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

at Supvcame Oued, 8.

No. 02-634 licens

IN THE —s« FEB 24 gay

Supreme Court of the United States

OPS OSE Clase

GREEN TREE FINANCIAL CORP. ee

A/K/A GREEN TREE ACCEPTANCE CORP.

A/K/A GREEN TREE FINANCIAL SERVICES CORP.

N/K/A CONSECO FINANCE CORP.,

Petitioner,

Vv.

LYNN W. BAZZLE AND Burt A. BAZZLE,

IN A REPRESENTATIVE CAPACITY ON BEHALF OF A CLASS

AND FOR ALL OTHERS SIMILARLY SITUATED,

DANIEL B. LACKEY, GEORGE BUGGS, AND FLORINE BUGGS,

IN A REPRESENTATIVE CAPACITY ON BEHALF OF A CLASS

AND FOR ALL OTHERS SIMILARLY SITUATED,

Respondents.

On Writ of Certiorari to the

South Carolina Supreme Court

BRIEF OF AMICUS CURIAE DIRECTV, INC.

IN SUPPORT OF PETITIONER

DALE H. OLIVER CHRISTOPHER LANDAU

MICHAEL E. WILLIAMS Counsel of Record

TIFFANY C. GRAHAM KIRKLAND & ELLIS

QUINN EMANUEL URQUHART 655 Fifteenth St., N.W.

OLIVER & HEDGES, LLP Washington, D.C. 20005

865 S. Figueroa St. (202) 879-5000

Los Angeles, CA 90017

MICHAEL E. BAUMANN

ANDREW E. PARIS

REBECCA J. WAHLQUIST

KIRKLAND & ELLIS

777 S. Figueroa St.

Los Angeles,CA 90017

Feb 24, 2002

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

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arbitration agreement that does not provide for class action

