _ permits class-wide arbitration in the arbitrator’s

discretion as authorized by South Carolina law.” Resp. Br.

17-18. That is pure fantasy The South Carolina Supreme

Court did not hold that the parties actually intended to

authorize class arbitration. Rather, it ruled, that by construing

contract language against Green Tree, Pet. App. 19a, the

arbitration agreement became “silent” regarding class

arbitration, id. at 21a, 22a. Thereafter, it relied upon its prior

decision that “a state court may order consolidation of claims

subject to mandatory arbitration without any contractual or

Statutory directive to do so.” /d at 21a Based upon that

extra-contractual principle, the court concluded that it “would

permit class-wide arbitration” in this case /d

Under South Carolina law, generally applicable contract

principles dictate that “‘[w]ords cannot be read into a contract

which import intent wholly unexpressed when the contract

was executed.” Gilstrap v. Culpepper, 320 S.E.2d 445, 447

(S.C. 1984). Recognizing its departure from general contract

law, the court below acknowledged that imposition of class

arbitration would result in an “intrusion upon the contractual

aspects of the relationship,” but nevertheless “h[eld] that

3

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. at 22a That ruling

“do[es] violence to the policies behind by the FAA” by

preventing private parties from “structur[ing] their arbitration

agreements as they see fit” and allowing courts unilaterally to

modify the “contractual rights and expectations of the

parties” Volt, 489 US. at 479.

Second, under the FAA, neither a court nor an arbitrator

may impose obligations on an arbitration proceeding without

a contractual directive to do so. Unlike litigation, which is

based upon the coercive power of the state, arbitration is

based exclusively upon private contract. Waffle House, Inc.,

534 US. at 294, First Options, 514 US. at 943. Thus,

although court litigation of a party’s claims may be pursued

through a class action without contractual authorization,

Resp Br 24-25 & n_10, in contrast, class arbitration may nof

be imposed without the express contractual agreement of the

parties in their agreement to arbitrate Indeed, the FAA

provides that arbitral awards should be set aside where the

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

Where, as here, an arbitration agreement does not authorize

an arbitrator to resolve claims by third parties, the arbitrator

may not extend his power through class arbitration.

Finally, in an apparent effort to distract attention from the

legal issues actually presented, Respondents (i) attempt to

portray Green Tree as a bad actor that knowingly violated

settled South Carolina law, (ii) imply that Green Tree's

conduct caused actual damage to thousands of South Carolina

residents, and (iii) argue that the statutory provision at issue

here can be enforced effectively only through a class-action

mechanism. Resp. Br. 2, 5-8, 19-20. These contentions do

not withstand scrutiny. Respondents ignore that the basis for

the arbitrator’s finding of liability was “the ruling of the

South Carolina Supreme Court in Jilley v. Pacesetier,” Pet.

App. 69a, 91a, a decision handed down in 1998, years after

4

the loans at issue. Similarly, their assertion that Green Tree

had “[yJears before” been “held liable _. . for the same

violations at issue here” Resp. Br. 2, is unsupported and

unsupportable. Further, Respondents’ baseless claims of

“predatory lending,” Resp. Br. 2, “usurious interest rates,” or

“other unfair contract terms,” id at 5, also are unsupported

and belied by their failure even to attempt to show “actual

damages,” Pet. App. 69a, 96a.' Nor can Respondents validly

contend that class arbitration was necessary to vindicate or

enforce this statutory provision. See Pet. Br 33-34. The

South Carolina legislature has barred class actions based upon

the statute at issue while authorizing the recovery of

attorneys’ fees and statutory damages without a showing of

actual damages, see S.C. Code Ann. § 37-10-105(a), and the

conduct of parties such as Green Tree remains subject to

oversight by regulatory agencies, e.g., id. § 37-6-101 et seq

I. IMPOSITION OF CLASS ARBITRATION “WITH-

OUT ANY CONTRACTUAL OR STATUTORY

DIRECTIVE TO DO SO” VIOLATES THE FAA’S

REQUIREMENT THAT ARBITRATION AGREE-

MENTS BE ENFORCED “IN ACCORDANCE

WITH THEIR TERMS.”

The judgment below violates the FAA because the South

Carolina Supreme Court failed to apply “ordinary state

contract doctrine,” Resp. Br. 17, and instead approved the

imposition of class arbitration onto the parties’ agreement

without any contractual directive to do so, Pet. App. 2la.

