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

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[Sipe Court, U.S.

FILED

MAR 26 2003

No. 02-634

CLERK

IN THE

Supreme Court Of The Hnited States

GREEN TREE FINANCIAL CorpP. 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. LACKE, 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 OF AMICUS CURIAE TRIAL LAWYERS FOR

PUBLIC JUSTICE IN SUPPORT OF RESPONDENTS

F. Paul Bland, Jr.

(Counsel of Record)

Michael J. Quirk

Trial Lawyers for Public Justice, P.C.

1717 Massachusetts Avenue, NW

Suite 800

Washington, D.C. 20036

(202) 797-8600

Counsel for Amicus Curiae

[BEST AVAILABLE COPY =|

QUESTION PRESENTED

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

preempts generally applicable state contract law and state

procedural rules applied by a state court in determining

whether parties can arbitrate class-wide claims under an

arbitration clause, when the state court found the clause to be

silent on the subject.

i ee

TABLE OF CONTENTS

Page

QUESTION PRESENTED .............00c00ceeeeee i

TABLE OF AUTHORITIES .................005- ae

INTEREST OF AMICUS CURIAE .........2022020+5. l

STATEMENT OF CASE ..........20.c0cceceeeuces 3

SUMMARY OF ARGUMENT ............-..-00005- 6

ARGUMENT

1. THE FAA DOES NOT PREEMPT THE STATE

LAWS APPLIED BY THE COURT BELOW IN

HOLDING THAT THE PARTIES CAN ARBITRATE

SPEED cb cecsecesccccccescceeesces 9

A. The Text of the FAA Permits Application of

State Contract Law and Procedural Rules. . 10

B. There Is No Implied Conflict Preemption Where

No Federal Law Standards Address the Subject

of State Law Regulation. .............. 12

c. The State Laws Applied by the Court Below Do

Not Frustrate the Purposes of the FAA. ... 15

I. THE COURT SHOULD NOT REACH ISSUES

RAISED BY PETITIONER’S AMIC] REGARDING

STATE UNCONSCIONABILITY LAW. ....... 18

DET onecannceseceeccesetcscesosaceens 26

TABLE OF AUTHORITIES

Cases Page

Allied-Bruce Terminix Co.'s, Inc. v. Dobson,

Pe dcccenenumacnaieued 2, 8, 16

America Online, Inc. v. Superior Ct., 108 Cal.

Rptr. 2d 699 (Cal. Ct. App. 2001) ............. 23

California Div. of Labor Standards Enforcement

v. Dillingham Construction, N_A.,

SP I atdnccesccssdéssdoccicées 9

Discover Bank v. Superior Court, 129 Cal. Rptr. 2d

Fe ED cc-cdcccceessocececes 17

Doctor's Associates, Inc. v. Casarotto,

Far nncdcccecececeeeses 8, 16, 22

Ellis v. Taylor, 449 S.E.2d 487 (S.C. 1994) ............ 5

Episcopal Housing Corp. v. Federal Ins. Co.,

Bee Ge Ge BOGE cccccesccccccecvess 5

Equal Employment Opportunity Comm'n v. Waffle

House, Inc., 534 U.S. 279 (2002) ....... 15, 23, 24

Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938) ...... 9

First Options of Chicago, Inc. v. Kaplan,

Fs SE b Sob covnnanceecureneees 7,10

Freightliner Corp. v. Myrick, 514 U.S. 280

PED hc cedcecdueascsssesacoososeses 7, 13-14

Gilmer v. Interstate/Johnson Lane Corp.,

Se EE 6 oseccccccccccesessceecse 15

Green Tree Financial Corp. v. Randolph,

Se es Cc ccccuccoccccscccosccesase 24

Howlett v. Rose, 496 U.S. 356 (1990) ...........-6555. 9

Kentucky v. Stincer, 482 U.S. 730 (1987) ..........-.-. 19

Mastrobuono v. Shearson Lehman Hutton, Inc.,

FO es EE o Shs ctvddeccescccocs 5, 10-11

McGoldrick v. Companie Generale Transatlantique,

FE es GOED wc ccctovceccccccoceseses 19

Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 460 U.S. 1 (1983) ......... 11

Myrtle Beach Lumber Co., Inc. v. Wiloughby,

Be ee is DEEED oc cccccccceccccocess 5

Perry v. Thomas, 482 U.S. 483 (1987) .......... 7, 10, 16

Plaza Devel. Serv’s v. Joe Harden Builder, Inc.,

365 S.E.2d 231 (S.C. App. 1998) ............ 5-6

Rice v. Santa Fe Elevator Corp., 331 U.S.