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TABLE OF CONTENTS

Page

QUESTION PRESENTED ......................4... i

TABLE OF AUTHORITIES ....................... ill

INTEREST OF THE AMICUS ............0.0000055. l

INTRODUCTION AND SUMMARY OF ARGUMENT . |

ARGUMENT .............. 00. c ccc cece eee ee eeees 2

I. THE FAA DOES NOT ALLOW COURTS TO

INVOKE A PUBLIC POLICY FAVORING

CLASS ACTIONS TO OVERRIDE THE

EXPRESS TERMS OF AN ARBITRATION

PATREEDMENT 2... ccc ccccccccccccceccccces 2

Il. INTERPRETING THE FAA TO AUTHORIZE

CLASSWIDE ARBITRATION ABSENT AN

EXPRESS AGREEMENT WOULD RAISE

SERIOUS CONSTITUTIONAL QUESTIONS ... 8

SOUND 0:56 4 050000066600 40566s 80056848065 12

TABLE OF AUTHORITIES

Page

Cases

Allied-Bruce Terminix Cos. v. Dobson,

i ccencpdeckikeesheescntbnenenss 7

American Centennial Ins. Co. v. National Cas. Co.,

ee ED GED ncbecécvacsdccesnnscs 5

Baesler v. Continental Grain Co.,

900 F.2d 1193 (8th Cir. 1990) .................... 5

Baravati v. Josephthal, Lyon & Ross, Inc.,

ee EE CED vc codvucedesesenteuens 3

Bazzle v. Green Tree Fin. Corp.,

et ENS cocked dbenseuendencecdouss 10

Bernhard v. Polygraphic Co. of Am.,

Fe 10

Blue Cross v. Superior Ct.,

67 Cal. App. 4th 42 (2d Dist. 1998) .............. 4,6

Boucher v. Syracuse Univ.,

ey I, OID, «onc cceueveeesesecss 11

Champ v. Siegel Trading Co., Inc.,

EE SEED cdcceccescecevctns . 4,7

Dean Witter Reynolds, Inc. v. Byrd,

re beta nesigenentudewns 3

Del E. Webb Constr. v. Richardson Hosp. Auth.,

ee ee SS GOED oc cccceseconsccecccess 5

Discover Bank v. Boehr,

105 Cal. App. 4th 326 (2d Dist. 2003) ............. 10

vi

Doctor's Assocs., Inc. v. Casarotto,

517 U.S. 681 (1996) . 2... ee ee eens

Dominium Austin Partners, L.L.C. v. Emerson,

248 F.3d 720 (8th Cir. 2001) .... 2... eee eee eee eee

Edward J. DeBartolo Corp. v. |

Florida Gulf Coast Bldg. & Constr. Trades Council,

485 U.S. 568 (1988)... 6.6 ee eee eee

Garcia v. DIRECTV, Inc.,

No. B158570 (Cal. Ct. App. Dec. 11, 2002) ........

General Tel. Co. v. Falcon,

457 US. 147 (1982)... 0. cece ee eee eee eees

General Tel. Co. v. Falcon,

437 US. 147 CIGRA) . 0. ccc cc ccccccccccccscccces

Government of the United Kingdom v. Boeing Co.,

998 F.2d 68 (2d Cir. 1993)... 2... 6 eee eee

Hansberry v. Lee,

B11 U.S. 32 (1DAD) . www ccccccccccsccccccces

Hires Parts Serv. v. NCR Corp.,

859 F. Supp. 349 (N.D. Ind. 1994) .......-..--+>-

Iowa Grain Co. v. Brown,

171 F.3d 504 (7th Cir. 1999) .. 2.2... eee eee eee

Jones v. United States,

529 U.S. 848 (2000)... 2... ee eee eee eee

Keating v. Superior Ct.,

31 Cal. 3d 584 (1982),

rev'd on other grounds sub nom.

Southland Corp. v. Keating,

AGS US. 1 (1GBE) . 2 ccc ccccccccccccccecccens

Lapine Tech. Corp. v. Kyocera Corp.,

130 F.3d 884 (9th Cir. 1997) .... 2.2... ee eee eee

Vii

Mandel v. Household Bank (Nevada) Nat'l Ass'n, _

105 Cal. App. 4th 75 (4th Dist. 2003) ..............

Mastrobuono v. Shearson Lehman Hutton, Inc.,

514 U.S. 52 (1995)

Mitsubishi Motors Corp. v. Soler Chryler-Plymouth, Inc.

es duh icdudsbascdadeuedadeuts

Moncharsh v. Heily & Blase,

3 Cal. 4th 1 (1992)

Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp.,

460 U.S. 1 (1983)

New England Energy, Inc. v. Keystone Shipping Co.,

Sow OO 0 bee Cie. BOGE) ow. wc ccc ccc ccccccccccs

Phillips Petroleum Co. v. Shutts,

"SeVePrcgee eee ese geeeaegcee eee e668 6 & 6 & 6 & O@

eeseoecoeo eee eeeeeeeeeeeeeeeeeeee 6

SE ee cheng oe Rice

Pike v. Freeman,

266 F.3d 78 (2d Cir. 2001)

Protective Life Ins. Corp. v. Lincoln Nat'l Life Ins. Corp.,

873 F.2d 281 (11th Cir. 1989)

Schlessinger v. Rosenfeld, Meyer & Susman,

40 Cal. App. 4th 1096 (2d Dist. 1995) ..............

Shearson/American Express, Inc. v. McMahon,

482 U.S. 220 (1987)

Southland Corp. v. Keating,

i 3,4

Sovak v. Chugai Pharm. Co.,

280 F.3d 1266 (9th Cir. 2002)

Szetela v. Discover Bank,

97 Cal. App. 4th 1094 (4th Dist. 2002) .............

Vill

Ting v. AT&T,

___ F.3d__, 2003 WL 292296

(9th Cir. Feb. 11, 2003) 2... 6... eee eee eee es 5,6

Volt Info. Sciences, Inc. v.

