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

MOTION FILED 9

FEB 2 4 2005 No. 02-634

IN THE

Supreme Court of the United States

GREEN TREE FINANCIAL CorpP. A/K/A GREEN TREE

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

CORP. N/K/A CONSECO FINANCE CorpP.

Petitioner,

Vv.

LYNN W. BAZZLE and BurRT A. BAZZLE, in a representative

capacity on behalf of a class and for all others similarly

situated; DANIEL B. LACKEY, GEORGE BUGGS, and FLORINE

BUGGS, in a representative capacity on behalf of a class and

for all others similarly situated,

Respondents.

On Writ of Certiorari to the

Supreme Court of South Carolina

MOTION FOR LEAVE TO FILE BRIEF AND

BRIEF OF WASHINGTON LEGAL FOUNDATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONER

Daniel J. Popeo

Richard A. Samp

(Counsel of Record)

Washington Legal Foundation

2009 Massachusetts Ave.. NW

Washington, DC 20036

(202) 588-0302

Date: February 24, 2003

MOTION FOR LEAVE TO FILE BRIEF

OF WASHINGTON LEGAL FOUNDATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONER

Pursuant to Rule 37.2 of the rules of this Court, the

Washington Legal Foundation (WLF) respectfully moves for

leave to file the attached brief as amicus curiae in support of

Petitioner. Petitioner has consented to the filing of this brief;

its letter of consent has been lodged with the Clerk of the

Court. WLF has been unable to obtain the consent of

counsel for Respondents, thereby necessitating the filing of

this motion.

WLEF is a non-profit public interest law and policy

center with supporters in all 50 states. While WLF engages

in litigation and participates in administrative proceedings in

a variety of areas, WLF devotes substantial resources to

promoting civil justice reform and freedom of contract. To

that end, WLF has appeared before this Court as well as

other federal and State courts in cases touching upon the

enforceability and interpretation of arbitration agreements.

See, e.g., PacifiCare Health Systems, Inc. v. Book, No. 02-

215 (dec. pending). WLF has consistently supported the

rights of private parties to enter into binding agreements to

arbitrate any disputes arising between them, as a quicker and

more efficient alternative to litigation.

WLF has also appeared regularly in cases addressing the

proper scope of class action litigation. See, e.g., Dow

Chemical Co. v. Stephenson, No. 02-271 (dec. pending);

Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367

(1996); Linder v. Thrifty Oil Co., 23 Cal. 4th 429 (2000).

WLF has repeatedly expressed its concern over the

proliferation of class action lawsuits being filed in federal and

state courts and the inhibiting effect that such suits can have

on the development and expansion of businesses.

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WLF is concerned that the decision of the South

Carolina Supreme Court, if allowed to stand, will undermine

the effectiveness of arbitration as an efficient alternative to

litigation, by wedging into the arbitration process all of the

detailed procedures inherent in class action litigation. That

result is particularly problematic when, as here, there is no

indication that the parties ever consented to the adoption of

class action procedures when they entered into an arbitration

agreement. WLEF is concerned that if the decision below

stands, parties will be more reluctant to enter into arbitration

agreements because they will justifiably fear that some court

will later construe the agreements as consent to being

subjected to class-based arbitration, which generally lacks the

procedural protections afforded by courts in class action

litigation.

WLF is filing this brief because of its interest in

promoting the welfare of the business community and the

public at large; it has no direct interest in the outcome of this

case. Because of its lack of direct economic interests, WLF

believes that it can assist the Court by providing a perspective

distinct from that of any party.

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For the foregoing reasons, WLF respectfully requests

that the Court allow it to participate in this case by filing the

attached brief.

Respectfully submitted,

Daniel J. Popeo

Richard A. Samp

(Counsel of Record)

Washington Legal Foundation

2009 Massachusetts Ave., NW

Washington, DC 20036

(202) 588-0302

Date: February 24, 2003

i

QUESTION PRESENTED

Whether the Federal Arbitration Act, 9 U.S.C. § 1 ef

seq., prohibits class-action procedures from _ being

superimposed onto an arbitration agreement that does not

provide for class-action arbitration.