PE 6 dd edceucessncccedecccoonscossés 9

South Central Bell Telephone Co. v. Alabama,

SPs ME a cccnccccccucesentecceee 19

Southland Corp. v. Keating, 465 U.S. 1 (1984) .... 7, 12, 16

Sprietsma v. Mercury Marine, 123 S. Ct. 518

|” RR aie iat nl eI ae 7,14

State ex re. Dunlap v. Berger, 567 S.E.2d 265 (W.Va.),

cert. denied, 123 S. Ct. 695 (2002) ... 21-22, 23, 24

Ting v. AT&T, 319 F.3d 1126 (9 Cir. 2003) ........ 20-21

Ting v. AT&T, 182 F. Supp. 2d 902

EE Se a ae 21, 25

TRW Inc. v. Alexander, 534 U.S. 19 (2001) ............ 19

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

of Leland Stanford Junior Univ.,

SP scedecavesnuceseeese passim

Statutes

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

DEE Stsnbouk bueed oeeeeedadeeeunsens 7, 10, 12

PE atendkdducdnenasadeuseciedseees 7, 11-12

PGE Steuaneusseadedbnushenessesakeus 6, 7,12

Se DUPED ccccencanescscescoseness 3

SE a ed oe ad

Miscellaneous

Restatement (Second) of Contracts § 206

INTEREST OF AMICUS CURIAE'

Trial Lawyers for Public Justice (“TLPJ”) submits this

brief as amicus curiae in support of Respondents, urging the

Court to hold that the Federal Arbitration Act (“FAA”), 9

U.S.C. §§ 1-16, does not preempt the state contract law and

procedural rules applied by the court below in determining that

the Respondent plaintiffs could arbitrate claims for class-wide

relief against Petitioner Green Tree Financial Corp.

(“Petitioner” or “Green Tree”).

TLPJ is a national public interest law firm that

specializes in precedent-setting and socially significant civil

litigation. In prosecuting cases throughout the federal and state

courts, TLPJ seeks to advance consumers’ and victims’ rights,

environmental protection, civil mghts and civil liberties,

workers’ rights and workplace safety, the protection of the poor

and powerless, and the preservation and improvement of the

civil justice system. Based on these goals, TLPJ has become

concerned over a recent trend wherein many businesses are

attempting to deny consumers access to courts and to limit their

own liability to consumers by imposing mandatory and binding

arbitration clauses as part of routine economic transactions.

Six years ago, TLPJ established a Mandatory Arbitration

Abuse Prevention Project to combat these abuses. While TLPJ

supports alternative dispute resolution that is truly voluntary

between parties and affords consumers a true opportunity to

enforce their legal nghts, our research and investigation have

' Pursuant to Rule 37.6 of the Rules of this Court, amicus states

that no counsel for a party authored this brief in whole or in part, and no

person or entity other than amicus and its counsel made a monetary

contribution to the preparation or submission of the bnef. Pursuant to Rule

37.3(a), letters of consent to file this brief from Petitioners and Respondents

have been filed with the Clerk of the Court.

convinced us that corporate abuses of the opportunity to compel

arbitration sometimes serve to deny consumers any opportunity

to effectively vindicate their claims. Through its Mandatory

Arbitration Abuse Prevention Project, TLPJ has devoted much

effort to representing consumers in fighting these abuses.

The question presented is whether the FAA preempts

generally applicable state contract law and procedural rules that

a state court applied in holding that a sub-prime mortgage

lender’s mandatory arbitration clause allows consumer

plaintiffs to arbitrate claims for class-wide relief. TLPJ has a

strong interest in the resolution of this question because Green

Tree’s preemption arguments would threaten to eliminate what

this Court has held to be the primary source of protection for

consumers against corporate over-reaching in cases governed by

the FAA: namely, the rules and requirements of state contract

law. See Allied-Bruce Terminix Co’s, Inc. v. Dobson, 513 U.S.

265, 281 (1995). The South Carolina Supreme Court found that

Green Tree’s arbitration clause did not clearly address the

subject of class-wide claims, and proceeded to resolve this

ambiguity in favor of the plaintiffs by applying the general

common law rule for resolving ambiguity against the drafter.