Contrary to Respondents’ argument, the FAA protects not

only the parties’ “choice to arbitrate rather than litigate,”

Resp. Br. 23, but also requires that courts “give effect to the

' Respondents’ Ghnte Win eaten Shan eeeeee

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“on the real property described below,” J.A. 33, and listed, the street

address, city, state, and zip code of the mortgaged property, id.

5

contractual rights and expectations of the parties,” Volt, 489

US. at 479. Continued enforcement of that long-standing

mandate would not, as Respondents predict, result in

“wholesale federalization” of “arbitration-contract interpreta-

tion,” Resp. Br. 18, but would mean that a court may not, as

here, construe an “[arbitration] agreement in a manner

different from that in which it otherwise construes

nonarbitration agreements under state law.” Perry v. Thomas,

482 US. 483, 493 n9 (1987) The South Carolina Supreme

Court’s hostility to enforcing the arbitration agreements

actually entered into by private parties according to their

terms warrants reversal of the judgment below.

A. This Court’s Cases Make Clear That The FAA

Requires That Agreements To Arbitrate Be

Enforced “In Accordance With Their Terms.”

Respondents’ suggestion that the FAA protects only “the

parties’ choice to arbitrate rather than litigate,” Resp. Br. 23,

cannot be squared with this Court’s interpretation of Section 2

of the FAA As this Court has explained, Section 2 puts

arbitration “‘agreements upon the same footing as other

contracts,” Allied-Bruce Terminex Cos. vy. Dobson, 513 US.

265, 271 (1995), and “requires courts to enforce privately

negotiated agreements to arbitrate, like other contracts, in

accordance with their terms,” Volt, 489 U.S. at 478. see also

Mastrobuono, 514 U.S. at 53-54 (same).

As Green Tree showed previously, Pet. Br 21-23, 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.” First Options, 514

U.S. at 947 (internal quotation marks and citations omitted).

These requirements are incompatible with the suggestion that

courts are free to rewrite agreements to arbitrate without

regard to the parties’ contractual directives so long as, in the

end, they permit arbitration. That suggestion cannot be

6

ce

reconciled with the FAA’s basic purpose: “‘to put arbitration

provisions on the same footing as a contract’s other terms.’”

Allied-Bruce, 513 U.S. at 275.

Nor does the FAA insulate from review state-court

determinations regarding the proper scope of arbitration

agreements. Resp. Br. 26 (stating that FAA “trusts” courts’

interpretation of arbitration agreements) In Volt, for

instance, this Court reviewed whether a state court’s

interpretation of an arbitration contract conflicted with the

FAA, 489 US. at 476, and upheld that court’s interpretation

because it had, as the FAA requires, enforced the agreement

in accordance with its terms, id. at 473 n.4, 476. Similarly, in

Perry, this Court explained that a state court could not

“construe [an arbitration] agreement in a manner different

from that in which it otherwise construes nonarbitration

agreements under state law.” 482 US. at 493 n.9. Finally, in

Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996),

the Court reiterated that Section 2 of the FAA “precluded

States from singling out arbitration provisions for suspect

Status, requiring instead that such provisions be placed ‘upon

the same footing as other contracts.’” /d. at 687.

The continued application of these principles in no way

threatens a “wholesale federalization of matters of state law.”

Resp. Br. 18. Rather, the FAA ensures only that courts are

not hostile to arbitration agreements and that they steadfastly

enforce the intentions of the parties as written. E.g., Scherk

v. Alberto Culver Co., 417 U.S. 506, 511 (1974) (FAA

requires that courts “place arbitration agreements ‘upon the

same footing as other contracts’”) (quoting H.R. Rep. No. 68-

91, at 1, 2 (1924)); see Howsam vy. Dean Witter Reynolds,

Inc., 123 S. Ct. 588, 593 (2002) (Thomas, J., concurring in

judgment). In contrast, adoption of Respondents’ approach

would constitute a radical departure from settled law that

would allow courts to resurrect the same “judicial hostility” to

arbitration by conditioning enforcement of the parties’

agreement to arbitrate on judicial imposition of terms dictated

7

not by the parties’ consent, but by a court’s own notions of

“efficiency,” equity,” and “judicial economy.” Pet. App. 22a.

This Court has explained that the FAA permits parties to

trade[ ] the procedures .. . of the courtroom for the

simplicity, informality, and expedition of arbitration.’”

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

(1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 US. 614, 628 (1985)). Under

Respondents’ view, a party’s decision to choose arbitration

instead of litigation would be an empty one because a court

freely could rewrite the terms of that private arbitration

agreement based upon its own policy preferences so long as

the court ultimately required arbitration.