TABLE OF CONTENTS

Page

TABLE OF AUTHIORITIES ...... ccc ccccccee ili

INTERESTS OF THE AMICUS CURIAE .......... l

STATEMENT OF THE CASE ................. l

SUMMARY OF ARGUMENT ................. 5

EE ab Geb esbascaceeebasseubsee e's 6

I. CLASS ACTIONS ARE UNWORKABLE IN

THE ARBITRATION CONTEXT BECAUSE

ABSENT CLASS MEMBERS COULD NOT BE

BOUND BY AN ARBITRATION AWARD

WITH WHICH THEY WERE DISSATISFIED . . . 6

Il. WHILE PARTIES ARE FREE TO AGREE TO

CLASS-BASED ARBITRATION, IT IS UNREA-

SONABLE EVER TO ASSUME THEY HAVE

DONE SO GIVEN THE ONE-WAY NATURE

OF CLASS-BASED ARBITRATION AWARDS . 11

lil. THE DECISION TO ALLOW CLASS-WIDE

ARBITRATION WAS MADE BY_ THE

COURTS, NOT THE ARBITRATOR, AND

THUS IS NOT ENTITLED TO ANY SPECIAL

PEED ccc ceceeseceseseseesess 15

EUUUEEEEES wee dccccesceeseeeenemenses 18

TABLE OF AUTHORITIES

Page

Cases:

AT&T Technologies v. Communications Workers,

Gee Gs PED we ee esesteuscheencesewx 17

Gilmer v. Interstate/Johnson Lane Corp.,

Pa PEE oc babeceskcsnesesstene es 6

Hansberry v. Lee,

gk! ers eee ee ee ee 7

Hines v. Davidovitz,

ff Fe Pee VT eT Te Ce Teer 13

Howsam v. Dean Witter Reynolds, Inc.,

4 RR Fe 17

Keating v. Superior Court,

ff ff S00 eee ee eee 10

Martin v. Wilks,

Ss SEP © Goa ebeecrebeeedtoantenses 7

Mastrobuono v. Shearson Lehman Hutton, Inc.,

SPU PEED oe cecneceteeeener 11, 12, 13

Mitsubishi Motors Corp. v. Soler Chrysler

Plymouth, Inc., 473 U.S. 614 (1985) ............ 6

Phillips Petroleum v. Shutts,

3! eee eae 7, 8,9, 10

Shearson/American Express, Inc. v. McMahon,

See Ge I 6 oh o6-0 9:08 4666 Kt 00088 9, 14

Southland Corp. v. Keating,

Se a UD 60h S KAS ORS eb Oe eens eens 16

Volt Information Sciences v. Bd. of Trustees

of Leland Stanford Junior University,

Ge Sele GR GUND ce ccc esecescees 8, 11, 13, 14

iV

Page

Statutes:

Federal Arbitration Act, 9 U.S.C. §§ 1-16 ..... passim

| RPT Trrerrerrerre rc 16

| errr rr sre rere Te eT ECT 4, 16

S.C. Code Ann. §§ 37-10-102(a), -105............. 2

Miscellaneous:

18 C. Wright, A. Miller, & E. Cooper, Federal

Practice and Procedure § 4449 (1981) ......... oo 7

BRIEF OF WASHINGTON LEGAL FOUNDATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONER

INTERESTS OF AMICUS CURIAE

The interests of amicus curiae Washington Legal

Foundation (WLF) are set forth in the motion accompanying

this brief.

STATEMENT OF THE CASE

In the interests of brevity, WLF hereby incorporates by

reference the Statement of the Case contained in the Brief for

Petitioner.

In brief, Petitioner Green Tree Financial Corp. (“Green

Tree”) is challenging under the Federal Arbitration Act

(“FAA”), 9 U.S.C. §§ 1-16, two interrelated class action

awards. Those two awards require Green Tree to pay nearly

$27 million in statutory damages, attorney fees, and costs to

two Classes consisting of more than 3,700 individuals. One

of the arbitration proceedings was initiated by Petitioners

Lynn and Burt Bazzle (the “Bazzle arbitration”). The other

proceeding was initiated by Daniel B. Lackey and George

and Florine Buggs (the “Lackey arbitration”). Although the

arbitration agreements entered into between Green Tree and

those individuals are "silent" on the subject of class-based

arbitrations, the South Carolina courts directed the

arbitrations to proceed as class actions. Green Tree contends

that South Carolina’s decision to subject them to class-based

arbitration is inconsistent with, and therefore is preempted

by, the FAA.

