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

;\

No. 02-634 '/ ci <e |

IN THE | FEB 24 2003 |

Supreme Court of the Hnited States

, OF PRIeL OF : PE 4 Oke |

—————— Se

GREEN TREE FINANCIAL CorP. 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

Supreme Court of South Carolina

BRIEF FOR AMERICAN BANKERS ASSOCIATION,

AMERICAN FINANCIAL SERVICES ASSOCIATION,

_ AND CONSUMER BANKERS ASSOCIATION

AS AMICI CURIAE IN SUPPORT OF PETITIONER

LOUIS R. COHEN

Counsel of Record

CHRISTOPHER R. LIPSETT

ERIc J. MOGILNICKI

MICHAEL D. LEFFEL

WILMER, CUTLER & PICKERING

2445 M Street, N.W.

Washington, D.C. 20037

(202) 663-6000

Counsel for Amici Curiae

FEBRUARY 2003

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TABLE OF CONTENTS

Page

OR Ee GREP CUREIEEROTEEED seneeensenscsntnensenesesdosemstentemresens il

STATEMENT OF INTEREST OF AMICI CURIAE ........... 2

UEP © CO ARRTIUITIIING cccccscccescccsccesscccccccssccssscescesess 3

GUEETEEE TE wnncinsestcccicinassniccmnnnnpiscennmsesnenemsessemenesemenenees 4

I. FORCED CLASS ARBITRATION IS CON-

eS Ne en. daieectitcinterenccsnsenennsccnnsnsennnsennensenes 4

Il. FORCED CLASS ARBITRATION CANNOT

BIND ABSENT CLASS PLAINTIFFS. .................00006 9

Ill. FORCED CLASS ARBITRATION IS UN-

gg | SE ET 14

IV. THE DEFECTS OF FORCED CLASS ARBI-

TRATION CANNOT BE REPAIRED BY IN-

JECTING THE COURTS INTO THE ARBI-

Ue PUTIN cxesnncnssnnnsesessnsssesscmsesmnasessncesene 16

V. FORCED CLASS ARBITRATION IS AN

ATTACK ON ARBITRATION ITSELF. ................... 18

ERPUEENEEIOT cncstnscessacenmmnsisnnsicsnsnevensenecssnorcntsenecceqnseees 21

TABLE OF AUTHORITIES

Page(s)

Al Ainsworth v. Skurnick, 960 F.2d 939 (11th Cir.

| || ee 16

ACORN v. Household International, Inc., 211 F.

Supp. 2d 1160 (N.D. Cal. 2002) ......ssseseeseseesessesseenenens 20

Allen v. McCurry, 449 U.S. 90 (1981) cccccccceeseeeeereeeereseenees 15

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

2GS (1DDS) ..ccccccccccrcccssescoossccssnessssonesssssenesessnsenenen 8,9, 18

American Centennial Ins. v. National Cas. Co., 951

F.2d 107 (6th Cir. 1991) ........ccsssssssssessreeseeereesesensessees 5

American Pipe & Construction Co. v. Utah, 414

U.S. 538 (1974) ..ccccccccscsssceesccsvesscovssssoosssossossssossosonssess 14

Arriaga v. Cross Country Bank, 163 F. Supp. 2d

1189 (S.D. Cal. 2001) ......cccccccssssssceesoroccccssssossssensossssnsees 7

Baesler vy. Continental Grain Co., 900 F.2d 1193

(Bth Cir. 1990) ....cccccccccsssrccccsceccsccsonscosssssossssssossssssonscosss 5

Baron v. Best Buy Co., No. 99-14028, slip op. (1 Ith

Cir. June 1, 2001) .....cccccccccscessscrscccscccsocsssssossesssessesssenens 6

Blakeley v. Rabon, 221 S.E.2d 767 (S.C. 1976) .....ssseseeeeseees 5

Blue Cross v. Superior Court, 78 Cal. Rptr. 2d 779

(Ct. App. 1998) ......sccsersersersereerersesesensseeseesnessssnsnnes 6, 17

Brown v. KFC National Management Co., 921 P.2d

146 (Haw. 1996) ..........ccccccsssssssssscrsscsssesceessscsssessssssessens 7

Castano v. American Tobacco Co., 84 F.3d 734 (Sth

Cir. 1996) .....ccccccccccscccccossccccssssoscosssonssossssnnnsssssnesessesenees 17

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

1DDS) ...cccocccssevesssesessoosscsnsvecsnsnnsssennnnnnnnnnnnnnnnnnnnnn 5,19

Charles v. Canal Insurance Co., 121 S.E.2d 200

(S.C. 1961) ...cccccccccccosesoscossorscesevessossssoossssonsssssossssonosssses 5

Circuit City Stores, Inc. v. Adams, 532 U.S. 105

0 |) ) 18

Comb v. PayPal, Inc., 218 F. Supp. 2d 1165 (N.D.

Cal, 2002) ...cccocccccccsscccossscvscccsocsessssssosssscssossssssosesososesess 20

Cooper v. Federal Reserve Bank of Richmond, 467

U.S. 867 (1984) ......cccccccccssssrervsscescsssssnssssosssesesosseoooosess 15

TABLE OF AUTHORITIES—Continued

Page(s)

Devlin v. Scardelletti, 122 S. Ct. 2005 (2002) cocccccccccccocceee 15

Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d

860 (Pa. Super. Ct. 1991) .cccccccccccccccccscecececseceesees 6, 17

Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681

at 7,8

Dominium Austin Partners v. Emerson, 248 F.3d

TT ae 5

EEOC v. Waffle House, 534 U.S. 279 (2002) coccccccccccccosee 5, 6

Federated Department Stores v. Moitie, 452 U.S.

SEES SAC 14

First Options of Chicago, Inc. v. Kaplan, 514 U.S.

EE 4

Flexible Manufacturing System Pty. Lid. v. Super

Products Corp., 86 F.3d 96 (7th Cir. 1996) o....ccccccccce. 16

Gammaro v. Thorp Consumer Disc. Co., 828 F.

SUPP. STD (DD. REIeR. 1993) ..2.0ccccecccceccorcesesccscecescccesccseees 5

General Telephone Co. v. Falcon, 457 U.S. 147

LT 17

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

eerie cretercrenstnetannsanen 7, 8, 18, 20

Government of United Kingdom v. Boeing Co., 998

a 5

Green Tree Financial Corp.-Alabama v. Randolph,

Le 8

Hale v. First USA Bank, N.A., No. OOCIV5406JGK,

2001 WL 687371 (S.D.N.Y. June 19, 2001) coocccccccccceces 7

Hansberry v. Lee, 311 U.S. 32 (1940) voces. 10, 11, 13, 15

In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293 (7th

STITT teileeretetncrctreeenenennnanstcneneustennesesessesssnes 16

Johnson v. West Suburban Bank, 225 F.3d 366 (3d

STITT Sideliaeiineateneerescetreenenenenesstntenesceccenceseeseenessees 7

iV

TABLE OF AUTHORITIES—Continued

Page(s)

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

1982), rev'd in part on other grounds sub

nom. Southland Corp. v. Keating, 465 U.S. |

|) 6,17

Kremer v. Chemical Construction Corp., 456 U.S.

G1 (19GB) ....ccccccccccccosccccvesececcccccssscsscsscosossssssocssosssseess l

Leonard v. Terminix International Co., L.P., — So.