Board of Trs. of the Leland Stanford Jr. Univ.,

489 U.S. 468 (1989) 2... eee 3,4

Weyerhaeuser Co. v. Western Seas Shipping Co.,

743 F.2d 635 (9th Cir. 1984) .. 2.0... eee eee 5

Constitutions, Statutes, and Rules

DUBC. BO IG UD ...ccccccccvccccecsvevesecens 9,10

Cal. Civ. Proc. § 1282.2(d) ......... eee eee eee eens 8

Fed. R. Civ. P. 2c L) 0. cece eee eee cece eee enees il

fg & +» wrrrrerrr er Ty Tite tt 1

SS 5 cv knceccscdccecevenstadeesesdecnses l

Other Authorities

Commercial Rules of Am. Arb. Assoc. (2003) .......++- 12

S. Rep. No. 536, 68th Cong.,

Ist Sess., 3 (1924) 20... .. ccc cece eee e cee eeeeees 7

Sternlight, Jean R..,

As Mandatory Binding Arbitration Meets the

Class Action, Will the Class Action Survive ?,

42 Wm. & Mary L. Rev. 1 (2000) ........ be scance 11

Waltchter, Daniel R.,

Classwide Arbitration and 10B-5 Claims

in the Wake of Shearson/

American Express, Inc. v. McMahon,

74 Comell L. Rev. 380 (1989) ... 2... 6 eee eee ees 11

INTEREST OF THE AMICUS”

Amicus DIRECTV, Inc., is a California corporation that

provides digital satellite television services nationwide. A network

of independent retailers sell DIRECTV-compatible reception

equipment and promote DIRECTV’ s services to individuals and

businesses who then contract with DIRECTV. Each of these

retailers has a Sales Agency Agreement with DIRECTV outlining

the nghts and responsibilities of both parties to the contract. That

Agreement includes an arbitration clause that requires the parties to

arbitrate according to the procedures of the Federal Arbitration Act

(“FAA”), which do not provide for classwide arbitration.

Some of the independent retailers, however, are seeking to

arbitrate their claims against DIRECTV on aclasswide basis. And,

like the court below, state courts in California and Oklahoma have

invoked a public policy favoring class actions to subject DIRECTV

to potential classwide arbitration even though DIRECTV never

agreed to such a procedure. By thus invoking state public policy to

overnide the parties’ contractual freedom to arbitrate according to

the terms of their agreement, these courts (like the court below in

this case) have undermined the letter and spirit of the FAA.

Accordingly, DIRECTV supports reversal of the South Carolina

Supreme Court’s decision in this case.

INTRODUCTION AND SUMMARY OF ARGUMENT

The FAA requires both federal and state courts 10 enforce

arbitration agreements according to their terms. Where parties

have agreed that their arbitration will be governed by the FAA,

which does not provide for class actions, courts are not free to

override that agreement by invoking a state public policy favoring

* Pursuant to this Court’s Rule 37.6, amicus states that no counsel for any

party authored this brief in whole or in part, and that no person or entity

other than amicus, its counsel, or its insurer made a monetary contribution

to the preparation or submission of this brief. The parties have consented

to the filing of this brief, and letters evidencing such consent have been

filed with the Clerk of this Court, pursuant to S. Ct. R. 37.3.

2

class actions. A state policy invalidating arbitration agreements

unless they authorize class actions is not a state policy of general

applicability, but a policy specifically directed at arbitration, and

hence preempted by the FAA.

This straightforward application of FAA preemption is only

underscored by the due process implications of classwide

arbitration. Class actions are an exception to the general rule that

parties represent themselves in a legal dispute, and that exception

has been upheld in the courtroom context only in light of procedural

rules that carefully limit the use of the class action mechanism.

Those procedural rules are inapplicable in the arbitration context,

thereby raising serious due process concems where the parties have

not agreed to proceed in this manner. Nor is it feasible to address

these concems through a hybrid court-arbitration procedure, which

effectively saddles parties with the worst of both worlds: the

complexity and delay of the courtroom without the corresponding

procedural protections and appellate mghts. DIRECTV’s

experiences with such hybrid procedures have been decidedly

negative, and have deprived DIRECTV of the benefit of its

federally protected arbitration agreements.

ARGUMENT

I. THE FAA DOES NOT ALLOW COURTS TO INVOKE

A PUBLIC POLICY FAVORING CLASS ACTIONS TO

OVERRIDE THE EXPRESS TERMS OF AN

ARBITRATION AGREEMENT.