Green Tree’s argument that the FAA preempts this and any

other state law that furthers the goals of “efficiency and equity,”

Pet. Br. at 34, would give corporations license to strip

consumers of important substantive and procedural rights by

stealth through the imposition of mandatory arbitration clauses

that do not even make mention of these rights.

Green Tree’s preemption arguments also run counter to

the FAA’s plain language, to generally recognized federal

preemption principles, and to the Court’s decisions addressing

the types of state laws that the FAA does preempt. TLPJ

therefore respectfully submits this brief urging the Court to

affirm the decision below entering judgment on the class-wide

arbitration awards issued in favor of the plaintiffs.

TLPJ has an additional interest in the resolution of this

case pertaining to a question that is not properly before the

Court, but was nevertheless raised by several amici filing briefs

supporting Green Tree. These amici ask the Court to hold that

the FAA preempts applications of the state common law

doctrine of unconscionability that would result in findings that

particular arbitration clauses are unconscionable because they

explicitly purport to ban consumer claims for class-wide relief.

See, e.g., Brief of Amicus Curiae Chamber of Commerce at 5

n. 2; Brief of Amicus Curiae American Bankers Association, ef

al. at 6. Since the Court granted certiorari to resolve disputes

over the manner of enforcement (not the alleged illegality) of

Green Tree’s arbitration clause; since neither party raises

arguments involving South Carolina’s law of unconscionability;

and since no factual record pertaining to the elements of state

law unconscionability is before the Court, TLPJ respe -tfully

urges the Court not to reach out to address this issue.

STATEMENT OF CASE

The plaintiffs are consumers who entered into home

equity and mobile home mortgage loans with Green Tree.

These loans are covered by South Carolina’s Consumer

Protection Code, including its provision replacing the State's

usury limits with the requirement that a I~nder ascertain a

borrower’s choice of legal counsel and insurance agent in

matters relating to the transaction prior to the closing. See S.C.

Cope ANN. § 37-10-102. In 1996 and 1997, plaintiffs filed the

two cases that were consolidated in this appeal as putative class

actions, alleging that Green Tree failed to comply with these

statutory requirements in all of the transactions at issue.

Green Tree responded to both suits by moving to

compel! arbitration of all claims pursuant to the arbitration

clauses that it put into its standard-form loan contracts. These

clauses stated in relevant part that: “All disputes, claims, or

controversies arising from or relating to this contract or the

relationships which result from this contract . . . shall be

resolved by binding arbitration by one arbitrator selected by us

with consent of you.” Pet. App. 110a. In the case filed by

plaintiffs Lynn and Burt Bazzle, the state trial court granted the

plaintiffs’ motion for class certification and Green Tree’s

motion to compel arbitration. /d. at 3a. In the case filed by

plaintiff Daniel Lackey, the state appellate court ordered

enforcement of Green Tree’s arbitration clause, and the parties

stipulated to arbitrate before the arbitrator who was presiding

over the Bazzle case. /d. at 6a. After finding the requirements

for class certification to be satisfied, the arbitrator certified a

class of approximately 1,840 plaintiffs in the Lackey case. /d.

After hearing evidence showing that Green Tree hed

notice of the statutory requirements in many of the transactions

at issue but continued to refuse to comply, the arbitrator issued

awards for the plaintiffs in both cases. In the Bazzie case, the

arbitrator awarded between $5,000 and $7,500 in damages to

each of the 1,899 plaintiffs for a total award of $10,395,000.

Id. at 4a. In the Lackey case, the arbitrator awarded $5,000 in

damages to each plaintiff for a total award of $9,200,000. Jd.

at 7a. State trial courts entered judgment on the plaintiffs’

motions to confirm both class-wide arbitration awards. The

South Carolina Supreme Court assumed jurisdiction and

consolidated Green Tree’s appeals from these orders on the

question of whether the trial court in Bazz/e and the arbitrator

in Lackey exceeded their legal or contractual authority by

allowing the plaintiffs to arbitrate class-wide claims. /d. at 8a.

The South Carolina Supreme Court applied established

state contract law principles in affirming the decisions below

permitting arbitration of class claims. First, the court found

that, “if the terms of a contract are clear and unambiguous, the

Court must enforce the contract according to its terms

regardless of its wisdom or folly.” /d. at 17a (citing Ellis v.