2d —, 2002 WL 31341084 (Ala. Oct. 18,

BOD2) ..ccccceccsccssscecesescnsoorssvsscssscossossossssososssooossssonosssseses 20

Lomax v. Woodmen of World Life Insurance Soci-

ety, 228 F. Supp. 2d 1360 (N.D. Ga. 2002) ......ccceceeereees 7

zada v. Dale Baker Oldsmobile, Inc., 9\ F. Supp.

2d 1087 (W.D. Mich. 2000) .........cccesseseeeneenseennnenenes 20

zano v. AT&T Wireless, 216 F. Supp. 2d 1071

(IND. Cal. 2002) ....cccccorcerssecsessscssersccssessssssessonssnssssssossees 7

Lloyd v. MBNA America Bank, N.A., 27 Fed. Appx.

82, 84 (3d Cir. 2002) .......c.esccceesscssssrerresnessenrsessessrsneees 6

Lytle v. CitiFinancial Services, Inc., 810 A.2d 643

(Pa. Super. Ct. 2002) ......cccccescesseeseeeeenseesensnnsnnnenennnnnnans 20

Marsh v. First USA Bank, N.A., 103 F. Supp. 2d 909

(N.D. Tex. 2000) ......ccccerccorscessssscseorsssressresseesssssssssssonsees 7

Martin v. Wilks, 490 U.S. 755 (1989) ....ccccccsseseseseseeeeseeeeeee LO

Mastrobuono v. Shearson Lehman Hutton, Inc., 514

U.S. $2 (1GDS) ..cccccccccceccceecccsrccccssscssssescssessssseneososssoossssse 5

Matsushita Electric Industry Co. v. Epstein, 516

U.S. BGT (1DBG) ..cccccccccccccececcecoccsscccsscccsscocsssscnsosonescosecs 15

McCarthy v. Providential Corp., No. C 94-0627

FMS, 1994 WL 387852 (N.D. Cal. July 19,

| | 5

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) ....cececeseseseneneeeneneens 7

Montana v. United States, 440 U.S. 147 (1979) .....cssevees 15

Mullane v. Central Hanover Bank & Trust Co., 339

U.S. 306 (1950) ...ccccccccseccsserssesesscccscsconscsesessossesesosseosess 12

:

’

7 ST Se TT ie Sinema ne nn eine

~~ eee

v

TABLE OF AUTHORITIES—Continued

Page(s)

Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) o.o.ccccccceceee 10

Parklane Hosiery Co. v. Shore, 439 U.S. 322

GPU ED cxndiunnisinnenesemetamanenensstmeneniansteineesbanseeemees 14, 15

Pennoyer v. Neff, 9S U.S. 714 (1877) c.cccccccccccccscseeeeseeceeeees 10

Perry v. Thomas, 482 U.S. 483 (1987) .o.c.ccccccccccceeeeeeee 5, 7,8

Phillips Petroleum Co. v. Shutts, 472 U.S. 797

TE 14, 15

Pick v. Discover Financial Servi ices, Inc., No. Civ.

A. 00-935-SLR, 2001 WL 1180278 (D. Del.

es A UE eeresertinntiseristenieeernnenspeecienerternteseniiains 7

Press-Enterprise Co. v. Superior Court, 464 U.S.

ae TUTTE) sccrsessncnenntenseientasneaierentintenseanteninsentiaioncasieiinis 12

Rains v. Foundation Health System Life & Health,

23 P.3d 1249 (Colo. Ct. App. 2001) ...cccccccccccccceseeceseeeees 7

Randolph v. Green Tree Finance Corp—Alabama,

244 F.3d 814 (11th Cir, 2001) 0........ccccccceccccesscecescecececes 7

Raytheon Co. v. Automated Business Systems, Inc.,

882 F.2d 6 (Ist Cir, 1989) .oo.ccccccccccccscseseseseeseseseeeeeeee 13

Remmey v. PaineWebber, Inc., 32 F.3d 143 (4th Cir.

UT cesatetenememneemeniennveamenennsnmiunnmsatataatatiaenia 18

Rodriquez de Quijas v. Shearson/American Express,

iy GE te SPT GUTEED cnnnnnniennnanmninninnnnerenn 8, 18

Sagal v. First USA Bank, N.A., 69 F. Supp. 2d 627

(D. Del. 1999), aff'd, 254 F.3d 1078 (3d Cir.

SED eeceemecnsncrnasparanseimnnsianapmiatinisiasaataetsataaatssastis 7

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

See SEI ctrrnnenimnstiirnenitniinnicteneieeuteetenes 8, 20

Snowden v. Checkpoint Check Cashing, Inc., 290

F.3d 631 (4th Cir.), cert denied, 123 S. Ct. 695

SEITE. coneesanseteesetenntncineterientdenenettmnnsntatentnsimataseieenatees 6

Sobel v. Hertz, Warner & Co., 469 F.2d 1211 (2d

Eoatt TEP OUD cesenesnmnsnirnenntncenitantpsnanatininiatemeanssmmamaameas 13

Southland Cerp. v. Keating, 465 U.S. 1 (1984) cocccccccceccesceee 8

vi

TABLE OF AUTHORITIES—Continued

Stein v. Geonerco, Inc., 17 P.3d 1266 (Wash. Ct.

App. 2001) .....sccssssesesesesssesnenensnsnnnnensnsnenene snenensnanenensenenes 7

zetela v. Discover Bank, 118 Cal. Rptr. 2d 462 (Ct.

App. 2002), cert. denied, 71 U.S.L.W. 3400

(U.S. Feb. 24, 2003) (NO. 02-829) ......cecceeseeeeeeeereeeeees 20

Ting v. AT&T, — F.3d —, 2003 WL 292296 (9th

Cir. Feb. 11, 2003) ..........cccccsssssersseerereensseererssnensnnnes 6, 20

United States Parole Commission v. Geraghty, 445

U.S. 388 (1980) .......cccccccccceorresessrsssveesesrssensssssssenees 10, 14

United Steelworkers of America v. Enterprise Wheel

& Car Corp., 363 U.S. 593 (1960) ....ceceeseeeereneees 11, 13

Vigil v. Sears National Bank, 205 F. Supp. 2d 566

(E.D. La. 2002) .......ccccccescsssssvssssersenrsenssnsssnsnsesnssensensennes 7

Volt Information Sciences, Inc. v. Board of Trustees,

489 U.S. 468 (1989) .......cccccccccccserseeeeeeeeeessneennenssnnnsnnens 5

West v. Randall, 29 F. Cas. 718 (C.C.D.R.1. 1820)

(NO. 17,424) .....ccccccccescesccssssssssesesssenssensssnnsssssssonsssnssenss 10

Zawikowski v. Beneficial National Bank, No.