The Bazzle Arbitration. In 1995, the Bazzles entered

into a retail installment contract and security agreement with

2

Green Tree to finance home improvements. The agreement

included an arbitration clause which provided, inter alia, that

all disputes “arising from this contract” were to be resolved

by an arbitration proceeding governed by the FAA.

The Bazzles later claimed that Green Tree, when it

entered into the loan agreement, violated the attorney and

insurance-agent notice preference provisions of South

Carolina law. See S.C. Code Ann. §§ 37-10-102(a), -105.

Their suit in South Carolina state court was later certified as

a class action (over Green Tree’s objections both that

certification was unwarranted and that any action by the court

should be stayed pending arbitration) on behalf of other South

Carolinian who had entered into home improvement loan

agreements with Green Tree. The court then ordered that the

class action proceed before an arbitrator appointed by the

court. On July 24, 2000, the arbitrator ruled in favor of a

plaintiff class of 1,899 individuals. Pet. App. 55a-8la. The

arbitrator found that Green Tree had violated South Carolina

law in connection with the loan agreements entered into with

each class member. Although the plaintiffs did not attempt

to show that they had suffered any damages as a result of the

violations, the arbitrator imposed a class-wide penalty of

between $5,000 and $7,500 per transaction -- for a total

award of $10,935,000. /d.. 69a-71a. He also awarded the

plaintiffs $3,645,500 in attorney fees. Jd. 7la-8la. On

September 15, 2000, the South Carolina Court of Common

Pleas confirmed the award. /d. 27a-3Sa.

The Lackey Arbitration. Daniel Lackey and his fellow

class members entered into consumer installment contracts

and security agreements with Green Tree for the purchase of

manufactured homes. The agreements contained arbitration

3

clauses that were essentially identical to the arbitration clause

at issue in the Bazzle arbitration.

Daniel Lackey and George and Florine Boggs in 1996

filed a putative class action against Green Tree in South

Carolina state court, alleging violations of the attorney and

insurance-agent notice preference provisions of South

Carolina law. In 1998, the South Carolina Court of Appeals

ordered (over the plaintiffs’ objection) that the arbitration

clause be enforced. Thereafter, the individual who was

already presiding over the Bazzle arbitration was appointed

as arbitrator. He later granted the plaintiffs’ motion to certify

the arbitration as a class action on behalf of South Carolinians

who had entered into manufactured home loans with Green

Tree, agreeing with the plaintiffs that certification was

warranted for the reasons expressed by the trial court in the

Bazzle proceedings.

On July 24, 2000 (the same day he ruled in the Bazzle

arbitration), the arbitrator ruled in favor of a plaintiff class of

1,840 individuals. /d. 82a-109a. Although the plaintiffs did

not attempt to show that they had suffered any damages as a

result of the violations of South Carolina law, the arbitrator

imposed a class-wide penalty of $5,000 per transaction -- for

a total award of $9,200,000. Jd. at 96a-98a. He also

awarded the plaintiffs $3,084,918 in attorney fees and costs.

Id. 98a-106a. On December 19, 2000, the South Carolina

Court of Common Pleas confirmed the award. /d. 36a-54a.

Green Tree appealed both actions, which eventually

were consolidated in the South Carolina Supreme Court. On

August 26, 2002, that court affirmed both awards, rejecting

Green Tree’s contention that the arbitrations should not have

been permitted to proceed on a class-wide basis. /d. la-26a.

4

Initially, the court examined the arbitration clauses and

determined that they were “silent” regarding class-wide

arbitration. /d. 19a. The court stated that the language

relied on by Green Tree was ambiguous and “should,

therefore, be construed against the drafting party, Green

Tree.” /d. Although acknowledging that (as specified by the

parties) the arbitrations were governed by the FAA, id. 11a,

the court distinguished several federal cases -- which held

that class-wide arbitration is impermissible unless explicitly

agreed to by the parties -- on the ground that those cases were

based on § 4 of the FAA, which the court held inapplicable

to state-court proceedings. /d. 19a-20a.

The court went on to identify an “independent state

ground” for affirmance: as a matter of South Carolina law,

trial courts have “discretion” to permit class-wide arbitration

when the arbitration clause is silent regarding that issue. /d.