As this Court has often noted, the FAA was enacted “to

revers|e] centuries of judicial hostility to arbitration agreements by

plac[ing] arbitration agreements upon the same footing as other

contracts.” Shearson/American Express, Inc. v. McMahon, 482

U.S. 220, 225-26 (1987) (internal quotations and citations

3

omitted).' Accordingly, the Act established a “federal policy

favoring arbitration,” Moses H. Cone Mem'l Hosp. v. Mercury

Const. Corp., 460 U.S. 1, 24 (1983), that requires courts to

enforce private arbitration agreements “according to their terms,”

Volt Info. Sciences, Inc. v. Board of Trs. of the Leland Stanford

Jr. Univ., 489 U.S. 468, 476 (1989); see also Mastrobuono v.

Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995)

(“(C]Jourts are bound to interpret contracts in accordance with the

expressed intentions of the parties.””). Parties are thus free to agree

to arbitral procedures as formal or informal as they wish, and the

FAA requires both federal and state courts to respect and enforce

the parties’ agreement. See, e.g., Volt, 489 U.S. at 479 (“[P]arties

are generally free to structure their arbitration agreements as they

see fit,” and thus may “specify by contract the rules under which

that arbitration will be conducted.”’); Baravati v. Josephthal, Lyon

& Ross, Inc., 28 F.3d 704, 709 (7th Cir. 1994) (“{S)hort of

authorizing trial by battle or ordeal or, more doubtfully, by a panel

of three monkeys, parties can stipulate to whatever procedures they

want to govern the arbitration of their disputes.”) (Posner, J.).

Like South Carolina, however, California has flouted this

federal policy. Recent California decisions indicate a judicial

unwillingness to enforce arbitration agreements to the extent they

conflict with California’s public policy favoring class actions. This

trend began with the California Supreme Court’s decision in

Keating v. Superior Ct., 31 Cal. 3d 584, 623 (1982), rev'd on

' See also Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-220 (1925)

(“[The] purpose [of the FAA] was to place an arbitration agreemeni upon

the same footing as other contracts, where it belongs, and to overrule the

judiciary’s longstanding refusal to enforce agreements to arbitrate.”’)

(internal quotations and citations omitted); Southland Corp. v. Keating, 465

U.S. 1, 13 (1984) (“[ T]he purpose of the act was to assure those whe desired

arbitration and whose contracts related to interstate commerce that their

expectations would not be undermined by federal judges, or . . . by state

courts or legislatures.”) (internal quotation omitted).

4

other grounds sub nom. Southland Corp. v. Keating, 465 U.S.

1 (1984), which held that state law authorized classwide arbitration

but did not address “the question whether superimposing class

action procedures on a contract arbitration was contrary to the

|FAA],” Southland, 465 U.S. at 8-9. The California Court of

Appeal did address that issue in Blue Cross of Cal. v. Superior

Ct.,67 Cal. App. 4th 42 (2d Dist. 1998), and held that “when the

arbitration agreement between the parties is silent as to classwide

arbitration and state law specifically authorizes it . . ., an order

compelling classwide arbitration neither contradicts the contractual

terms nor contravenes the policy behind the [FAA].” /d. at 60

(emphasis added). According to Blue Cross, a state policy

requiring classwide arbitration in the absence of an agreement to

that effect does not violate the FAA, because such a policy does

not “divert a case from arbitration to court,” but simply “seeks only

to make more efficient the process of arbitrating.” /d. at 59

(internal quotation omitted).

Subsequent California decisions have relied on Blue Cross to

impose a public policy favoring classwide arbitration even where

the express terms of the parties’ arbitration agreement do not

permit classwide treatment. One such decision is Garcia v.

DIRECTY, Inc., No. B158570 (Cal. Ct. App. Dec. 11, 2002), a

case brought against amicus DIRECTV by several retailers. The

agreement between DIRECTV and those retailers not only requires

arbitration, but specifies that “[t]his section and any arbitration

conducted hereunder shall be governed by the United States

Arbitration Act,” thereby evincing the parties’ intent to conduct their

arbitration under the FAA’s, not California’s, procedural rules.