98C2178, 1999 WL 35304 (N.D. Ill. Jan. 11,

°C RETA PRETEEN TEE 7

_ STATUTES AND RULES

Federal Arbitration Act, 9 U.S.C. §§ 1-16 .....ssssscccssssssesesssees 3

ON LTT 4, :

OE LLIN

LTTE 11, 16, 17

LEGISLATIVE MATERIALS

HR. Rep. No. 97-542 (1982) ..cccscssssssssssssssssesssesseseeseseee 8, 19

S. Rep. No. 68-536 (1924) cesssssssscccccssssssssssesssseesesensensnsee 8, 19

ore

Vii

TABLE OF AUTHORITIES—Continued

Page(s)

BOOKS, ARTICLES & TREATISES

Brafford, Anne, Arbitration Clauses in Consumer

Contracts of Adhesion: Fair Play or Trap for

the Weak and Unwary?, 21 J. Corp. L. 331

GRU cctereennsinencccmnssnsesinmnnnenssiianssanensinamepsmsmeaee 9

Conte, Alba & Herbert B. Newberg, Newbery on

Class Actions (4th ed. 2002) ...c.ccccccccccccecseeseseeeeceees 13,17

Drahozal, Christopher R., “Unfair” Arbitration

Clauses, 2001 U. I. L. Rev. 695 (2001) coccccccccceceeeees 8

Friendly, Henry J., Federal Jurisdiction: A General

SPT ‘cicmtiaeieiisdeiiinainitiinintanasiniatsasiaiiaaatatiaen 16

Gorman, Robert A., The Gilmer Decision and the

Private Arbitration of Public Law Disputes,

TE? le St i Os GED ecrncenuenteinenienemenemmeiiennmeenens 8

Hoeniger, Berthold H., Commercial Arbitration

Handbook § 3.10 (1st ed. 1990, rev. 1-1991) coon. 9

Maltby, Lewis L., Private Justice: Employment Ar-

bitration and Civil Rights, 30 Colum. Hum. Rts.

Sia eh Ge OTT ncetienciteninenisiiciinecandatintatanssieeiemmmenies 8,9

Meyerowitz, Steven A., The Arbitration Alternative,

EE 13

Pearson, Jessica, An Evaluation of Alternatives to

Court Adjudication in Consumer Dispute Reso-

lution 322 (ABA Special Comm. on Dispute

Si TUPTIIUD scccteinrtirsisssmniineaitinntiantntntanensesapinieseaitaaasacasi 9

Sternlight, Jean R., As Mandatory Binding Arbitra- _

tion Meets the Class Action, Will the Class Ac-

tion Survive?, 42 Wm. & Mary L. Rev. |

i 11, 12,13

Story, J., Commentaries on Equity Pleading § 97 (J.

TN 10

Tidwell, Gary, et al., Party Evaluation of Arbitra- .

tors: An Analysis of Data Collected from NASD

Regulation Arbitrations 25 (Aug. 5, 1999) .....ccccccccccseee 9

vill

TABLE OF AUTHORITIES—Continued

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Waltcher, Daniel R., Note, Classwide Arbitration

and 10B-5 Claims in the Wake of Shear-

son/American Express, Inc. v. McMahon, 74

Cornell L. Rev. 380 (1989) .....ccssenseereeeesnnennnennensnnens

In the Supreme Count of the United States

No. 02-634

GREEN TREE FINANCIAL Corp. A/K/A GREEN TREE

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

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

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

Supreme Court of South Carolina

BRIEF FOR AMERICAN BANK FERS ASSOCIATION,

AMERICAN FINANCIAL SERVICES ASSOCIATION,

AND CONSUMER BANKERS ASSOCIATION

AS AMICI CURIAE IN SUPPORT OF PETITIONER

This amici curiae brief is submitted in support of the pe-

titioner.' By letters filed with t!.e Clerk of the Court, peti-

tioner and respondents have consented to the filing of this

brief.

' Pursuant to Supreme Court Rule 37.6, amici state that the brief

was prepared in its entirety by amici curiae and their counsel. No mone-

tary contribution toward the preparation or submission of this brief was

made by any person other than amici curiae, their members, and their

counsel.

2

STATEMENT OF INTEREST OF AMICI CURIAE

The American Bankers Association (“ABA”) is the prin-

cipal national trade association of the banking industry in the

United States. Its members are located in all fifty states and

the District of Columbia and include baks of all types and

sizes—money center banks, regional banks, and community

banks. ABA members hold approximately ninety percent of

the domestic assets of United States banks. The ABA fre-

quently appears in litigation as an amicus curiae where the

issues raised are of widespread importance to banks or con-

sumers of banking services.

The American Financial Services Association (“AFSA”)

was organized in 1916 and represents more than 300 compa-

nies that engage in lending and sales financing amounting to

approximately twenty percent of all consumer credit in the

United States. These companies range from independently

owned consumer finance firms to the nation’s largest finan-

cial-services, retail, and automobile sales finance companies.

AFSA’s membership includes national and state banks that

operate multi-state consumer credit programs.

The Consumer Bankers Association (“CBA”) was

founded in 1919 to provide a progressive voice for the retail

banking industry. CBA members hold more than 900 bank

and thrift charters, with total assets of more than $2.9 trillion,

and are leaders in the areas of consumer, auto, home equity,

and education finance, bank sales of investment products,

small business services, and community development.

Many members of the ABA, AFSA, and CBA use stan-

dard form agreements and contracts, which include arbitra-

tion provisions. Some of those provisions authorize individ-

ual arbitration and are silent about class-action arbitration.

Other arbitration provisions expressly state that class arbitra-

tions are not permitted. Members with either sort of arbitra-

tion agreement have a strong interest in ensuring that the

agreements are enforced in keeping with their terms, and that

3

class arbitration procedures are not imposed upon them in

derogation of the Federal Arbitration Act.

SUMMARY OF ARGUMENT

Amici agree with petitioner that arbitration agreements

must be enforced as written and that class arbitration proce-

dures may not be imposed on parties who have not agreed to

them. Forced class arbitration proceedings violate the Fed-

eral Arbitration Act (“FAA” or “Act”), 9 U.S.C. §§ 1-16, and

are inherently unfair to defendants, in part because they

cannot bind absent plaintiffs.

, |. The most basic principle of the FAA is that an arbi-

tration agreement should be enforced as written. The FAA is

violated when a court determines either that parties who have

agreed to do so may not arbitrate, or that they shall arbitrate

under a procedure to which they did not agree. The enforce-

ability of arbitration agreements is subject to state-law con-

tract defenses, including unconscionability, but such a de-

fense cannot be a mere pretext for hostility to arbitration it-

self and cannot be a basis for imposing a fundamentally dif-

ferent private decision-making process.

. 2. Forced class arbitrations cannot be binding on absent

plaintiff class members who did not agree to, and play no

part in, the particular arbitration proceeding. The decision in

a judicial class action is binding on absentees because courts

are created by public laws to resolve disputes. The decisions

of an arbitrator have authority only because of the particular

parties’ agreement and cannot be imposed on other persons.

Moreover, a notice of a class arbitration is not a notice to

which an absent class member has an obligation to respond

And because class arbitrations are often neither public nor

recorded, absent class members have little ability to protect

their interests. Finally, settlements of class arbitrations are

not subject to review by a neutral judge, but only by the arbi-

trator selected by the parties, who cannot be expected to af-

—. absentees the protection provided by a judge under Rule

4

3. Forced class arbitrations are fundamentally unfair to

defendants. Since absent plaintiff class members cannot be

bound to the result of a class arbitration, the defendant can be

subjected to a series of similar claims, with no prospect of a

class victory but the prospect of a class defeat the first time

an arbitrator rules for a plaintiff. The absence of a written

record, an explanatory opinion, or judicial review makes this

ratchet all the more unfair. This kind of one-sided class pro-

cedure would obviously make arbitration an unacceptable

alternative for the party (such as a lender) that must run the

risk of a classwide recovery without hope of obtaining a rul-

ing that would bar future claims.