Taylor, 449 S.E.2d 487 (S.C. 1994)). Next, the court cited the

maxim that “[a]mbiguous language in a contract . . . should be

construed liberally and interpreted strongly in favor of the non-

drafting party.” Jd. (citing Myrtle Beach Lumber Co., Inc. v.

Wiloughby, 274 S.E.2d 423 (S.C. 1981) (case involving non-

arbitration contract)). The court also cited this Court’s

precedent applying the same state law rule to arbitration clauses

covered by the FAA. Jd. at 18a (citing Mastrobuono v.

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

The state court below then made a factual finding that

Green Tree’s arbitration clause was “silent regarding class-wide

arbitration” because the clause nowhere mentions the issue. /d.

at 19a (emphasis in original). The court considered Green

Tree’s arguments against class-wide arbitration based on the

clause’s language pertaining to “disputes . . . arising from or

relating to this contract” and “relationships which result from

this contract,” id. (emphasis in original), but concluded that

“[a]t best, it creates an ambiguity, and should, therefore, be

construed against the drafting party, Green Tree.” /d.

The South Carolina Supreme Court thus held that the

plaintiffs could arbitrate their class claims based on the “general

principles of contract interpretation” that apply to Green Tree’s

arbitration clause, id. at 20a-21a, and based on established state

law allowing consolidation of claims subject to arbitration. /d.

at 18a-19a (citing Episcopal Housing Corp. v. Federal Ins. Co.,

255 S.E.2d 451 (S.C. 1979); Plaza Devel. Serv's v. Joe Harden

Builder, Inc., 365 $.E.2d 231 (S.C. App. 1988)). The court

noted a split of authority among federal and state courts on

whether class-wide arbitration was allowed under the FAA

absent express contractual authorization, but noted that federal

court decisions barring such proceedings were based largely on

Section Four of the Act, 9 U.S.C. § 4, which by its terms does

not apply to state courts. /d. at 20a. Finally, the court found

that it would be fundamentally unfair to strip consumers of the

right to seek class-wide relief through non-negotiable, adhesive

contracts that nowhere even make mention of this right:

If we enforced a mandatory adhesive arbitration

clause, but prohibited class actions in arbitration

where the agreement is silent, the drafting party

could effectively prevent class actions against it

without having to say it was doing so.

Following the federal approach risks such a

result where arbitration is mandated through an

un-negotiated adhesion contract. Under those

circumstances, 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.

Id. at 22a.

SUMMARY OF ARGUMENT

The South Carolina Supreme Court correctly applied

ordinary state contract law and state procedural rules in holding

that Green Tree’s arbitration clause allows arbitration of the

plaintiffs’ claims for class-wide relief. Green Tree argues that

the FAA preempts these state laws because the Act prohibits

;

any result that is not explicitly spelled out in the arbitration

clause itself. These arguments fail on several counts.

First, Green Tree’s preemption arguments are contrary

to the text of the FAA , which expressly preserves state contract

law and allows state courts to apply their own procedural rules

when they are asked to enforce arbitration clauses. The FAA’s

savings clause makes arbitration clauses revocable on the same

legal and equitable grounds as apply to any other contract. See

9 U.S.C. § 2. Based on this savings clause, this Court has held

repeatedly that the Act preserves generally applicable state

contract law. See, e.g., First Options of Chicago, Inc. v.

Kaplan, 514 U.S. 938, 944 (1995); Perry v. Thomas, 482 U.S.

483, 492 n.9 (1987). Similarly, the FAA’s procedural rules for

enforcing arbitration clauses apply only in “the courts of the

United States” or “any United States District Court.” 9 U.S.C.

§§ 3 and 4. Based on this statutory language, the Court has

rejected any attempt to make these rules apply in state court

cases. See Volt Info. Sciences, Inc. v. Board of Trustees of

Leland Stanford Junior Univ., 489 U.S. 468, 477 n.6 (1989);

Southland Corp. v. Keating, 465 U.S. 1, 16 n.10 (1984).

Second,. Green Tree’s call for a radical expansion of

FAA preemption here does not comport with general principles

of implied conflict preemption. When addressing alleged

conflicts under other federal statutes, this Court has held that

there can be no implied conflict preemption based on frustration

of federal purposes where no federa! law addresses the subject

that state law is regulating. See, e.g., Sprietsma v. Mercury

Marine, 123 S. Ct. 518, 527-28 (2002); Freightliner Corp. v.