See, e.g., Volt, 489 U.S. at 470, 479 (interpreting this “governed

by” language to refer to the procedural rules applicable to the

arbitration). Asa matter of federal law, however, the FAA does

not permit classwide arbitration unless the parties have expressly

agreed to such proceedings. See e.g., Dominium Austin

Partners, L.L.C. v. Emerson, 248 F.3d 720, 728-29 (8th Cir.

0 ae

—-——_— = A et te we ee

5

2001); Jowa Grain Co. v. Brown, 171 F.3d 504, 510 (7th Cir.

1999); Champ v. Siegel Trading Co., Inc., 55 F.3d 269, 276-77

(7th Cir. 1995).? Thus, the Garcia court overrode the parties’

agreement by insisting that the retailers suing DIRECTV must be

allowed to pursue a classwide arbitration. That decision is

particularly incongruous in the context of the DIRECTV

Agreement, which involves sophisticated commercial parties

(DIRECTV and its retailers) on both sides, and thus does not

implicate the concern with protecting allegedly aggrieved consumers

that underlies California’s policy favoring class actions in the first

place. See, e.g., Keating, 31 Cal. 3d at 609.

Indeed, California courts have refused to enforce arbitration

agreements that specifically preclude classwide arbitration. In

Szetela v. Discover Bank, 97 Cal. App. 4th 1094, 1101 (4th Dist.

2002), the court of appeal stated that an express class-action

waiver provision in an arbitration agreement is unenforceable

because it violates California’s public policy favoring class actions.

According to Szetela, such a provision “contradicts the California

Legislature’s stated policy of discouraging unfair and unlawful

business practices, and of creating a mechanism for a representative

to seek relief on behalf of the general public as a private attorney

general.” /d. Under Szetela, parties to a contract in California

cannot bargain to preclude classwide arbitration, despite the

bargaining freedom protected by the FAA. /d.; see also Ting v.

* Similarly, most federal courts have held as a matter of federal law that the

FAA does not allow the consolidation of multiple arbitration proceedings

absent an express agreement of the parties. See, e.g, Government of the

United Kingdom v. Boeing Co., 998 F.2d 68, 74 (2d Cir. 1993); American

Centennial Ins. Co. v. National Cas. Co., 951 F.2d 107, 108 (6th Cir. 1991);

Baesler v. Continental Grain Co., 900 F.2d 1193, 1195 (8th Cir. 1990);

Protective Life Ins. Corp. v. Lincoln Nat’! Life Ins. Corp., 873 F.2d 281, 282

(11th Cir. 1989); Del E. Webb Constr. v. Richardson Hosp. Auth., 823 F.2d

145, 150 (Sth Cir. 1987); Weyerhaeuser Co. v. Western Seas Shipping Co.,

743 F.2d 635, 637 (9th Cir. 1984); but see New England Energy, Inc. v.

Keystone Shipping Co., 855 F.2d 1, 5 (1st Cir. 1988).

6

AT&T, _ F.3d __, 2003 WL 292296, at *19-22 (9th Cir.

Feb. 11, 2003); Mandel v. Household Bank (Nevada) Nat'l

Ass'n, 105 Cal. App. 4th 75 (4th Dist. 2003).

The analysis of these courts is based on the faulty premise that

state courts are free to rewrite arbitration agreements as long as

they invoke a doctrine of general applicability, like

unconscionability. See, e.g., Blue Cross, 67 Cal. App. 4th at 50-

51; Szetela, 97 Cal. App. 4th at 1099-1100; Ting, 2003 WL

292296, at *20-22 & n.15. But the use of the unconscionability

doctrine to amend arbitration agreements to authorize class actions

where the parties have not done so is not arbitration-neutral. To

the contrary, it reflects a state policy mandating a particular type of

arbitration procedure notwithstanding the contracting parties’