4. The defects of class arbitration cannot be repaired by

injecting the courts into the arbitration process to resolve

questions of class definition, form and sufficiency of notice,

adequacy of representation, fairness of any settlement, and so

forth. The attempt to do this would sacrifice the benefits of

arbitration, leaving the worst of both worlds.

5. The decision of the court below reflects the old judi-

cial hostility to arbitration in modern and more sophisticated

dress. Its premise is that courts should not enforce agree-

ments to arbitrate disputes on an individual basis. That

premise is at odds with the FAA and this Court's decisions.

ARGUMENT

I. FORCED CLASS ARBITRATION IS CONTRARY

TO THE FAA.

The source of an arbitrator’s power to decide a dispute is

the contract between the parties to resolve their disputes in

that particular way. First Options of Chicago, Inc. v. Kap-

lan, 514 U.S. 938, 943 (1995) (“[A]rbitration is simply a

matter of contract between the parties.”). The FAA makes

such contracts fully enforceable, 9 U.S.C. § 2, and this Court

has repeatedly held that “private agreements to arbitrate are

[to be] enforced according to their terms,” Volt Info. Scis.,

~----

5

Inc. v. Board of Trs., 489 U.S. 468, 479 (1989), “like other

contracts,” id. at 478.°

Every federal court to reach the issue has held that when

an arbitration agreement is silent as to class arbitration, arbi-

tration must proceed on an individual basis and courts and

arbitrators are powerless to rewrite the parties’ agreement so

as to compel class arbitration.* As this Court said in EEOC

Vv. Waffle House, Inc., 534 U.S. 279 (2002), “[NJothing in the

2

See also Mastrobuono v. Shearson Lehman Hutton, Inc.. 514 U.S.

52, 53-54 (1995); Perry v. Thomas, 482 U.S. 483, 492-93 n.9 (1987)

3

~ It is clear that the South Carolina court did not treat the arbitration

agreement at issue “like other contracts.” South Carolina contract law

includes the following basic principle:

It is elementary and needs no citation of authority that the

function of courts is to adjudge and enforce contracts as they

are written and entered into by the parties. The court cannot

make them for the parties. ... [T}he court cannot exercise its

discretion as to the wisdom of such contract or substitute its

own for that which was agreed... .

Charles vy. Canal Ins. Co., 238 S.C. 600, 608-09, 121 S.E.2d 200, 205

(1961). “Words cannot be read into a contract which impart intent

wholly unexpressed when the contract was executed.” Blakeley v

Rabon, 221 S.E.2d 767, 769 (S.C. 1976). But that is precisely what the

South Carolina court did. Pet. App. 22a.

. See, e.g., Dominium Austin Partners v. Emerson, 248 F.3d 720

728-29 (8th Cir. 2001); Champ v. Siegel Trading Co., 55 F.3d 269 275

(7th Cir. 1995); McCarthy v. Providential Corp., No. C 94-0627 FMS

1994 WL 387852, at *8 (N.D. Cal. July 19, 1994); Gammaro v. Thorp

Consumer Disc. Co., 828 F. Supp. 673, 674 (D. Minn. 1993), see also

€.8-, Government of United Kingdom v. Boeing Co., 998 F.2d 68, 74 (2d

Cir. 1993) (“district court cannot consolidate arbitration proceedings aris-

ing from separate agreements to arbitrate, absent the parties’ agreement to

allow such consolidation”); American Centennial Ins. v. National Cas.

Co., 951 F.2d 107, 108 (6th Cir. 1991) (“a district court is without power

to consolidate arbitration proceedings, over the objection of a party to the

arbitration agreement, when the agreement is silent regarding consolida-

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

1990) (“absent a provision in an arbitration agreement authorizing con-

solidation, a district court is without power to consolidate arbitration pro-

ceedings”).

6

[FAA] authorizes a court to compel arbitration of any issues,

or by any parties, that are not already covered in the agree-

ment.” /d. at 289 (emphasis added).

The South Carolina court, however, joined a small group

of state courts that have allowed one party to pursue an arbi-

tration procedure wholly different from the one to which the

parties agreed.” Neither the agreement between Bazzle and

Green Tree nor the agreement between Lackey and Green

Tree included the absent class members or provided for class

arbitration. But the court asserted that “parties with nominal

individual claims” would have no effective “avenue for

relief” if they could not pursue their claims on a class basis.

Pet. App. 22a. It therefore imposed on the parties a decision-

making procedure to which neither the parties (nor the absent

class members themselves) had agreed.

The Ninth Circuit recently took a different tack: it held

that arbitration agreements that explicitly preclude class arbi-

tration are void as unconscionable under state law. See Ting

v. AT&T, — F.3d —, 2003 WL 292296, at *20 (9th Cir. Feb.

11, 2003). Ting thus denied the parties who had agreed to

arbitrate the ability to do so at all, and channelled them into

court proceedings. In Ting and the present case, the courts

failed to follow the FAA’s fundamental requirement that ar-

bitration agreements be enforced in accordance with their

terms.°

. See, e.g., Keating v. Superior Court, 645 P.2d 1192 (Cal. 1982),

rev'd in part on other grounds sub nom. Southland Corp. v. Keating, 465

U.S. 1 (1984); Blue Cross v. Superior Court, 78 Cal. Rptr. 2d 779 (Ct.

App. 1998); Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d 860 (Pa.

Super. Ct. 1991).

© Most courts have refused to compel class arbitrations when the

agreement was silent on this issue. See cases cited supra n.4. Similarly,

most courts, unlike the court in Ting, have rejected efforts to invalidate

arbitration agreements that explicitly prohibited class actions. See, €.g.,

Lloyd v. MBNA Am. Bank, N.A., 27 Fed. Appx. 82, 84 (3d Cir. 2002);

Snowden v. Checkpoint Check Cashing, Inc., 290 F.3d 631, 638-39 (4th

Cir.), cert denied, 123 S. Ct. 695 (2002); Randolph v. Green Tree Fin.

UP ethe

J

Under the FAA, arbitration agreements are subject to the

same defenses that state law applies to all contracts, includ-

ing unconscionability. 9 U.S.C. § 2; see also Doctor's As-

socs., Inc. v. Casarotto, 517 U.S. 681 (1996): Perry, 482

U.S. at 492 n.9. But a finding of unconscionability cannot be

simply a pretext for reasserting the old judicial hostility to

arbitration. It must be based on applying established state

law to the facts of a particular contract, see Perry, 482 U S at

492 n.9, not a broadside ruling that an entire class of éon-

= sanctioned by federal law, is inherently unconscion-

able.

As this Court has long recognized, parties agreeing to

arbitrate their disputes are necessarily forfeiting the “proce-

dures and opportunity for review of the courtroom.” Gilmer

v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 ( 1991), in

favor of the more efficient system of arbitration. Permittin

parties to trade their right to go to court for the efficiency of

arbitration lies at the very heart of the FAA.’ To permit

: orp.—Alabama, 244 F.3d 814, 815 (11th Cir. 2001); Baron v. Best Buy

m No. 99-14028, slip op. at 3 (11th Cir. June 1, 2001): Johnson v. West

Suburban Bank, 225 F.3d 366, 369 (3d Cir. 2000), cert. denied sub nom

Johnson v. Tele-Cash, Inc., 531 U.S. 1145 (2001); Lomax v. Woodmen of

World Life Ins. Soc'y, 228 F. Supp. 2d 1360, 1365 (N.D. Ga. 2002);

santo v. AT&T Wireless, 216 F. Supp. 2d 1071, 1076 (N.D. Cal 2002):

\ igil v. Sears Nat'l Bank, 205 F. Supp. 2d 566, 573 (E.D. La 20002): Pi k

v. Discover Fin. Servs., Inc., 2001 WL 1180278, at *5 (D Del Se t 28

2001); Arriaga v. Cross Country Bank, 163 F. Supp. 2d | 189 1195 (S D.