20a. The court held that granting such discretion was

consistent with South Carolina’s policy of “strongly

favor[ing] arbitration” and 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.” Jd. 2la-22a. The court worried that if such

discretion were not granted, “parties with nominal individual

claims, but significant collective claims, would be left with

no avenue for relief and the drafting party with no check on

its abuses of the law.” Jd. 22a. The court also held that

arbitral decisions are subject to limited review; the court

upheld the arbitral awards in the absence of evidence that

they were issued “in manifest disregard of the law” -- a level

of error that could only be reached by showing that “the

arbitrator knew of a governing legal principle yet refused to

apply it, and the law disregarded was well defined, explicit,

5

and clearly applicable to the case.” Jd. 24a (emphasis in

original).

SUMMARY OF ARGUMENT

Under well-established due process and FAA

principles, absent class members are not bound by judgments

entered in arbitration proceedings that proceed on a class-

wide basis. By their very nature, arbitrations are informal

proceedings in which it is virtually impossible to gauge the

adequacy of the class representative’s representation of

absent class members. The inability of reviewing courts to

ensure adequate representation throughout the proceedings -

combined with the fact that the arbitration process is

premised on the voluntary participation of all parties -

precludes any effort to bind absent class members.

Accordingly, there can be no justification for

interpreting an arbitration provision as permitting class-wide

arbitration, in the absence of a clause explicitly authorizing

such arbitration. Interpreting arbitration provisions in this

manner in the absence of explicit authorization greatly

complicates arbitration proceedings, thereby depriving parties

of the simple, informal, and quick procedure promised them

under the FAA when they agreed to arbitrate their disputes.

Yet, because absent class members cannot be bound by such

class-wide arbitration, there are no corresponding benefits to

offset those costs.

The great danger from the decision below is that it will

discourage parties from agreeing to arbitrate future cases. In

light of the decision below, contracting parties could well

conclude that no amount of disclaimers can insulate them

from a judicial finding that they are subject to class-wide

6

arbitration. If so, they are unlikely to agree to arbitrate

future disputes, a result inimical to the purposes served by

the FAA. Because the decision below “stands as an obstacle

to the accomplishment of the full purposes and objectives of

Congress” as expressed by the FAA, it is preempted by the

FAA.

ARGUMENT

I. CLASS ACTIONS ARE UNWORKABLE IN THE

ARBITRATION CONTEXT BECAUSE ABSENT

CLASS MEMBERS COULD NOT BE BOUND BY

AN ARBITRATION AWARD WITH WHICH

THEY WERE DISSATISFIED

Consideration of whether class-wide arbitration is

consistent with the FAA must begin with an examination of

the practicability of class-wide arbitration as a means of

resolving large numbers of disputes involving common

questions of law or fact. Unless class-wide arbitration can

predictably resolve disputes, there can be no justification for

complicating arbitration proceedings (by, as here for

example, increasing the number of claims more than a

thousand fold, from three to 3,700) and thereby depriving

parties of the “simplicity, informality, and expedition”

promised them under the FAA when they agreed to arbitrate

their disputes. Gilmer v. Interstate/Johnson Lane Corp., 500

U.S. 21, 30 (1991) (quoting Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)).

The clear answer is that class-wide arbitration cannot

resolve disputes within any degree of finality. That is

because, under well established due process principles, absent

class members cannot be bound by arbitrations conducted as

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were these arbitrations, and as arbitrations are commonly

conducted elsewhere. In the absence of the ability to bind

absent class members, no rational party to a contract would

ever agree to class-wide arbitration of contract disputes.

It is “'a principle of general application in Anglo-

American jurisprudence that one is not bound by a judgment

in personam in a litigation in which he is not designated as a

party or to which he has not been made a party by service of

process.'" Martin v. Wilks, 490 U.S. 755, 761 (1989)

(quoting Hansberry v. Lee, 311 U.S. 32, 40 (1940)). "This

rule is part of our ‘deep-rooted historic tradition that

everyone should have his own day in court.'" /d. at 762

(quoting 18 C. Wright, A. Miller, & E. Cooper, Federal

Practice and Procedure § 4449 at 417 (1981)). A judgment

or decree among parties to a lawsuit resolves issues as among

them, "but it does not conclude the rights of strangers to

those proceedings." /d.