B. The Decision Below Violated The FAA By Impos-

ing Class Arbitration On The Parties’ Agreement

Without Any “Contractual Directive To Do So.”

The decision below violated the FAA because the South

Carolina Supreme Court ordered class arbitration even though

it acknowledged there was no “contractual or statutory

directive to do so.” Pet. App. 2la. That ruling is flatly

contrary to general principles of contract law and therefore

violates the FAA. Respondents utterly abandon the holding

of the court below and now suggest that the arbitration

agreements “can be read affirmatively to authorize [class

arbitration].” Resp. Br. 31; id at 31-34. Their arguments

should be rejected. .

oce

/

1. As Respondents recognize elsewhere, “the state’s high

court is the ultimate arbiter of the meaning of the contract

terms.” /d. at 28. Here, South Carolina’s high court did not

conclude that the parties had intended to authorize class-wide

arbitration; instead, it determined that the arbitration agree-

ments were “silent” regarding “class-wide arbitration.” Pet.

App. 2la. That predicate determination was essential to the

Court’s ultimate ruling: “we adopt the approach taken by the

California courts in Keating and Blue Cross, and hold that

8

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.” Jd. at 22a?

After concluding that the parties’ agreement was “silent” on

the issue of class arbitration, the court applied its decision in

Episcopal Housing Corp. v. Federal Insurance Co., 255

SE2d 451, 452 (S.C. 1979), where it had “authorized

consolidation of the claims” in an arbitration “absent

contractual or statutory authority.” Pet. App. 18a Based

upon Episcopal Housing, the court imposed class arbitration

here “without any contractual or statutory directive to do so.”

Id. at 21a. Under that analysis, courts in South Carolina can

modify and rewrite private arbitration agreements to impose

whatever requirements they deem appropriate so long as they

conclude that the arbitration agreement does not expressly

foreclose that result.

The parties did not agree to be bound by any arbitration-

specific provision of South Carolina law; rather, they

expressly agreed that their arbitration agreements would be

“governed by the [FAA],” Pet. App. 110a, which this Court

has held requires enforcement of such agreements “according

to their terms,” e.g., Volt, 489 U.S. at 476; Mastrobuono, 514

U.S. at 54. Allowing a court “to read [class arbitration] into

the parties’ agreement would ‘disrupt[{] the negotiated

risk/benefit allocation and direct[] [the parties] to proceed

with a different sort of arbitration”” Champ v. Siegel

? As Respondents note, Resp. Br. 30 (citing Pet. App. 19a), the court

below concluded that a portion of the “clause providing for arbitration of

‘disputes, claims, or controversies arising from or relating to this contract,

or the relationships which result from this contract,” “creates an

ambiguity,” and “construed” that ambiguity “against the drafting party.”

Pet. App. 19a. Although the court never identified the “ambiguity,” the

upshot of its analysis was not that the parties agreed or authorized class-

wide arbitration, but that “Green Tree’s arbitration clause was silent

regarding class-wide arbitration.” /d This was necessary to the court's

holding that “class-wide arbitration may be ordered when the arbitration

agreement is silent.” Pet. App. 22a.

~

9

Trading Co., 55 F.3d 269, 275 (7th Cir. 1995) (first alteration

added) (quoting New England Energy, Inc. v. Keystone

Shipping Co., 855 F.2d 1, 10 (ist Cir. 1988) (Selya, J.,

dissenting)).

By no stretch of the imagination does the South Carolina

Supreme Court’s ruling constitute a “routine application of

ordinary state contract law principles.” Resp. Br. 19. Under

generally applicable contract law in South Carolina, as

elsewhere, “‘[w]jords cannot be read into a contract which

import intent wholly unexpressed when the contract was

executed.”” Gilstrap, 320 S.E.2d at 447 (holding that interest

charge could not be imposed on contract that was “silent as to

an interest rate”) (internal quotation marks omitted); see

Parker v. Byrd, 420 §.E.2d 850, 852 (S.C. 1992) (reiterating

same principle of general contract law); Blakeley v. Rabon,

221 S E.2d 767, 769 (S.C. 1976) (same); McPherson v. JE.

Sirrine & Co., 33 SE.2d 501, 509-10 (S.C. 1945) (same).°

Put another way, in South Carolina, as elsewhere, courts “are

without authority to alter a contract by construction or to

make new contracts for the parties.” C.A.N. Enters., Inc. v.