Cal. 2001); Hale v. First USA Bank, N.A., No. 0OCIVS406JGK, 2001 WL

pg at *7 (S.D.N.Y. June 19, 2001); Marsh v. First USA Bank, NA,

a F. Supp. 2d 909, 924 (N.D. Tex. 2000): Sagal v. First USA Bank,

A., 69 F. Supp. 2d 627, 631-32 (D. Del. 1999), aff d, 254 F.3d 1078 (3d

Cir. 2001); Zawikowski v. Beneficial Nat'l Bank, No. 98C 2178 1999 WL

35304, at *2 (N.D. Ill. Jan. 11, 1999); Brown v. KFC Nat'l Memt. Co

921 P.2d 146, 166 n.23 (Haw. 1996); Rains v. Foundation Health Sys.

Life & Health, 23 P.3d 1249, 1253 (Colo. Ct. App. 2001): Stein v. Geon.

erco, Inc., 17 P.3d 1266, 1270-71 (Wash. Ct. App. 2001). )

7 .

. This Court has frequently noted that a party agreeing to arbitration

is agreeing to a different forum with different procedures. See Mitsubishi

Motors Corp. v. Soler C hrysler-Plymouth, Inc., 473 U.S. 614, 628

8

courts, or state legislatures, to label certain arbitration proce-

dures unconscionable merely because they are alternatives to

litigation would eviscerate the FAA.”

Individual arbitration of small claims is not an uncon-

scionable process. On the contrary, as Congress recognized

when it passed the FAA, arbitration is typically both faster

and cheaper than litigation, see S. Rep. No. 68-536, at 3

(1924), and Congress has reiterated that view in more mod-

ern times.’ See also Lewis L. Maltby, Private Justice: Em-

ployment Arbitration and Civil Rights, 30 Colum. Hum. Rts.

L. Rev. 29, 55, 56-57 (1998); Robert A. Gorman, The Gilmer

Decision and the Private Arbitration of Public Law Disputes,

1995 U. Ill. L. Rev. 635, 646; Christopher R. Drahozal, “Un-

fair” Arbitration Clauses, 2001 U. Ill. L. Rev. 695, 755

(2001) (noting the cost for consumers to arbitrate is decreas-

ing “as arbitration institutions compete to provide low-cost

arbitration”) (footnote omitted); cf. Green Tree Financial

Corp.-Alabama v. Randolph, 53\ U.S. 79, 95 & n.2 (2000)

(Ginsburg, J., concurring) (discussing the low cost of arbitra-

tion). As the Court noted in Allied-Bruce, arbitration is par-

(1985); see also Gilmer, 500 U.S. at 26, 32; Rodriguez de Quijas v.

Shearson/American Express, Inc., 490 U.S. 477, 480 (1989), Shear-

son/American Express, Inc. v. McMahon, 482 U.S. 220, 229-30 (1989).

* See Doctor's Assocs., 517 U.S. at 687 (holding that States are

“precluded ... from singling out arbitration provisions for suspect

status”); Perry, 482 U.S. 483 (striking California statute prohibiting arbi-

tration of wage collection actions); Southland Corp. v. Keating, 465 U.S.

1, 13 (1984) (“{TJhe purpose of the [FAA] was to assure those who de-

sired arbitration and whose contracts related to interstate commerce that

their expectations would not be undermined by . . . state courts or legisla-

tures.”’) (alterations in original).

” See H.R. Rep. No. 97-542, at 13 (1982) (“The advantages of arbi-

tration are many: it is usually cheaper and faster than litigation; it can

have simpler procedural and evidentiary rules; it normally minimizes

hostility and is less disruptive of ongoing and future busisiess dealings

among the parties; [and] it is often more flexible in regard to scheduling

...."); see also Allied-Bruce Terminix v. Dobson, 513 U.S. 265, 280

(1995).

9

ticularly “helpful to individuals ... complaining about a

product, who need a less expensive alternative to litigation.”

Allied-Bruce, 513 U.S. at 280 (citation omitted). Thus, “for

smaller, simpler, more routine cases, it is hard to beat admin-

istered arbitration.” Berthold H. Hoeniger, Commercial Ar-

bitration Handbook § 3.10 (ist ed. 1990, rev. 1-1991); see

also Anne Brafford, Arbitration Clauses in Consumer Con-

tracts of Adhesion: Fair Play or Trap for the Weak and Un-

wary’, 21 J. Corp. L. 331, 333 (1996) (citation omitted)

(“Many consumer disputes, which often involve simple fac-

tual issues, can be resolved quickly and relatively cheaply

through arbitration.”). Finally, studies suggest both that arbi-

tration is fair to consumers'” and that those who participate in

a are widely satisfied that their cases were handled

airly.

Il. FORCED CLASS ARBITRATION CANNOT BIND

ABSENT CLASS PLAINTIFFS.

By allowing each plaintéff to pursue a forced class arbi-

tration, the South Carolina court not only rewrote the arbitra-

tion agreements that Bazzle and Lackey each had with Green

Tree but also purportedly altered the rights of each absent

class member. Bazzle upheld a process that imposed upon

absent class members a proceeding they did not choose to

bring, before a decision maker not selected in accordance

'" See Maltby, 30 Colum. Hum. Rts. L. Rev. at 46-48 (comparing

Lisa Bingham, Employment Arbitration: The Repeat Player Effect, |

Employment Rts. & Employment Pol'y J. 189 (1997) with data from fed-

eral di.srict courts) (comparing the results individuals obtain in arbitration

with tue results they obtain in court for similar cases and finding that

individuals are four times more likely to prevail in arbitration than in

traditional litigation); see also Jessica Pearson, An Evaluation of Alterna-

tives to Court Adjudication in Consumer Dispute Resolution 322 (ABA

Special Comm. on Dispute Res. 1983)

i :

See Gary Tidwell et al., Party Evaluation of Arbitrators: An

Analysis of Data Collected from NASD Regulation Arbitrations 25 (Aug.

5, 1999) (presented to the National Meeting of the Academy of Legal

Studies in Business).

10

with their own arbitration agreements or any other rule or

agreement binding on them. That process also required

absent class members to opt out or to proceed with a large

number of parties and claims that they did not agree could be

included in the resolution of any disputes they may have.

Such a proceeding plainly cannot bind absent plaintiff

class members. “It is a principle of general application in

Anglo-American jurisprudence that one is not bound by a

judgment ... in which he i not designated as a party or to

which he has not been miude a party by service of process.”

Hansberry v. Lee, 311 U.S. 32, 40 (1940); see also Pennoyer

v. Neff. 95 U.S. 714, 733 (1877) (mem.). Judicial class ac-

tions represent a narrow exception to this “deep-rooted his-

toric tradition.” Martin v. Wilks, 490 U.S. 755, 762 (1989)

(internal quotations omitted); see Hansherry, 311 U.S. at 41.