Myrick, 514 U.S. 280, 289-90 (1995). The FAA contains no

provisions setting out federal contract interpretation rules or

addressing multiple-party disputes. Volt Info. Sciences, 489

U.S. at 474 and 476 n.5 (1989) (noting absence of federal law

for interpreting contracts and FAA’s silence on multiple-party

issues). Since neither the FAA nor any other federal law speaks

to the parties’ disputes over contract interpretation and the

permissibility of aggregating claims, the court below properly

applied state law to these issues.

Finally, the state laws at issue here do not conflict with

the FAA or the Act’s underlying purposes. The Court has only

found the FAA to preempt state laws that show hostility

towards arbitration by specifically interfering with the parties’

contractual selection of forum, either by imposing unique

burdens that limit the enforcement of arbitration clauses or by

barring all arbitration of claims. See, e.g, Doctor's Associates,

Inc. v. Casarotto, 517 U.S. 681 (1996); Allied-Bruce Terminix

Co.'s, Inc. v. Dobson, 513 U.S. 265 (1995). The state laws

applied by the court below did not target or even address

questions of forum selection, since all parties agreed that their

claims were subject to arbitration. Instead, the court properly

applied state law to resolve the separate issue of whether the

plaintiffs could obtain class-wide relief, an issue that does not

touch upon the FAA’s preemptive policy goals for protecting

contractual forum selection.

On a completely separate matter, the Court should not

use this case to decide issues raised by Green Tree’s amici

regarding the state common law doctrine of unconscionability

that are not raised in the question on which certiorari was

granted. As the Court has recognized, unconscionability is a

state law ground for revoking coiitracts, including arbitration

agreements. See Casarotto, 517 U.S. at 687. Since all of the

parties here agree that the arbitration clause is enforceable,

albeit based on conflicting understandings of its terms, the

Separate issues of whether this or a differently-worded

arbitration clause would be unconscionable (and therefore

unenforceable) under generally applicable state contract law, or

whether the FAA would preempt such state law, were not

briefed by the parties, and therefore are not properly before the

Court. See S. Ct. Rule 14.1(a). The Court should decline the

invitation by several of Petitioner's amici to reach out and

address these separate issues.

ARGUMENT

I. THE FAA DOES NOT PREEMPT THE STATE

LAWS APPLIED BY THE COURT BELOW IN

HOLDING THAT THE PARTIES CAN

ARBITRATE CLASS CLAIMS.

Because preemption constitutes a radical intrusion on a

state’s power, this Court has long recognized a strong

presumption against preemption of state laws. Particularly

where “‘federal law is said to bar state action in flelds of

traditional state regulation, we have worked on the assumption

that the historic police powers of the States were not to be

superseded by the Federal Act unless that was the clear and

manifest purpose of Congress.” California -Div. of Labor

Standards Enforcement v. Dillingham Construction, N.A., Inc.,

519 U.S. 316, 325 (1997) (quoting Rice v. Santa Fe Elevator

Corp., 331 U.S. 218, 230(1947)). The state laws applied by the

court below were a common law rule of contract interpretation

and a procedural rule for administering cases filed in state court,

both areas of traditional and almost exclusive state regulation.

See, e.g., Erie Railroad Co. v. Tompkins, 304 US. 64, 78

(1938) (“Congress has no power to declare substantive rules of

common law applicable in a state. . .”); Howlett v. Rose, 496

U.S. 356, 372 (1990) (“The States thus have great latitude to

establish the structure and jurisdiction of their own courts. ).

Therefore, Green Tree bears the considerable burden of

demonstrating that it was the clear and manifest purpose of

Congress in enacting the FAA to displace these state laws. In

light of the FAA’s plain language and this Court’s decisions

regarding implied conflict preemption generally and preemption

under the FAA specifically, Green Tree cannot bear this burden.

A. The Text of the FAA Permits Application of

State Contract Law and Procedural Rules.

The lower court’s application of state contract law

principles and state procedural rules is consistent with, and

indeed is invited by, the express provisions of the FAA. The

Act proclaims that written arbitration agreements “shall be

valid, irrevocable, and unenforceable, save upon such grounds

as exist at law or in equity for the revocation of any contract.”