Class action litigation represents one very limited

exception to that broad principle. Under limited

circumstances a nonparty to a lawsuit may be bound by a

judgment when a similarly situated individual who is a party

purports to act on behalf of the nonparty and adequately

represents the nonparty throughout the proceedings. /d. at

762 n.2; Phillips Petroleum Co. v. Shutts, 472 U.S. 797,

811-812 (1985). This class-action exception to the general

rule “was an invention of equity to enable it to proceed to a

decree in suits where the number of those interested in the

litigation was too great to permit joinder." /d. at 808. The

Court has permitted absent class members to be bound by

class action judgments in the limited circumstances described

above both because of the practical necessity of a judicial

device that allows for the efficient adjudication of massive

numbers of similar claims and because the litigation process

allows the issue of adequate representation to be closely

monitored -- both by the trial judge and by judges hearing

appeals from a class action judgment. /d. at 808-812.

None of those justifications for the class-action

exception are applicable to class-based arbitrations. The

entire arbitration process is based on the concept of consent.

This Court has recognized that "the FAA does not require

parties to arbitrate when they have not agreed to do so." Volt

Information Sciences v. Bd. of Trustees of Leland Stanford

Junior University, 489 U.S. 468, 478 (1989). Thus, an

individual who has been included in a certified class in a

class-based arbitration cannot be compelled to adjudicate his

claims in the arbitral forum -- even if he has been notified of

the arbitration and has failed to exercise a right to opt out.

Every party to a contract has a due process right to seek

redress under that contract in a court of law (and, in many

instances, to have his claims tried before a jury); in adopting

the FAA, Congress made clear that that right will not be

extinguished in the absence of an explicit agreement by a

contracting party to submit his claims to arbitration. And

even if a party has agreed to arbitration, he has the right to

insist on arbitration pursuant to the terms of his own

arbitration clause (e.g., the right to a say in choosing the

arbitrator) and not to be forced to participate in someone

else's arbitration.

Nor can binding nonparties to arbitration awards be

justified as a practical necessity; i.e., as the only practicable

means of adjudicating massive numbers of similar claims.

Both federal and state courts permit binding class actions to

proceed in appropriate circumstances, and thus there is no

pressing need to create a parallel system of class-based

9

arbitrations. On rare occasions, it may be that similarly

situated individuals who have signed arbitration clauses

cannot effectively vindicate their rights through individual

arbitrations but could do so if allowed to press their claims

collectively. Under those circumstances, the FAA's solution

is to deem the arbitration clauses unenforceable (thereby

freeing the individuals to pursue class action litigation in a

court), not to permit class-based arbitration. See, e.g.,

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

220, 229-30 (1987). See also Shutts, 472 U.S. at 809 (class-

action exception justified in part because judicial class actions

"may permit the plaintiffs to pool claims which would be

uneconomical to litigate individually.").

Moreover, the careful monitoring of adequacy of

representation that Shutts deemed so critical to the class-

action exception simply is not possible in the context of

arbitration. For example, rarely is a transcript maintained of

an arbitration proceeding, thus making it virtually impossible

for a reviewing court to determine whether the class

representative and her counsel adequately represented the

interests of absent class members throughout the arbitration

proceedings. Indeed, in making his decision an arbitrator is

generally not required to provide any findings of fact or

conclusions of law; so a class-based arbitration award may

well state nothing regarding the arbitrator's findings as to

adequacy of representation.

In sum, absent class members cannot be bound by

awards issued after arbitrations conducted as were these

arbitrations, and as arbitrations are commonly conducted

elsewhere. In the absence of binding judgments, class-based

arbitrations are wholly unworkable and deprive parties of the

10

efficiencies that caused them to agree to arbitration in the first

instance.

As the Court recognized in Shutts, "Whether it wins or

loses, [a class action defendant] has a distinct and personal

interest in seeing the entire plaintiff class bound by res

judicata just as [the class action defendant] is bound." Shutts,

472 U.S. at 805. For example, even though Green Tree lost

in this case, it would at least like assurances that absent class

plaintiffs are barred from seeking additional damages beyond

the $5,000 to $7,500 in statutory damages awarded to each

-of the class members. But as the preceding discussion

indicates, Green Tree can have no such assurances; an absent

class member who claims to have suffered damages in excess

of the amount awarded is likely to assert that he cannot be

bound by the award from an arbitration proceeding to which

he never consented and in which the adequacy of

representation could not be closely monitored.