At equity, the “necessary parties” rule required that all parties

be joined to an action, no matter how “numerous they may

be.” West v, Randall, 29 F. Cas. 718, 721 (C.C.D.R.1. 1820)

(No. 17,424) (Story, J.). Because this rule made litigation

simply unmanageable in some instances, equity developed an

exception, the predecessor to the modern class action. Ortiz

v. Fibreboard Corp., 527 U.S. 815, 832 (1999); West, 29 F.

Cas. at 722: see also J. Story, Commentaries on Equity

Pleading § 97 (J. Gould 10th rev. ed. 1892). From these

roots, the modern class action has further evolved to address

certain problems.

This Court has carefully guarded the rights of persons

who are absent from, yet bound by, this exceptional process.

Absent class members may be bound only if a court has fol-

lowed procedures established by law, including a judicial de-

'2 As this Court stated in United States Parole Commission v. Ger-

aghty, 445 U.S. 388, 402-03 (1980), these problems include: “the protec-

tion of the defendant from inconsistent obligations, the protection of the

interests of absentees, the provision of a convenient and economical

means for disposing of similar lawsuits, and the facilitation of the spread-

ing of litigation costs among numerous litigants with similar claims.”

Sng

t

a

§

=

“a

if

a

:

A

termination that they are “ uately represented” -

ticipants. See Ortiz, 527 re 846. Martin, 490 une 562

n.2; See also Hansberry, 311 U.S. at 42. This due process

requirement is now embodied, in federal judicial proceed-

ings, in Federal Rule of Civil Procedure 23. This rule was

adopted pursuant to the Constitution and the laws of the

United States, and determines what is necessary, and gener-

ally sufficient, to protect the rights of absent parties (and

therefore to make it appropriate they be bound to the result of

the class action).

A forced class arbitration lacks an

. y such fundamental

protections for absent class members. We emphasize four

points: (a) lack of participation in the selection of the arbitra-

tor; (b) the inadequacy of class notice from an arbitrator; (c)

the closed proceedings; and (d) the impossibility of assuring

the fair settlement of claims on a class basis. See generally

Jean R. Sternlight, As Mandatory Binding Arbitration Meets

the Class Action, Will the Class Action Survive?, 42 Wm. &

Mary L. Rev. 1, 112 (2000).

& An absent class member cannot be bound by the deci-

sion of an arbitrator chosen by the named plaintiff and defen-

dant. Absent class members may be bound by the decisions

in judicial class actions because courts are established by

laws binding on all relevant persons. But arbitrators derive

their powers solely from the particular parties’ private con-

tract. Cf. United Steelworkers of Am. vy. Enterprise Wheel &

Car Corp., 363 U.S. 593, 597 (1960). When a person has not

agreed to have his claims decided by a particular arbitrator

there is no basis by which that arbitrator can assert authority

over that person. This point has been made by consumer ad-

vocates: “arbitral resolution of the claims of a plaintiff class

cannot have preclusive effect on absent class members since

arbitrators have no authority to bind absent parties.” See

Brief Amicus Curiae of Public Citizen at 23-24, Green Tree

Fin. Corp—Alabama v. Randolph, No. 99-1235 (U.S. 2000).

12

Here, the arbitration clause specifically reserved the se-

lection of the arbitrator to the parties whose claims were at

issue. (“All disputes, claims, or controversies ... shall be

resolved by binding arbitration by one arbitrator selected by

us with consent of you.” Pet. App. 110a.) Such a provision

is useful. Such a provision is useful in resolving individual

disputes, but flawed when applied to a class arbitration. Ab-

sent class members cannot be bound by the ruling of an arbi-

trator they had “absolutely no role in selecting.” Sternlight,

42 Wm. & Mary L. Rev. at 112.

This is not merely a procedural nicety. One function of

a court in a judicial class action is to protect the absent plain-

tiff class members against the possibly contrary interests of

the named plaintiffs who are supposed to be their representa-

tives. A decisionmaker selected by the named plaintiffs and

defendants is not well positioned to play that role. As Pro-

fessor Sternlight notes, “the arbitrator will have been selected

at least in part by the named plaintiffs or their attorneys, not

by the absent class members. Thus, it is difficult to see how

such an arbitrator would play the role of the court in check-

ing possible self-dealing.” /d. at 113 (citations omitted).

b. An arbitrator selected by one of the parties is under

no obligation to send any particular notice, in any particular

manner, to “absent” persons. Moreover, there is no estab-

lished procedure for judicial determination of the adequacy

of either the contents or the method of delivery of an arbitra-

tor’s notice. And a notice of a class arbitration is not a notice

to which an absent class member has an obligation to re-

spond. In view of the fundamental importance of notice, see

Mullane v. Central Hanover Bank & Trust Co., 339 U.S.

306, 314 (1950), these multiple uncertainties about the giving

of notice are a further substantial obstacle to binding absent

plaintiff class members.

c. The fact that arbitrations are frequently not public and

their results are often confidential creates additional prob-

lems. Unlike court proceedings, which are presumptively

13

open, see, e.g., Press-Enter. Co. v. Superior Court, 464 U.S.

501, 507-08 (1984), arbitration is a private dispute resolution

mechanism, whose proceedings are not necessarily memori-

alized even in a transcript, ¢.g., Sternlight, 42 Wm. & Mary

L. Rev. at 114, and whose resolution is often not supported

by a written opinion.'* This is not a problem (and may be an

advantage) in resolving One-on-one disputes, but private pro-

ceedings are wholly unworkable where the rights of “absent

class members” are being decided. See Hansberry, 311 U.S.

at 41. Absent class members could have no confidence in the

final decision and could not as a practical matter challenge it.

d. Settlements, also, cannot be made demonstrably fair

to absent class members. One important objective of the pro-

tections afforded in judicial class actions is to prevent “the

fraudulent and collusive sacrifice of the rights of absent par-

ties.” Jd. at 45; Alba Conte & Herbert B. Newberg, 2 New-

berg on Class Actions § 11.65 (4th ed. 2002). The trial judge

plays a critical role in preventing class representatives and

defendants from engineering a course of litigation or settle-

ment that is unfair to absent class members. But because ar-

bitrators who are selected only by the present parties lack

tenure, and have no jurisdiction beyond what the parties have

eat shaw them, they may be far less willing or able to

tees against collusion b i

pointed them. , ia

13

See Steven A. Meyerowitz, The Arbitration Alternative, 7\

A.B.A. J. 78, 80 (1985) (noting that in general, arbitrations are not open

to the public and no record of the proceedings is kept); see also, ¢.¢.,

United Steelworkers of Am., 363 U.S. at 598 (“[a}rbitrators have no obli-

gation ... to give their reasons for an award”); Raytheon Co. v. Auto-

mated Bus. Sys., Inc., 882 F.2d 6, 8-9 (1st Cir. 1989) (holding that arbitra-

tors are not required to issue written opinions); Sobel v. Hertz, Warner &

Co., 469 F.2d 1211, 1214-15 (2d Cir. 1972) (same). By contrast, objec-

tors in court are free to review the record to assist themselves in attacking

any settlement. See generally 2 Newberg on Class Actions §§ 11.57,

11.58 (discussing the rights of objectors to class settlements).