South Carolina Health & Human Servs. Fin. Comm'n, 373

S.E.2d 584, 587 (S.C. 1988); see A. 7. Conner v. Alvarez, 328

S.E 2d 334, 336 (S.C. 1985) (explaining that court’s “‘duty is

limited to the interpretation of the contract made by the

parties themselves’); Gilstrap, 320 S E.2d at 447 (same).

The South Carolina Supreme Court’s determination that a

“state court may order consolidation” and _ class-wide

arbitration “of claims subject to mandatory arbitration without

> Accord 11 R.A. Lord, Williston on Contracts § 31.5, at 299 (4th ed.

1999) (“court must enforce [the contract] as drafted by the parties,

according to the terms employed, and may not make a new contract for the

parties or rewnite their contract while purporting to interpret or construe

it”) (footnotes omitted); 5 M.N. Kniffin, Corbin on Contracts § 24.19, at

184 (rev. ed. 1998) (“courts do not make a contract for the parties and...

the parties must be content to perform and to receive performance in

accordance with whatever agreement they themselves chose to form”)

(internal quotation marks and citation omitted).

10

any contractual or statutory authority to do so,” Pet. App. 21a,

is directly at odds with generally applicable principles of

contract law. F.g., Gilstrap, 320 SE.2d at 447, C.A.N.

Enters., Inc, 373 S.E.2d at 586. That court’s abandonment of

general principles of contract law in favor of a “different” rule

for the construction of arbitration agreements, Perry, 482 U.S.

at 493 n9, is contrary to the FAA, which requires that

arbitration be put “‘upon the same footing as _ other

contracts,” Allied-Bruce, 513 U.S. at 281 (quoting Volt, 489

U.S. at 474) Indeed, reversal of the judgment below is

appropriate even under the approach advocated by

Respondents, who concede that “the FAA displaces state-law

principles that farget arbitration agreements for special or

different treatment.” Resp. Br. 23-24; see also Perry, 482

US. at 493 n9

2. Unable to defend the decision below on its terms,

somewhat ironically, Respondents attempt to substitute their

Own interpretation of the agreement for that of the South

Carolina Supreme Court, arguing that the agreement “can be

read affirmatively to authorize [class arbitration].” Resp. Br.

31-36. Respondents, however, previously informed this

Court that the “arbitration agreement” does not “speak[] to

the question of class arbitrations.” Opp. at 12. Moreover,

Respondents argue elsewhere that this Court has no authority

to review the South Carolina Supreme Court’s “reading of the

Agreement.” Resp. at 26. In this case, the South Carolina

Supreme Court concluded that the arbitration agreements

were “silent” on the issue of class-wide arbitration and relied

upon arbitration-specific precedent to impose additional terms

and obligations that the court below believed furthered

“judicial economy.” Pet. App. 22a.

Here, there can be no question that the parties did not

authorize class-wide arbitration. To the contrary, the

agreements by their terms authorize only bilateral arbitration

by two contractually defined entities, “you” and “us,” and

dictate the manner in which those parties would choose the

1]

arbitrator who would resolve their disputes. J.A. 33, 35. The

notion that the “clause referring to ‘arbitration by one

arbitrator selected by us with consent of you,’” Resp. Br. at

35, authorizes the arbitrator to resolve claims advanced by

thousands of parties other than “you” and “us” is absurd. See

First Options, 514 U.S. at 942, 946 (holding that arbitration

contract could not bind non-parties).

Arbitration is a contractual right. Under general principles

of South Carolina contract law, one party (e.g., the Bazzles or

Lackey) cannot enforce the arbitration rights of other parties

(e.g., the unnamed class representatives) without a contractual

directive to do so. Contrary to their arguments, Resp. Br. 38-

39, the generally applicable rule of contract law is that “an

individual who is not a party to a contract may not enforce it.”

Stokes v. Westinghouse Savannah River Co., 206 F.3d 420,

429 (4th Cir. 2000) (applying South Carolina law);

louchberry v. City of Florence, 367 S.E.2d 149, 150 (S.C.

1988) (setting forth background “presumption” that “contract

is not enforceable” by third parties); Goode v. St. Stephens

United Methodist Church, 494 § E.2d 827, 833 (S.C. Ct. App.

1997) (“a third party not in privity of contract with the

contracting parties has no right to enforce a contract”). Thus,

absent contractual authorization, neither the Bazzles nor

Lackey would have the right to enforce the arbitration rights

reflected in agreements to which they were not parties.