Some courts that have permitted class-based arbitrations

have sought to alleviate the problems cited above by

increasing court supervision of the arbitration process

whenever a class-based proceeding is certified. See, e.g.,

Keating v. Superior Court, 645 P.2d 1192, 1209 (Cal. 1982)

(court "would have to make initial determinations regarding

certification and notice to the class, and . . . exercise a

measure of external supervision in order to safeguard the

rights of absent class members to adequate representation").

Such measures do not, of course, address the fact that absent

class members have not affirmatively consented to the

arbitration. More importantly, such measures add

significantly to the complexity of the arbitration process,

thereby depriving parties of the simple and expeditious

proceedings that, as the FAA recognizes, parties bargain for

when entering into arbitration agreements.’

Il. WHILE PARTIES ARE FREE TO AGREE TO

CLASS-BASED ARBITRATION, IT IS UNREA-

SONABLE EVER TO ASSUME THEY HAVE

DONE SO GIVEN THE ONE-WAY NATURE OF

CLASS-BASED ARBITRATION AWARDS

It is the policy of the FAA to enforce the agreements of

contracting parties with respect to arbitration of disputes.

Mastrobuono v. Shearson Lehman Hutton, Inc. , 514 U.S. 52,

53-54 (1995) ("[TJhe central purpose of the Federal

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

arbitrate are enforced according to their terms.'") (quoting

Volt, 489 U.S. at 479); id. at 57 ("[PJarties are generally free

to structure their arbitration agreements as they see fit.").

Thus, parties to a contract are free, if they so desire, to

specify the use of class-based arbitration proceedings to

resolve any contract disputes.

But it is highly unlikely that parties would ever intend

that their disputes should be arbitrated on a class-wide basis.

Because, as demonstrated above, absent class members would

not be bound by any judgment, parties to arbitration realize

that they have nothing to gain and much to lose from class-

based arbitration. Any effort to discern the intended meaning

of an arbitration clause must begin with a recognition of the

distaste with which the contracting parties are likely to view

class-based arbitration.

' The extreme complexity of the Bazzle and Lackey arbitrations

is well illustrated by the size of the attorney fees awarded by the

arbitrator -- a total of more than $6.7 million.

12

At no point in its analysis did the South Carolina

Supreme Court register any recognition of the one-sided

nature of the class-based arbitration it was imposing on Green

Tree. Instead, the court reached its determination that class-

based arbitration was permitted under the arbitration clause

by purporting to employ rules of statutory construction based

on South Carolina law.

First, the court determined that the arbitration clause

was “silent” regarding class-wide arbitration. Pet. App.

19a. The court concluded that that silence created an

"ambiguity" regarding the availability of class-wide

arbitration, and that the ambiguity should be construed

against Green Tree as the drafting party. /d. That

conclusion is far from clear, even as a matter of South

Carolina law. As this Court explained in Mastrobuono:

"[T]he common-law rule of contract interpretation that a

court should construe ambiguities against the interest of the

party that drafted it . . . [is intended] to protect the party who

did not choose the language from an unintended or unfair

result." Mastrobuono, 514 U.S. at 63-64. The Court

applied the common-law rule in that case because it deemed

it unlikely that stock brokerage customers would have had

"any idea that by signing a standard-form agreement to

arbitrate disputes they might be giving up an important

substantive right" to sue for punitive damages. /d. at 64. In

contrast, it cannot be seriously contended that the common-

? That conclusion is highly questionable. The arbitration clauses

provide for arbitration of “{ajll disputes, claims, or controversies

arising from or relating to this contract, or the relationships which

result from this contract." /d. 110a. If parties specify that they agree

to arbitrate disputes arising from a particular contract, it is logical to

conclude that they have not agreed to arbitrate disputes arising from

another contract.

13

law rule needs to be applied in this case in order to protect

Green Tree's customers "from an unintended or unfair

result.” Given that the parties are unlikely to have intended

(had they written a clause directly addressing the issue) to

permit class-based arbitration that could bind the parties but

would not bind absent class members, a ruling that no class-

based arbitration is permitted can hardly be deemed “an

unintended or unfair result."

