# Reply Brief — Green Tree Financial Corp. v. Bazzle

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0614%3A09

## Record

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

## Text

[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

pam Ma BS pan Ay Aine erica mfinpee 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0614%3A09. Public record. Not legal advice.