Recognizing as much, Respondents argue that, “in the context

of a class action, the reference to ‘you’ may be read as

plural.” Resp. Br. 36 n17 (emphasis added). But this

argument assumes that the parties agreed to class arbitration,

and that simply begs the question. The proper “context” here

is the contract entered into by the parties, which defined

““You’” to “mean|{] each Buyer above,” and defined “‘us’” to

“mean{] the Seller above, its successors and assigns.” J.A.

33, 35.

Respondents’ own efforts at contract interpretation fare no

better. Their claim that the parties’ “choice-of-law clause”

12

~ authorized class arbitration because South Carolina law

“permits class arbitration in the absence of contract language

specifically forbidding it,” Resp. Br. 2, 3, 32, constitutes a

blatant bootstrap argument. The only support for this

“principle” of South Carolina law is the decision under

review. Unlike Volt, inclusion of a general choice-of-law

provision governing the substantive aspects of the contract

could not mean that the parties, through silence, agreed to

class-wide arbitration where the South Carolina Supreme

Court explained that it had never before “considered whether

or not class-wide arbitration may be ordered when the

arbitration agreement is silent.” Pet. App. 17a. To the

contrary, the precedent cited by Respondents, Resp. Br. 32,

makes clear that in South Carolina “the inclusion of a

governing [state] law provision in an _ arbitration

agreement _. does not necessarily require the application of

state, rather than federal, arbitration law,” Zabinski v. Bright

Acres Assocs., 553 § E.2d 110, 117 (S.C. 2001). This Court

reached the same conclusion in Mastrobuono, 514 US. at 64,

holding that a general “choice-of-law provision covers the

rights and duties of the parties, while the arbitration clause

covers arbitration.” /d. In all events, Respondents’ argument,

Resp. Br. 32 & n.16, simply ignores that the court below

determined that the “arbitration agreements expressly state

that they... . are governed by the FAA.” Pet App. lla‘

Respondents’ attempt to save the judgment below by pluck-

ing snippets from the arbitration clause — Resp. 32-33 (“all

powers,” “all disputes,” and “‘equitable’ powers”) — without

regard io the principle that they must be read in connection

with the contract as a whole cannot be justified under general

principles of contract construction. As this Court has explain-

ed, a contract “should be read to give effect to all its provis-

” «

* Respondents’ suggestion that the parties intended to be governed only

by the definitional section of the FAA, but not by its remaining provisions,

Resp. Br. 42, is specious and ignores the ruling of the court below that the

Bazzles’ and Lackey’s arbitration agreements were to be “governed by the

FAA.” Pet. App. lla & n.9.

Se we

13

ions and to render them consistent with each other.” Mastro-

buono, 514 US. at 63; see Myrtle Beach Lumber Co. v.

Willoughby, 274 S$ E.2d 423, 425 (S.C. 1981) (“ijn constru-

ing an agreement, consideration should be given to all of the

verbiage”). Here, the language relied upon by Respondents

cannot be considered in isolation from the fact that the

arbitrator who is to wield contractually granted “powers” to

resolve “all disputes” was chosen by the specific parties to the

contracts to resolve only their disputes. .Pet App. 110a

Respondents’ final contention that the parties authorized all

procedures that were not expressly foreclosed, Resp. Br. 33-

34, simply underscores the hostility to private bilateral

agreements to arbitrate inherent in their position Under

Respondents’ reasoning, the South Carolina Supreme Court

would have been entitled to dictate the precise conduct of the

parties’ arbitration unless the parties, in advance, specifically

identified and expressly rejected every such possible

contingency. Absent a lengthy recitation of the precise

conduct of arbitration, the South Carolina Supreme Court

would have carte blanche to impose the entirety of the South

Carolina Rules of Civil Procedure onto the parties’ agreement

and thereby recreate, in an arbitral setting, state-court

litigation. That is not an “ordinary principle of contract” law,

but is instead nothing less than a power to rewrite the parties’

arbitration agreements in a manner squarely foreclosed by the

FAA. See Perry, 482 U.S. at 492, Allied-Bruce, 513 US. at

271.

Il. ARBITRATOR DISCRETION CANNOT RESCUE

THE DECISION BELOW BECAUSE CLASS

ARBITRATION WAS IMPOSED ON’ THE

ARBITRATOR, WHO HAD NO DISCRETION TO

EXCEED HIS CONTRACTUAL POWERS.