14

Ill. FORCED CLASS ARBITRATION IS UNFAIR TO

DEFENDANTS.

Because forced class arbitration decisions cannot be

binding on absent plaintiff class members, class arbitration is

fundamentally unfair to the defendant. A defendant may face

a series of proceedings in which it has no prospect of win-

ning more than the named plaintiff's individual dispute. But

the first defeat will purport to provide relief to the entire re-

maining class. This problem is exacerbated by the lack of

requirements for a written record, or an opinion explaining

the decision, or an opportunity for substantive review.

This Court has recognized that it is “unfair to allow

members of a class to benefit from a favorable judgment

without subjecting themselves to the binding effect of an un-

favorable one.” American Pipe & Constr. Co. v. Utah, 414

U.S. 538, 547 (1974).'* Defendants have “a distinct and per-

sonal interest in seeing the entire plaintiff class bound by res

judicata just as [the defendant] is bound.” Phillips Petro-

leum Co. v. Shutts, 472 U.S. 797, 805 (1985); see also Ger-

aghty, 445 U.S. at 402-03 (noting that one of the benefits of

class actions is “the protection of the defendant from incon-

sistent obligations”). Preventing defendants who prevail

from being subjected to collateral attacks on decisions “is not

a niere matter of practice or procedure inherited from a more

technical time than ours. It is a rule of fundamental and sub-

stantial justice, of public policy and of private peace, which

should be cordially regarded and enforced by the courts.”

Federated Dep't Stores v. Moitie, 452 U.S. 394, 401 (1981)

(citation and internal quotation marks omitted); see also

Parklane Hosiery Co. v. Shore, 439 U.S. 322, 332-33 (1979).

Indeed, “central to the purpose for which civil courts have

been established, [is] the conclusive resolution of disputes

'4 The 1966 amendments to the Federal Rules of Civil Procedure

were specifically designed to eliminate this sort of one-sidedness, which

had been a feature of the so-called “spurious” class action. See American

Pipe, 414 U.S. at 547.

ee ae I

15

within their jurisdictions.” Montana v. United States, 440

U.S. 147, 153 (1979) (citations omitted). The important pub-

lic policies underlying these rules of finality include protect-

ing parties from “the expense and vexation attending multiple

lawsuits, conserv[ing] judicial resources, and foster{ing] reli-

ance on judicial action by minimizing the possibility of in-

consistent decisions.” /d. at 153-54; see also, e.g., Kremer v.

Chemical Constr. Corp., 456 U.S. 461, 467 n.6 (1982); Allen

v. McCurry, 449 U.S. 90, 94 (1981); Parklane Hosiery, 439

U.S. at 326.

In a judicial class action “{a] judgment in favor of either

side is conclusive in a subsequent action between them on

any issue actually litigated and determined, if its determina-

tion was essential to that judgment.” Cooper v. Federal Re-

serve Bank of Richmond, 467 U.S. 867, 874 (1984); see also,

¢.g., Phillips Petroleum, 472 U.S. at 801; Hansberry, 311

U.S. at 41-42. As this Court held in Cooper, “{u)nder ele-

mentary principles of prior adjudication a judgment in a

properly entertained class action is binding on class members

in any subsequent litigation.” 467 U.S. at 874. The require-

ment is made clear in Rule 23: “*[{a]ll members of the class

... are bound by the judgment entered in the action unless, in

a rule 23(b)(3) action, they make a timely election for exclu-

sion.” Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367,

379 (1996) (citation omitted); see also Devlin v. Scardelletti,

122 S. Ct. 2005, 2011 (2002) (“appealing the approval of a

settlement is [a class member’s} only means of protecting

himself from being bound by a disposition of his rights he

finds unacceptable”).

All of these principles are violated by forced class arbi-

tration. Because any decision rendered in a class arbitration

cannot be binding on absent plaintiffs, a defendant will

achieve finality through a class arbitration only if he loses

and each absent class member is satisfied by the amount of

damages awarded.

16

The importance of this point is illustrated in a related

context. Under Federal Rule of Civil Procedure 23(f), a

court’s decision to certify a case as a class action may be

immediately appealed. The rule was adopted to address the

concern that “[a]n order granting certification . . . may force a

defendant to settle rather than incur the costs of defending a

class action and run the risk of potentially ruinous liability.”

Fed. R. Civ. P. 23 (Advisory Committee Notes).'” But a de-

fendant in a forced class arbitration faces a far worse threat:

it has no offsetting chance to win a class victory, and it typi-

cally has no avenue for immediate appeal of the class deter-

mination and has only limited judicial review after an arbitra-

tion award has been entered. See 9 U.S.C. § 10; see also,

e.g., Flexible Mfg. Sys. Pty. Ltd. v. Super Prods. Corp., 86

F.3d 96 (7th Cir. 1996); Al Ainsworth v. Skurnick, 960 F.2d

939 (11th Cir. 1992)."°

IV. THE DEFECTS OF FORCED CLASS ARBITRA-

TION CANNOT BE REPAIRED BY INJECTING

THE COURTS INTO THE ARBITRATION PROC-

ESS.

Some courts and commentators have suggested that the

defects of forced class arbitration can be overcome by sig-

nificant judicial participation in the arbitration process. See,

e.g., Daniel R. Waltcher, Note, C lasswide Arbitration and

10B-5 Claims in the Wake of Shearson/American Express,

Inc. v. McMahon, 74 Comell L. Rev. 380, 404 (1989)

'5 coe also Henry J. Friendly, Federal Jurisdiction: A General View

120 (1973) (discussing the problem of “blackmail settlements” involved

in large scale multistate class actions), cf. In re Rhone-Poulenc Rorer

Inc.. 51 F.3d 1293, 1294, 1298 (7th Cir 1995) (granting the “extraordi-

nary” relief of mandamus to review district court decision on class certi-

fication because of “pressure to settle” even in case where previous simi-

lar suits had been won by defendant).

1© O¢ course, if amici are wrong and defendants can be forced to

participate in class arbitrations, fairness would require binding absent

class members.

17

( Classwide arbitration . .. May sacrifice due process protec-

tions if court involvement in the proceedings decreases or

Conese upon certification.”). But this is a suggestion to de-

stroy the arbitration process in order to save it.

. Courts that have compelled class arbitration have recog-

nized that “[w]ithout doubt a judicially ordered classwide

arbitration would entail a greater degree of judicial involve-

ment than is normally associated with arbitration.” Keating

v. Superior Court, 645 P.2d 1192, 1209 (Cal. 1982), rev'd in

part on other grounds sub nom. Southland Corp. v. Keating

465 U.S. | (1984); see also Blue Cross v. Superior Court 78

Cal. Rptr. 2d 779, 786-87 (Ct. App. 1998); Dickler v. Shear-

son Lehman Hutton, Inc., 596 A.2d 860, 866 (Pa. Super. Ct

1991 ). They have acknowledged that it will be difficult “to

avoid judicial intrusion upon the merits of the dispute, or

upon the conduct of the proceedings themselves and to

minimize complexity, costs, or delay.” Keating, 645 P.2d at

1209 (citing Class Wide Arbitration: Efficient Adjudication

or Procedural Quagmire?, 67 Va. L. Rev. 789 (1981)).