wishes. The FAA does not allow States to regulate arbitration in

this manner, regardless of whether they purport to impose such

regulation through the rubric of a general doctrine like

unconscionability. See, e.g., Doctor's Assocs., Inc. v. Casarotto,

517 U.S. 681, 687-88 (1996) (FAA preempts state law requiring

notice of arbitration clause in underlined capital letters on first page

of contract); Mastrobuono, 514 U.S. at 58 (“{I]f contracting

parties agree to include claims for punitive damages within the

issues to be arbitrated, the FAA ensures that their agreement will be

enforced according to its terms even ifa rule of state law would

otherwise exclude such claims from arbitration.”) (emphasis

modified). What matters is not the legal /abe/ placed on the state

law or policy, but whether that law or policy is specific to

arbitration. Were the law otherwise, States would be free to thwart

arbitration at will by simply invalidating any disfavored arbitration

provision as unconscionable.

Indeed, allowing States to rewnte arbitration agreements in this

manner would allow States to undermine arbitration itself. The

whole point of arbitration is to “trade[] the procedures and

opportunity for review of the courtroom for the simplicity,

informality, and expedition of arbitration.” Mitsubishi Motors

7

Corp. v. Soler Chryler-Plymouth, Inc., 473 U.S. 614, 628

(1985). That trade-off is attractive not just to large corporate

defendants, but to plaintiffs as well: “Congress, when enacting [the

FAA], had the needs of consumers, as well as others, in mind. See

S. Rep. No. 536, 68th Cong., Ist Sess., 3 (1924) (the Act, by

avoiding ‘the delay and expense of litigation,’ will appeal ‘to big

business and little business alike, . .. corporate interests [and]...

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

265, 280 (1995). That trade-off breaks down, however, to the

extent that arbitration proceedings start to mimic the complexity of

courtroom proceedings. See, e.g., Keating, 31 Cal. 3d at 623

(Richardson, J., concurring and dissenting) (“[C]lass procedures

would tend to make arbitration inefficient instead of efficient, lengthy

instead of expeditious, and procedural instead of informal.”).

Parties forced into involuntary classwide arbitration thus get the

worst of both worlds: the complexity and delay of class-action

litigation, without the accompanying procedural safeguards and

meaningful appellate review. Parties may be willing to bear the risk

of arbitrator error in an individual case, assuming that over time

errors favoring one side or the other will neutralize each other in the

aggregate, but the impact of an error in a class arbitration is

multiplied by the number of class members.

Because a state policy mandating classwide arbitration absent

an express agreement to that effect “would disrupt the negotiated

risk/benefit allocation and direct the parties to proceed with a

different sort of arbitration” than they had bargained for, Champ,

55 F.3d at 275 (internal quotation and brackets omitted), the FAA

preempts such a policy.

8

Il. INTERPRETING THE FAA TO AUTHORIZE

CLASSWIDE ARBITRATION ABSENT AN EXPRESS

AGREEMENT WOULD RAISE SERIOUS

CONSTITUTIONAL QUESTIONS.

The conclusion that the FAA does not allow the States to

mandate classwide arbitration absent an express agreement follows

not just from the text of the FAA itself, but also from underlying

constitutional concerns. Class actions are a “recognized exception”

to the “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.” Hansherry v.

Lee, 311 U.S. 32, 40-41 (1940); see also General Tel. Co. vy.

Falcon, 457 U.S. 147, 155 (1982) (“The class-action device was

designed as an exception to the usual rule that litigation is conducted

by and on behalf of the individual named parties only.”’) (internal

quotation omitted). Because the class-action device raises serious

due process concerns, both with respect to the party forced to

litigate against the class and with respect to absent class members,

the Federal Rules of Civil Procedure and analogous state

procedural rules have been carefully construed to ensure “minimal

procedural due process protection” in class actions. Phillips

Petroleum Co. v. Shutts, 472 U.S. 797, 811-12 (1985).

The procedural protections of these rules, however, do not

apply in arbitration absent an explicit agreement of the parties. See

Pike v. Freeman, 266 F.3d 78, 92 n.17 (2d Cir. 2001) (“Federal

Rules of Civil Procedure do not apply in arbitrations before the

American Arbitration Association.”’); Cal. Civ. Proc. § 1282.2(d)

(“rules of judicial procedure need not be observed” in an

arbitration); Schlessinger v. Rosenfeld, Meyer & Susman, 40 Cal.