Respondents cannot dispute that “‘[aJrbitration under the

[FAA] is a matter of consent, not coercion,” Waffle House,

534 US. at 294 (quoting Volt, 489 US. at 479) (second

alteration in original), and that an arbitration contract “cannot

14

bind a nonparty,” id These principles, coupled with the

South Carolina Supreme Court’s determination that the

arbitration agreements were “silent” regarding class

arbitration, Pet. App. 22a, compel the conclusion that class

arbitration could not be imposed by the courts or by the

arbitrator See 9 USC § 10(a)(4). Respondents seek to

avoid that result by arguing that the FAA nevertheless

permitted the arbitrator to determine whether to conduct a

class arbitration, and that such a determination is subject to

deferential judicial review. See Resp. Br. 20-22, 43-45.

These arguments mischaracterize the proceedings below and

misstate the applicable law.

A. The Imposition Of Class Arbitration Was Not A

Discretionary Exercise Of Arbitral Powers

Under The Arbitration Agreements.

As Green Tree showed previously, Pet. Br. 34-37,

Respondents are flatly mistaken in contending that “the

arbitrator decided to proceed on a class-wide basis in both

cases.” Resp. Br. 2; see id. at 43. In doing so, Respondents

repeatedly conflate the issue whether the arbitration

agreements authorized class arbitration, and the decision to

certify a class assuming there was such authority. /d. at 44

n.23, 43-44. Only the abritrator’s power to conduct class

arbitration is at issue here.

On that issue, with regard to the Bazzle proceeding,

Respondents cannot and do not dispute that the trial court,

before referring the case to arbitration, ordered that it proceed

as a class, see id at 11-12, and dictated that class-arbitration

“proceed on an opt-out basis,” Pet. App. 3a-4a. Respondents

seek to undermine these facts by quoting a portion of the

arbitrator's opinion from the Lackey proceeding and

representing, mistakenly, that these statements were made in

the Bazzle proceeding. Resp. Br. at 43 (quoting Pet. App.

84a). Simply put, the arbitral award in the Bazzle proceeding

must be set aside because the trial court imposed class

1S

arbitration onto the parties’ agreement in a manner foreclosed

by the FAA.

Similarly, Green Tree previously showed that the Bazz/le

court’s ruling also infected the conduct of the Lackey

proceeding. Pet. Br. 36-37. There can be no doubt that the

erroneous decision of the trial court in Bazzile affected the

Lackey arbitration. As Respondents themselves put it in their

Motion to Confirm the arbitral award in Bazz/e, any decision

by the arbitrator in Lackey that “the case could proceed as a

class action” was simply “a reaffirmation and/or adoption of

[the Bazzle} Court’s prior determination.” J.A. 31-32 n.2.

Further, Respondents offer no authority in response to

Green Tree’s showing of judicial estoppel and instead admit

that they “did emphasize [to the Lackey arbitrator] that the

court had itself earlier approved class certification in identical

circumstances in Bazzle.” Resp. Br. 44 n.23. Indeed, the case

for judicial estoppel is particularly strong here because

Respondents argued to the Lackey arbitrator that “the law of

this case compels class arbitration,” R. App. 518, and the

Lackey arbitrator, who expressly relied upon the “briefs of the

plaintiffs,” ordered class arbitration, id at 73. Thus,

principles of judicial estoppel prevent Respondents, who

““prevail[ed] in one phase of [this] case on an argument” to

““rely[] on a contradictory argument to prevail in another

phase.” New Hampshire v. Maine, 532 U.S. 742, 749

(2001).

B. The Arbitrator’s Contractual Power To Bind

The Bazzles And Lackey Did Not Extend To The

Parties To Thousands Of Other Contracts.

In all events, the decision below affirming the arbitral

awards still must be reversed because the arbitrator had no

power under the Bazzles’ and Lackey’s contracts to bind

thousands of other individuals who were not parties to those

agreements. See 9 USC § 10(a)(4). Confirming that the

FAA prohibits an arbitrator from arrogating powers that the

16

parties have not granted in their arbitration agreement would

not, as Respondents warn, cause arbitrations to “grind to a

halt.” Resp. Br 30. Rather, ensuring that arbitrators do not

exceed the scope of the powers delegated to them promotes

arbitration by securing “the contractual rights and

expectations of the parties.” Volt, 489 U.S. at 479.

1. In arguing that Green Tree seeks to create a “federal

presumption against class arbitration,’ Resp. Br. at 37

(capitalization omitted), id at 24-25 & n.10, Respondents

ignore the sharp distinction between litigation, which is a

matter of coercion, and arbitration, which derives from the

parties’ consent. Under the FAA, arbitration is “simply a

matter of contract between the parties, .. . a way to resolve

those disputes — but only those disputes — that the parties have

agreed to submit to arbitration.” First Options, 514 US. at

943, see Howsam, 123 S. Ct. at 591 (“[A]rbitration 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”)

(alteration in original, internal quotation marks omitted).