9 U.S.C. § 2. The Court has construed this savings clause to

preserve the application of generally applicable state contract

law, whether of legislative or judicial origin, to arbitration

clauses. Perry, 482 U.S. at 492 n.9. This includes state laws

governing contract formation and interpretation, as well as

revocation. See, e.g., First Options, 514 U.S. at 944 (“When

deciding whether the parties agreed to arbitrate a certain matter.

. .courts generally apply ordinary state-law principles that

govern the formation of contracts.”); Volt Info. Sciences, 489

U.S. at 474 (“the interpretation of private contracts is ordinarily

a question of state law’’).

By applying the established rule of South Carolina

contract law that ambiguity shall be construed most strongly

against the drafter to the question of whether plaintiffs could

arbitrate class claims, the court below followed the directives

of the FAA and of this Court. In Mastrobuono, this Court was

asked to decide whether two investors could recover punitive

damages in arbitration where their broker’s standard-form

te, A ll AO CL A

contract did not explicitly address the subject, but contained a

choice-of-law clause that arguably prohibited the claims and an

arbitration clause covered by the FAA that arguably allowed

them. Mastrobuono, 514 U.S. at 58-61. After finding that,

“[a}t most, the choice-of-law clause introduces an ambiguity”

into the agreement, the Court allowed arbitration of the claims

because “respondents cannot overcome the common-law rule

of contract interpretation that a court should construe

ambiguous language against the interest of the party that drafted

it.” Jd. at 62 (citing Restatement (Second) of Contracts § 206,

and relevant state and federal court opinions). Thus, the South

Carolina Supreme Court’s reliance on state contract law to

resolve the ambiguity it found in Green Tree’s arbitration clause

over arbitration of class claims is perfectly consistent with this

Court’s teachings regarding the FAA’s savings clause.’

Similarly, it was appropriate for the state court below to

rely On state procedural rules in deciding whether the parties

could arbitrate class claims in light of the limited scope of the

FAA’s own procedural rules. Although the FAA establishes

procedures for judicial enforcement of arbitration clauses, these

rules only apply to cases filed in the “courts of the United

* While Mastrobuono applied the New York and IIlinois common

law rule for construing contractual ambiguity against the drafter, the Court

also observed the court-made rule under the FAA that “any doubts

conceming the scope of arbitrable issues should be resolved in favor of

arbitration. . .” /d. at 62 n.8 (quoting Moses H. Cone Memorial Hosp. v.

Mercury Construction Corp., 460 U.S. 1, 24-25 (1983)). In Mastrobuono,

the Moses H. Cone rule and the state common law rule both yielded the same

result favoring arbitration of the plaintiffs’ punitive damages claims. If the

Moses H. Cone rule were found to apply here, it should likewise yield the

same result brought about by the state common law rule, namely that

ambiguities in Green Tree's arbitration clause be resolved in favor of

arbitrating the plaintiffs’ class claims.

States,” 9 U.S.C. § 3, or in “any United States district court”

having jurisdiction based on the parties’ underlying claims, 9

U.S.C. § 4. Thus, even when finding that state laws were

preempted by Section Two of the Act, this Court has gone out

of its way to emphasize that “we do not hold that §§ 3 and 4 of

the Arbitration Act apply to proceedings in state courts.”

Southland, 465 U.S. at 16 n.10; see also Volt Info. Sciences,

489 U.S. at 477 n.6 (“we have never held that §§ 3 and 4, which

by their terms appear to apply only to proceedings in federal

court, ... are nonetheless applicable in state court.”) (emphasis

added). Since the FAA’s procedural rules do not bind state

courts, the Act should not be held to preempt South Carolina

decisional law allowing consolidation of arbitrable claims.

In short, contrary to Green Tree’s contentions here, the

FAA was written to accommodate, not to preclude, a state

court’s application of ordinary state contract law principles and

state procedural rules in construing and enforcing an arbitration

clause. The court below was therefore correct to apply these

types of state laws in holding that Green Tree’s arbitration

clause allows arbitration of class claims.

B. There Is No Implied Conflict Preemption

Where No Federal Law Standards Address

the Subject of State Law Regulation.

As the Court has recognized, “[t]he FAA contains no

express pre-emptive provision, nor does it reflect a

congressional intent to occupy the entire field of arbitration.”