App. 4th 1096, 1108 (2d Dist. 1995) (same). Thus, there is no

structural mechanism in arbitration to protect the unique due

process concems presented by class actions. That is not a problem

with arbitration, which is a vital tool for dispute resolution; rather,

9

it is a problem with engrafting class action procedures onto

arbitration agreements absent the parties’ express consent. To be

sure, parties can agree to waive their due process rights by

agreeing to arbitration. But there is no reason for courts to presume

that they have done so; to the contrary, the serious due process

implications of class actions warrant construing the FAA not to

authorize classwide arbitration absent the express agreement of the

parties. It is elementary that courts should construe statutes to

avoid, rather than precipitate, constitutional questions. See, e.g.,

Jones v. United States, 529 U.S. 848, 857-58 (2000); Edward

J. DeBartolo Corp. v. Florida Gulf Coast Bldg. & Constr.

Trades Council, 485 U.S. 568, 575 (1988).

The foregoing due process concerns are only heightened by the

lack of effective judicial review of arbitration awards. Such review

is sharply circumscribed for the very purpose of preserving the

efficiency and finality characteristic of arbitration. See, e.g.,

Moncharsh vy. Heily & Blase, 3 Cal. 4th 1, 10 (1992). While the

precise rules vary by jurisdiction, arbitration awards are generally

difficult to overturn even for clear error. In California, even an

unjust award is not subject to review: “an arbitrator's decision is

not generally reviewable for errors of fact or law, whether or not

such error appears on the face of the award and causes substantial

injustice to the parties.” /d. at 6.

In the federal system, the FAA supplies the standards for

judicial review of arbitral awards. An award may be vacated or

modified where procured by corruption, fraud, or undue means;

where there was evident partiality or corruption in the arbitrators,

where the arbitrators improperly refused to hear material evidence

or postpone the hearing; where the arbitrators exceeded their

powers; or where there was an evident miscalculation or mistake.

9 U.S.C. §§ 10, 11. The Ninth Circuit has described such review

as “extremely narrow .. . If, on its face, the award represents a

plausible interpretation of the contract, judicial inquiry ceases and

the award must be enforced.” Sovak v. Chugai Pharm. Co., 280

10

F.3d 1266, 1271 (9th Cir. 2002) (citations omitted); see also

Lapine Tech. Corp. v. Kyocera Corp., 130 F.3d 884, 888 (9th

Cir. 1997) (“[A] federal court may vacate or modify an arbitration

award only if that award is ‘completely irrational,’ exhibits a

‘manifest disregard of law,’ or otherwise falls into one of the

grounds set forth in 9 U.S.C. §§ 10 or 11.”) (internal quotation

omitted).

In aclasswide arbitration, these deferential standards of review

could easily lead courts to uphold plainly incorrect and unjust

decisions. Indeed, in this very case, the South Carolina Supreme

Court refused to modify its standards of review or subject to

serious scrutiny the arbitrators’ $27 million award to 3,700 class

members. See Bazzle v. Green Tree Fin. Corp., 351 S.C. 244,

266-67 (2002) (upholding award where no showing of “manifest

disregard for the law” and noting that while the standard for

appellate review of a court’s class certification decision is abuse of

discretion, the review of an arbitral award is “far more limited.”’);

see also Discover Bank v. Boehr, 105 Cal. App. 4th 326, 348

(2d Dist. 2003) (“{ A] multi-million dollar class arbitration award

entered on nothing more than mere whim cannot be corrected

under California law.”). It goes without saying that an error ina

classwide arbitration proceeding is far more prejudicial to the

defendant than an error in an ordinary individual arbitration

proceeding. Defendants should not be forced to defend against

classwide claims in arbitration where they have not agreed to do so,

and forcing defendants to do so would violate the due process

nghts of both defendants themselves and the absent class members.