Unlike courts of general jurisdiction, “arbitrators derive their

authority 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), John Wiley & Sons, Inc. v.

Livingston, 376 U.S. 543, 547 (1964) (“The duty to arbitrate

[is] of contractual origin... .”). And, unlike a court, an

arbitrator “is not a public tribunal imposed upon the parties by

superior authority” and “has no general charter to administer

justice for a community which transcends the parties,” but is

instead “part of a system of self-government created by and

confined to the parties” United Steelworkers of Am. v

Warrior & Gulf Nav. Co., 363 U.S. 574, 581 (1960) (internal

quotation marks omitted).

Because “‘[a}rbitration under the [Federal Arbitration Act]

is a matter of consent, not coercion,” Waffle House, 534 U S.

at 294, the issue is not, as Respondents would have it,

** lett PORE LIE I NIST EE IP Oy FRE TE erro

AMS

17

whether the agreements had “limiting language” excluding

such authority or constraining the arbitrator, Resp. Br. 35, or a

“presumption” against class-wide arbitration, id at 40; see

also id. at 3-4, 20, 33-34. Rather, the issue under the FAA is

whether the parties, through their agreements to arbitrate,

authorized the arbitrator to conduct class-wide arbitration that

would resolve not only the claims of the parties who initiated

arbitration, but also the claims of thousands of other

individuals. See 9 U.S.C. § 10(a)(4), First Options, 514 US.

at 943. That legal principal is controlling here because the

South Carolina Supreme Court explained — before it extra-

contractually modified the agreement in a manner foreclosed

by the FAA, see supra Part I — that the arbitration agreement

did not authorize, but was “silent” as to the issue of class

arbitration. Pet. App. 22a

Similarly, as this Court explained in Waffle House, “[i)t

goes without saying that a contract cannot bind a nonparty.”

534 US. at 294. Here, there can be no question that

arbitration proceedings at issue in this case were conducted

pursuant to arbitration agreements contained in the Bazzles

and Lackey Contracts, and that the thousands of other

unnamed class members whose claims were resolved were

not parties to those contracts. Indeed, as discussed above,

general principles of contract law dictate that, absent

contractual authorization, the Bazzles and Lackey had no

right to enforce the contractual arbitration provisions of third

parties. See Stokes, 206 F.3d at 429 (“an individual who is

not a party to a contract may not enforce it”); accord

Touchberry, 367 S.E.2d at 150; Goode, 494 S$ _E.2d at 833.

Respondents insist that Waffle House is distinguishable

because “all the unnamed class members did agree to final

and binding arbitration on the same terms as did the class

representatives, and acquiesced to the arbitration.” Resp. Br.

48 (emphasis added). In doing so, Respondents contend that

“(t]he unnamed class members’ right under the Agreement to

withhold their consent to Green Tree’s selected arbitrator was

18

preserved by the right to opt out of the plaintiff classes,” id. at

36 n.17, and that the rights of these unnamed class members

“were carefully preserved” by the arbitrator. /d. at 47.

These arguments are wrong for two reasons. First, as to the

unnamed class members, Respondents cannot contend that,

through silence and inaction, they actually provided the

affirmative “consent” that is a prerequisite for an arbitrator to

resolve their disputes under the arbitration agreement. Pet.

App. 110a (dictating that-arbitrator must be “selected by us

with consent of you”). Indeed, if the unnamed class members

had actually provided consent, there would have been no need

to make provision in the arbitral awards for “funds awarded to

class members who cannot be located.” Pet. App. 79a, 107a.

Second, Respondents disregard the rights of Green Tree, as

reflected in the contracts and associated arbitration

agreements between Green Tree and each of the individuals

who were joined as unnamed class members in the Bazz/e and

Lackey arbitrations. Each of these thousands of contracts

provided rights not only to these unnamed class members, but

also to Green Tree. Thus, Respondents ignore that Green

Tree never “acquiesced” to the expansion of the Bazzle and

Lackey arbitration agreements to include the claims of

thousands of individuals who were not parties to those

bilateral contracts. Nor did the arbitrator’s opt-out notice

“preserve” Green Tree’s contractual right — reflected in each

of the thousands of agreements — to “select” an arbitrator,

“with consent of you,” id, in the event that a dispute arose

out of that contract.