Volt Info. Sciences, 489 U.S. at 477. Therefore, the FAA can

only displace state law through the doctrine of implied conflict

preemption. /d. at 477-78. In order to establish that the FAA

impliedly preempts the state contract interpretation and

procedural rules applied by the court below, Green Tree must

demonstrate that there is an “actual conflict” between federal

and state law, either because it is “impossible for a private party

to comply with both . . . requirements” or because the state laws

“stand[] as an obstacle to the accomplishment and execution of

the full purposes of Congress.” Freightliner Corp.,514 U.S. at

287 (citations omitted). Implied conflict preemption cannot lie

here because the FAA contains no independent rules of federal

law for interpreting contracts or for addressing issues relating

to multiple-party disputes.

| This Court has recognized that the FAA does not set out

independent federal standards for interpreting contracts or for

addressing multiple party disputes. In the case of the former.

the Court explained that “the interpretation of private contracts

is ordinarily a question of state law, which this Court does not

sit to review.” Volt Info. Sciences, 489 U.S. at 474. In the case

of the latter, the Court observed that “the FAA itself contains no

provision designed to deal with the special practical problems

that arse in multiparty contractual disputes when some or all of

the contracts at issue include agreements to arbitrate.” /d. at

476 n.5. Based on this recognition, the Court found that state

laws authorizing courts to consolidate arbitration proceedings

would “foster the federal policy favoring arbitration” under the

FAA. /d. The Court has endorsed the application of state

contract law and procedural rules like those applied by the court

below on the ground that these state laws help to resolve issues

that the express provisions of the FAA do not address.

When addressing preemption arguments under other

federal statutory schemes, the Court similarly has held that there

cannot be implied conflict preemption where there is no federal

law standard addressing the subject of state law regulation. In

Freightliner Corp. , for example, the Court held that a state tort

law standard of care calling for antilock brakes in 18-wheel

tractor-trailers was not preempted by federal law because the

only federal regulation that ever addressed the subject of

antilock brakes on these vehicles had been repealed.

Freightliner Corp., 514 U.S. at 284-85. The Court held that “it

is not impossible . . . to comply with both federal and state law

because there is simply no federal standard for a private party

to comply with.” /d. at 289. Likewise, the Court held that there

could be no frustration of federal purposes because “{a] finding

of liability against petitioners would undermine no objectives

or purposes with respect to ABS devices, since none exist.” /d.

at 289-90; see also Sprietsma, 123 S. Ct. at 527-28 (finding no

implied conflict preemption of common law tort claims in the

absence of governing federal regulation).

The same rule should apply here against Green Tree's

arguments for a radical expansion of FAA preemption to

displace state laws governing contract interpretation and multi-

party disputes, issues that Congress itself has never addressed.

While Congress has not spoken to these matters, state

lawmaking authorities have given these issues their considered

judgment. The court below applied South Carolina's rule for

construing contractual ambiguity against its drafter, a default

rule that also furthers basic fairness concerns by ensuring that

the party who has the “greater opportunity to prevent mistakes

in meaning . . . is responsible for any ambiguity and should be

the one to suffer from its shortcomings.” Pet. App. at 17a; see

also Restatement (Second) of Contracts § 206, Comment (a)

(1979) (principle of “contra preferentem” guards against

situation where party guarding its own interests will “leave

meaning deliberately obscure, intending to decide at a later date

what meaning to assert.”). The court below also applied state

decisional law allowing aggregation of claims subject to

arbitration, recognizing that, in cases like this one involving

“identical issues against one defendant,” the rule serves the

“interest of judicial economy.” Pet. App. at 22a. These

important state policy goals should not be subverted in the

complete absence of evidence that Congress ever gave any

consideration to these issues. Since the FAA is silent on the

subjects to which the court below applied state law, there is no

basis for a finding that these state laws are preempted based on

any alleged conflict with federal law.’

Cc. The State Laws Applied by the Court Below

Do Not Frustrate the Purposes of the FAA.

Even without the FAA’s savings clause preserving state

contract law, there would be no basis for finding that the Act

preempts the state laws that the court below applied in

construing and enforcing Green Tree's arbitration clause. Since

neither express nor field preemption is at issue, the FAA only

preempts those state laws whose application would conflict

with the Act’s underlying purposes and objectives. Volt Info.