The real danger here is that by imposing class-based

arbitration procedures in the face of a "silent" arbitration

clause, the South Carolina courts are discouraging parties

from agreeing to arbitration in future cases. In light of the

decision below, contracting parties could well conclude that

no amount of language (of the "disputes . . . arising from or

relating to this contract" variety deemed ambiguous here) will

insulate them from a judicial finding that they are subject to

class-wide arbitration. If so, they are unlikely to agree to

arbitrate future disputes.

But any state policy that significantly discourages

arbitration of disputes is contrary to the federal policy

embodied in the FAA. In interpreting arbitration clauses,

"'due regard must be given to the federal policy favoring

arbitration.'" Mastrobuono, 514 U.S. at 63 (quoting Volt,

489 U.S. at 476). Because the decision below "stands as an

obstacle to the accomplishment of the full purposes and

objectives of Congress" as expressed by the FAA, it is

preempted by the FAA. Hines v. Davidovitz, 312 U.S. 52,

67 (1941).

Respondents insist that "'[t}here is no federal policy

favoring arbitration under a certain set of procedural rules’ ”

and thus that “States are . . . free to determine whether,

14

under state law, arbitrations may proceed on a class-wide

basis." Brief in Opposition to Certiorari Petition at 14

(quoting Volt, 489 U.S. at 476). Respondents’ citation to

Volt is inapposite. In that case, the parties had expressly

agreed to the applicability of the California arbitration rule at

issue. In contrast, the parties in this case specified, as the

South Carolina Supreme Court acknowledged, that "Green

Tree's arbitration clause is governed by the FAA." Pet.

App. lla n.9. Moreover, the Court determined that the

California arbitration rule at issue in Volt was one

"manifestly designed to encourage resort to the arbitral

process." Volt, 489 U.S. at 476. The same cannot be said

regarding the decision below, which is likely to discourage

parties from including arbitration clauses in future contracts.

In light of the federal policy of encouraging arbitration

of contract disputes, the only reasonable interpretation of the

arbitration Clause at issue in this case is that the parties did

not intend to permit class-wide arbitration of claims.

Directing arbitration to proceed on the basis of individual

claims will not deprive individual claimants of an effective

remedy against Green Tree. The award of from $5,000 to

$7,500 for individual claims, in addition to the award of

hefty attorney fees, makes it well worth the while of an

individual claimant to pursue her claims against Green Tree.”

> As noted previously, in those cases in which potential recoveries

are too small to make arbitration of individual claims an effective

means of vindicating substantive rights, courts should be directed to

declare the arbitration provision unenforceable and permit the parties

to seek judicial remedies, rather than to permit class-wide arbitration.

Shearson/American Express, 482 U.S. at 229-30.

~~.

15

lll. THE DECISION TO ALLOW CLASS-WIDE

ARBITRATION WAS MADE BY THE COURTS,

NOT THE ARBITRATOR, AND THUS IS NOT

ENTITLED TO ANY SPECIAL DEFERENCE

In their opposition to the petition for certiorari,

Respondents insisted that the decision to impose class-wide

arbitration was made by the arbitrator, not the South Carolina

state courts. Opp. Br. 25-28. Respondents argue that the

Court should defer to_the arbitrator's decision in this regard

because "by agreeing to submit the construction of their

contract to an arbitrator, the parties bargained for the

procedures he devised." /d. 26.

Respondents’ arguments can be squared with neither the

decision of the South Carolina Supreme Court nor the orders

of the trial courts. The South Carolina Court of Common

Pleas in the Bazzle proceeding unambiguously directed the

arbitration to proceed on a class-wide basis. Pet. App. 3a-4a.

In his subsequent decision, the arbitrator gave no hint that he

felt at liberty to reverse that decision. /d.. 82a-109a.

The impetus for class-wide arbitration in the Lackey

proceeding is less clear. On the one hand, unlike in the

Bazzle proceeding, the trial court never entered an order

requiring class-wide arbitration. On the other hand, the

arbitrator in the Lackey proceeding was the same arbitrator

as in the Bazzle proceeding, the Lackey Respondents argued

that the reasoning of the district court order in the Bazzle

proceeding also required class-wide arbitration of the Lackey

proceeding, and the arbitrator accepted that argument.