As a result, to the extent that the arbitrator imposed class

arbitration, the arbitral awards must be set aside because the

arbitrator plainly “exceeded [his] powers” under an

arbitration agreement that does not authorize class arbitration.

9 U.S.C. § 10(a)(4); see also First Options, 514 U.S. at 942,

946 (affirming vacatur of arbitrator's decision because

arbitrator lacked power over party); Mastrobuono, 514 US. at

58 (determining whether arbitrator lacked power to award

19

punitive damages based upon determination of “what the

contract has to say”).° The arbitrator selected by the parties in

Bazzle and Lackey had no authority to bind Green Tree with

regard to disputes with thousands of other third parties, and

therefore exceeded his powers under the Bazzle and Lackey

arbitration agreements.°

2. Finally, ensuring that the scope of arbitration remains in

accordance with the express terms of the arbitration

agreement serves to promote private arbitration and

constitutes an essential safeguard expressly incorporated into

the FAA. See 9 USC. § 10(a)(4). Respondents ignore the

importance of this safeguard when they argue that the scope

of arbitration should not be limited by “exclusive reliance on

authority spelled out in the contract.” Resp. Br. 30. That

argument reflects a misunderstanding of private arbitration

under the FAA and the parties’ agreement to arbitrate.

Under the FAA, parties can choose to “resolve those

disputes — but only those disputes — that the parties have

agreed to submit to arbitration.” First Options, 514 US. at

943, see also Volt, 489 US. at 478 (“FAA does not require

parties to arbitrate when they have not agreed to do so”).

> See also Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d 1250, 1256

(7th Cir. 1994) (“[t}he test for vacating an award under section 10(a)(4)”

is “whether the arbitrator exceeded the powers delegated to him by the

parties’) (emphasis added), Pet. Br. 43 n.15 (collecting circuit court

authority).

® As Respondents recognize, Green Tree did not submit the issue

whether the arbitrator had power to conduct a class-arbitration to the

arbitrator for binding resolution. Resp. Br. 44-45 (explaining that Green

Tree “never sought” and “does not want” a determination by the arbitrator

of whether arbitration agreement authorized class arbitration). Indeed,

Green Tree strenuously and continuously objected to class-wide

arbitration, R. App. 132-33, 151-52, 156-63, 407-15, 449-50, 1448, 1451,

1455, 1538-39, see First Options, 514 U.S. at 946 (explaining that a party

does not, by arguing issue regarding arbitrator's power, indicate “a

willingness to be effectively bound by the arbitrator's decision’),

Howsam, 123 S. Ct. at 592 (“a disagreement about whether an arbitration

clause . . . applies to a particular type of controversy is for the court”).

20

Section 10(a)(4) simply ensures that an arbitrator will not

“exceed [the] powers” delegated by the parties in their private

agreement Adoption of Respondents’ approach — whereby

an arbitrator could exercise power without regard to the

authority delegated under the parties’ agreement — would

undermine the federal policy in favor of arbitration because

private parties would not enter into private agreements to

arbitrate if an arbitrator's power over them were unlimited.

Nor would arbitration proceedings “grind to a halt” if an

arbitrator could not exercise power never granted by the par-

ties Here, the arbitrator indisputably had ample “powers” to

resolve the statutory issue brought by the Bazzles and Lackey

Pet App 110a Such “powers” necessarily included the

ability to dictate procedural matters to resolve “disputes,

claims, or controversies arising from or relating to this

contract” between “you” and “us.” J A 33,35. Nevertheless,

this contractual grant of authority is not a license for an

arbitrator — through class arbitration, consolidation or any

other mechanism — to transform a bilateral arbitration agree-

ment into a multi-lateral proceeding that purports to resolve

disputes involving thousands of additional parties who never

signed the agreements through which the arbitrator was

selected and never “consent[ed]” to the appointment of the

arbitrator Pet App 110a, see Waffle House, 534 US at 294

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

PO Box 486

Charleston, SC 29402

(843) 577-9440

HERBERT W. HAMILTON

KENNEDY COVINGTON

LOBDELL & HICKMAN, L L P

PO 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 &

WOOD LLP

1501 K Street, NW

Washington, DC. 20005

(202) 736-8000

ALAN S. KAPLINSKY

MARK J. LEVIN

BALLARD SPAHR ANDREWS

& INGERSOLL, LLP

1735 Market Street, 51st Floor

Philadelphia, PA 19103-7599

(215) 665-8500

Counsel for Petitioner

April 15, 2003

* Counsel of Record