This does not adequately state the difficulty. Courts will

be compelled “to make initial determinations regarding

certification and notice to the class.” Keating, 645 P.2d at

1209; see also Pet. App. 3a (noting that the trial court

certified the class in Bazzle). But to do so, “it inay be

necessary for the court to probe behind the pleadings before

coming to rest on the certification question.” General Tel

Co. v. Falcon, 457 U.S. 147, 160 (1982). Courts considering

certification must understand “the claims, defenses, relevant

facts, and applicable substantive law.” Castano v. Am. To-

bacco Co., 84 F.3d 734, 744 (Sth Cir. 1996). Courts

considering notice proposals would need to understand the

entire dispute well enough to approve “the best notice

practicable under the circumstances.” Cf. Fed. R. Civ. P

23(c)(2). To assure fairness, courts would also be required to

exercise a measure of external supervision” over dismissals

and settlements. Keating, 645 P.2d at 1209. Such “careful

court monitoring” would likely have to continue throughout

the litigation. | Newberg on Class Actions § 1.13. And of

18

on Class Actions § 1.13. And of course judicial determina-

tions would be potentially subject to review by higher courts.

All of this would require lawyers, time, and expense, de-

feating the very purposes arbitration was designed to serve.

As the Fourth Circuit noted in another context, such judicial

participation would “reduce arbitral proceedings to the status

of preliminary hearings. Parties would cease to utilize a

process that no longer had finality.” Remmey v. PaineWeb-

her, Inc., 32 F.3d 143, 146 (4th Cir. 1994).

Forced class arbitration with heavy judicial participation

lacks the advantages of either arbitration or judicial class ac-

tions. It eliminates the efficiencies of arbitration. And at the

same time, as long as there is any substantial role for an arbi-

trator selected by the parties, and any remaining informality

in the process, class arbitration cannot possibly provide the

full protections for absent parties that are afforded by the

painstakingly worked out procedures for judicial class ac-

tions.

V. FORCED CLASS ARBITRATION IS AN ATTACK

ON ARBITRATION ITSELF.

The decision below reflects a modern and more sophisti-

cated form of the old judicial hostility toward arbitration, “a

judicial disposition inherited from then-longstanding English

practice.” Circuit City Stores, Inc. v. Adams, 532 US. 105,

111 (2001). Congress passed the FAA “to overcome courts

refusals to enforce agreements to arbitrate.” Allied-Bruce

Terminix Cos. v. Dobson, 513 U.S. 265, 270 (1995) (citation

omitted); see also Gilmer v. Interstate/Johnson Lane Corp.,

500 U.S. 20, 28 (1991). In keeping with the FAA, this Court

has emphatically rejected the earlier hostility. See Rodriquez

de Quijas v. Shearson/American Express, Inc., 490 US. 471,

480-81 (1989) (citations omitted). “[S]uspicion of arbitration

as a method of weakening the protections afforded in the

substantive law ... has fallen far out of step with our current

strong endorsement of the federal statutes favoring this

method of resolving disputes.” /d. at 481 (citation omitted).

Si oe

19

Parties enter into arbitration agreements to avoid the ex-

pense and delay of litigation. “The desire to avoid the delay

and expense of litigation persists. The desire grows with

time and as delays and expenses increase.” S. Rep. No. 68-

536, at 3 (1924). Over the twentieth century, arbitration

evolved to provide a quick, inexpensive, and fair alternative

to litigation. H.R. Rep. No. 97-542, at 13 (1982). But parties

simply will not offer or agree to arbitration provisions that

courts have rendered unfair and unworkable. In agreeing to

arbitrate, parties weigh costs and benefits. For a court “to

read such a [class proceedings] term into the parties’ agree-

ment would disrupt the negotiated risk/benefit allocation and

direct the parties to proceed with a different sort of arbitra-

tion.” Champ v. Siegel Trading Co., 55 F.3d 269, 275 (7th

Cir. 1995) (internal quotation marks, brackets, and citations

omitted).

Amici’s members, who use standard form lending

agreements throughout the United States, face a particular

difficulty. They do not know where a customer will reside in

the future or where he will initiate proceedings if a dispute

arises. They cannot afford to offer arbitration anywhere, if

doing so may sometimes subject them to forced class arbitra-

tion.

The loss of arbitration would also harm the customers of

amici’s members. These customers benefit not only because

their own disputes are resolved more efficiently, but also be-

cause lending companies, including amici’s members, can

avoid much of the otherwise enormous cost of litigation.

Finally, we note that parties cannot necessarily avoid the

threat of forced class arbitration by stating explicitly in their

agreements that arbitration will not be done on a class basis.

The court below suggested (Pet. App. 22a n.21) that it might

reject such a proposition as unconscionable. Some other

courts have already done so. Such courts’ hostility to arbitra-

tion could hardly be more clear, resulting in either forced

class arbitration or even court proceedings. See, e.g., Ting,

20

2003 WL 292296, at *20 (arbitration agreement struck be-

cause, inter alia, it prohibited class proceedings); Comb v.

PayPal, Inc., 218 F. Supp. 2d 1165, 1175-76 (N.D. Cal.

2002) (same); ACORN v. Household Int'l, Inc., 211 F. Supp.

2d 1160, 1171, 1174 (N.D. Cal. 2002) (same); Lozada v.

Dale Baker Oldsmobile, Inc., 91 F. Supp. 2d 1087, 1104-05

(W.D. Mich. 2000) (same); Leonard v. Terminix Int'l Co., —

So. 2d —, 2002 WL 31341084, at *8 (Ala. Oct. 18, 2002)

(striking arbitration agreement because it prohibited class

proceedings); Szetela v. Discover Bank, 118 Cal. Rptr. 2d

862, 867-68 (Ct. App. 2002) (compelling arbitration, but

striking prohibition on class proceedings), cert. denied, 71

U.S.L.W. 3400 (U.S. Feb. 24, 2003) (No. 02-829); cf. Lytle

v. CitiFinancial Servs., Inc., 810 A.2d 643, 667-68 (Pa. Su-

per. Ct. 2002) (remanding for consideration of whether pro-

hibition on class proceedings was unconscionable)."”

This Court has held that arbitration agreements are en-

forceable so long as the parties can effectively vindicate their

substantive rights. See, e.g., Shearson/American Express,

Inc. v. McMahon, 482 U.S. 220, 229-30 (1987); see also

Gilmer, 500 U.S. at 32 (rejecting a claim that “arbitration

procedures cannot adequately further the purposes of the

ADEA because they do not provide for ... class actions”).

The combination of the cases cited above and the rulings in

Bazzle is to supply another condition: arbitration agreements

must provide for class arbitrations. This is precisely the sort

of condition to the enforcement of an arbitration agreement

that is forbidden under the FAA.

'” The majority rule is that arbitration agreements that prohibit class

arbitrations or class actions in favor of individual arbitration are fully

enforceable under the FAA. See, e.g., cases cited supra n.6.

c

4

§

21

CONCLUSION

For the foregoing reasons, the judgment of the South

Carolina Supreme Court should be reversed.

FEBRUARY 2003

Respectfully submitted,

Louis R. COHEN

Counsel of Record

CHRISTOPHER R. LIPSETT

ERIC J. MOGILNICKI

MICHAEL D., LEFFEL

WILMER, CUTLER & PICKERING

2445 M Street, N.W.

Washington, D.C. 20037

(202) 663-6000

Counsel for Amici Curiae