But whatever doubt there may have been about the

source of class-wide arbitration in the Lackey proceeding was

16

erased by the decision of the South Carolina Supreme Court.

At no point in its decision did the court indicate that its

affirmance of class-wide arbitration was based on a decision

to grant deference to an arbitrators’ reasonable interpretation

of a arbitration clause. Rather, the court engaged in its own

de novo analysis of the Green Tree arbitration clause. /d.

19a. The court held, alternatively, that the class-wide

arbitration could be affirmed based on ¢ria!l courts’

"discretion" to permit class-wide arbitration when the

arbitration clause is silent on the issue. Jd. 20a. The court

held that trial courts should exercise that discretion based on

whether class-wide arbitration "would serve efficiency and

equity and would not result in prejudice." /d. 2la-22a. By

so holding, the South Carolina Supreme Court made clear its

view that the availability of class-wide arbitration was an

issue for the courts to decide. Thus, contrary to

Respondents’ argument, the decision to permit class-wide

arbitration cannot be defended as one based on the

* The court distinguished several federal decisions -- which held

that class-wide arbitration is impermissib’e unless explicitly agreed to

by the parties -- on the ground that those cases were based on § 4 of the

FAA, which the court held inapplicable to state-court proceedings. /d.

19a-20a. The federal decisions cannot be distinguished on that basis;

they were not based solely on an interpretation of § 4. While the

applicability of FAA § 4 to state court proceedings is an open question,

it is settled law that FAA § 2 is applicable in both federal and state

courts. Southland Corp. v. Keating, 465 U.S. 1, 12 (1984). Section

2 provides that arbitration agreements covered by the FAA “shall be

valid, irrevocable, and enforceable, save upen such grounds as exist at

law or in equity for the revocation of any contract." As noted above,

the South Carolina Supreme Court's interpretation of the Green Tree

arbitration clause in a manner that will actively discourage use of

arbitration agreements violates both Section 2 and the pro-arbitration

policy underlying the FAA.

17

arbitrator's reasonable interpretation of an ambiguous

contract provision.

Respondents’ argument does, however, serve to point

out another basic flaw in the South Carolina Supreme Court's

analysis. The question whether a dispute is subject to

arbitration at all -- the “question of arbitrability” -- “is ‘an

issue for judicial determination [u]nless the parties clearly

and unmistakably provide otherwise.’” Howsam v. Dean

Witter Reynolds, Inc., 123 S. Ct. 588, 591 (2002) (quoting

AT&T Technologies, Inc. v. Communications Workers, 475

U.S. 643, 649 (1986)). But the Court has made clear that the

phrase “question of arbitrability” has a rather limited scope,

and once that question has been answered in the affirmative,

it is up to the arbitrator to decide procedural questions,

regardless how important those procedural questions may be

in the ultimate disposition of the arbitration. /d. at 592. The

issue whether the parties intended to permit arbitration on a

class-wide basis would seem to be the type of procedural

issue that Howsam assigns to the arbitrator for initial

determination. Thus, the South Carolina Supreme Court

erred in assigning that issue to the courts for decision, and in

upholding the court of common pleas's discretionary decision

that class-wide arbitration was appropriate. Accordingly, at

the very least the Court should reverse the judgment below,

with directions that the arbitrators hearing these proceedings

on remand should decide the class-wide arbitrability issue

without regard to any of the orders issued to date by the

South Carolina courts.

But because the issues raised by this case are highly

important and likely to recur frequently, WLF respectfully

suggests that the Court use this opportunity to express its

views on the propriety of class-wide arbitration orders in the

18

face of arbitration agreement; that are "silent" on the issue.

For all the foregoing reasons, WLF respectfully requests that

the Court hold that orders directing ciass-wide arbitration --

in the absence of a provision in the arbitration clause

expressly authorizing such arbitration -- stand as an obstacle

to the accomplishment and execution of Congress's purposes

in adopting the FAA and are therefore preempted.

CONCLUSION

Amicus curiae Washington Legal Foundation respect-

fully requests that the decision of the South Carolina Supreme

Court be reversed.

Respectfully submitted,

Daniel J. Popeo

Richard A. Samp

(Counsel of Record)

Washington Legal Foundation

2009 Massachusetts Ave., NW

Washington, DC 20036

(202) 588-0302

Dated: February 24, 2003