The due process risks of class arbitrations cannot be solved by

simply engrafting “due process” judicial oversight onto the

established deferential procedures. More fundamental changes

would be necessary. Arbitrators need not preserve a transcript of

their proceedings or justify their awards with written opinions. See,

e.g., Bernhard v. Polygraphic Co. of Am., 350 U.S. 198, 203-

04 & n.4(1956). The potential absence of any record for review

he Oe ope

11

complicates still further the protection of constitutional due process

rights. It is apparent that even to begin to ensure due process,

courts would need to radically change their arbitration review

standards and require arbitrators to preserve records of

arbitrations—requirements that will undercut the benefits of

arbitration agreements long recognized and protected by this Court.

Absent the agreement of the parties, changes of this magnitude

should be accomplished only by legislation, not judicial fiat.

To be sure, the due process risk could be minimized if a court

retained control of all class action procedures, but only at the

expense of the efficiency, cost, and finality that arbitration was

supposed to provide in the first place. Thus, academic proposals

for courts to assume a greater role in overseeing arbitration class

actions are infeasible.’ In effect, such proposals would create a

hybrid judicial-arbitral proceeding, where the parties litigate class

issues and arbitrate merits issues—a cumbersome and inefficient

procedure at best that derogates the parties’ agreement to arbitrate

all disputed issues. Presumably, courts in this scenario would be

called upon to undertake on ongoing supervisory role over an

arbitration, to ensure that a class certification decision is appropriate

not just as an initial matter, but on a continuing basis. See Fed. R.

Civ. P. 23(c)(1); Boucher v. Syracuse Univ., 164 F.3d 113,118

(2d Cir. 1999).

> See. e.g., Jean R. Sternlight, As Mandatory Binding Arbitration Meets the

Class Action, will the Class Action Survive?, 42 Wm. & Mary L. Rev. |, 111

(2000) (“Allowing arbitrators on their own to decide [due process issues]

simply will not comport with the Due Process Clause.”); Daniel R. Waltchter,

Classwide arbitration and 1/0B-5 Claims in the wake of

Shearson/American Express, Inc. v. McMahon, 74 Comell L. Rev. 380, 402

(1989) (“In spite of the fact that courts traditionally hesitate to intervene in

an arbitral forum, judicial discretion must exist in the classwide arbitration

setting if courts are to protect the absent class members’ due process

rights.”’).

12

Amicus DIRECTV knows the downside of such a hybrid

proceeding from firsthand experience. In Oklahoma, a state trial

court asserted control over the class certification process, imposed

a four-month discovery schedule to be followed by a two-day class

certification hearing, and effectively suspended the arbitration in the

meanwhile. Besides the mere length and expense of the certification

litigation, such proceedings often require discovery that goes

beyond that allowed under the applicable arbitration rules. Thus,

the plaintiffs in the Oklahoma DIRECTV action propounded

numerous interrogatories ostensibly seeking “class”

discovery—even though the commercial rules of the American

Arbitration Association do not permit interrogatories (or

depositions) absent agreement of the parties. See Commercial

Rules of Am. Arb. Assoc. (2003), R-23 (allowing for exchange of

documents only). Yet the avoidance of costly or abusive discovery

is often a reason why parties enter into arbitration agreements in the

first place. See Hires Parts Serv. v. NCR Corp., 859 F. Supp.

349, 353 (N.D. Ind. 1994). Accordingly, any suggestion that a

hybrid court-arbitration proceeding might provide a workable

mechanism to “cure” the due process problems with classwide

arbitration is illusory.

CONCLUSION

For the foregoing reasons, the judgment of the South Carolina

Supreme Court should be reversed.

DALE H. OLIVER

MICHAEL E. WILLIAMS

TIFFANY C. GRAHAM

QUINN EMANUEL URQUHART

OLIVER & HEDGES, LLP

865 S. Figueroa St.

Los Angeles, CA 90017

February 24, 2003

Respectfully submitted,

CHRISTOPHER LANDAU

Counsel of Record

KIRKLAND & ELLIS

655 Fifteenth St., N.W.

Washington, D.C. 20005

(202) 879-5000

MICHAEL E. BAUMANN

ANDREW E. PARIS

REBECCA J. WAHLQUIST

KIRKLAND & ELLIS

777 S. Figueroa St.

Los Angeles, CA 90017