Sciences, 489 U.S. at 477-78. The Court has often stated that

Congress enacted Section Two of the FAA with the primary

goals of “revers[ing] the longstanding judicial hostility to

arbitration agreements that had existed at English common law

and had been adopted by American courts” and of “plac{ing,]

arbitration agreements upon the same footing as other

contracts.” Equal Employment Opportunity Comm'n v. Wafile

House, Inc., 534 U.S. 279, 289 (2002) (quoting Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20, 23 (1991)).

> Since neither the FAA nor any applicable federal regulations

address these issues, Green Tree's preemption arguments would require this

Court to devise federal common law rules of contract interpretation from the

ground up and would make every dispute over any term in an arbitration

clause a federal question giving rise to the Court's jurisdiction.

Based on these goals, the Court has found that the FAA

preempts two types of state laws that show hostility towards

arbitration by aiming to restrict enforcement of the parties’

contractual selection of the private forum. The first are state

laws that single out arbitration clauses for disfavored treatment

by imposing unique obstacles to their enforcement, thereby

placing them on a “different footing” from other contracts. See

Casarotto, 517 U.S. at 687 (FAA preempts state statute that

“conditions the enforceability of arbitration agreements on

compliance with a special notice requirement not applicable to

contracts generally”); Allied-Bruce Terminix, 513 U.S. at 269-

70 (FAA preempts state statute that makes all pre-dispute

arbitration agreements invalid and unenforceable). The second

are state laws that “take[] [their] meaning precisely from the

fact that a contract to arbitrate is at issue,” Perry, 482 U.S. at

492 n.9, such as statutory anti-waiver rules that are construed to

bar enforcement of a// arbitration clauses in cases involving

specific types of claims. Southland, 465 U.S. at 10.*

In light of these decisions, the FAA should not be found

to preempt the state laws applied by the court below for the

simple reason that they did not address disputes over forum

selection. All parties have agreed that the plaintiffs’ claims are

subject to arbitration under Green Tree’s arbitration clause.

Given this agreement regarding forum, the parties’ separate

dispute over whether the clause allows individual and/or class

* To the extent that the Southland preemption scenario is relevant

here, it is worth emphasizing that the only party seeking to bar arbitration of

an entire category of claims, namely all claims for class-wide relief, is Green

Tree itself. Given the parallels between Green Tree’s arguments and the

statute that was preempted in Southland, Green Tree is in a curious position

to be putting all of its eggs in the FAA preemption basket.

AE IO eT Oe EMOE™

claims does not implicate the FAA’s policy goals, and therefore

was properly decided through the application of state law.

Although it should be clear that the parties’ disputes are

over matters decided by state law, it should also be clear that

Green Tree is the only party whose arguments in this case show

an overt “hostility towards arbitration” that could even arguably

be found to threaten the FAA’s underlying goals. In support of

its position that the FAA enacts a presumptive ban on

arbitration of class claims, Green Tree argues that “forced class

arbitration creates a bizarre and dangerous hybrid that imposes

the expense and delay of court litigation without the necessary

due-process safeguards of court involvement and review,” that

“class arbitrations /ack the essential protections mandated in

the courts,” and that class arbitration “raises difficult legal and

practical questions. . .” Brief at 41, 42 (emphases added); see

also Brief of Appellant Conseco Finance Serv. Corp., f/k/a

Green Tree Finance Serv Corp. in Eastman v. Conseco Finance

Serv. Corp., Wis. Sup. Ct. No. 01-1743, bankruptcy stay

entered (2003) at 8 (“Imposition of class arbitration would

likely cause a party to abandon arbitration altogether ...”) A

court that recently agreed with Green Tree’s position voiced a

similarly generalized hostility towards arbitration by basing its

holding on a completely hypothesized “multi-million dollar

class arbitration award entered on nothing more than a whim

[that] cannot be corrected. . .” See Discover Bank v. Superior

Court, 129 Cal. Rptr. 2d 393, 410 (Cal. Ct. App. 2003)

(emphasis added).

Regardless of the merit of Green Tree’s attitude towards

arbitration, the parties’ dispute here does not implicate the

FAA's goals for protecting contractual forum selection. All

parties agree that their claims are subject to arbitration under

Green Tree’s arbitration clause. The FAA does not answer or

even address the parties’ separate disagreement over how to

resolve ambiguity in the terms of that clause regarding the

aggregation of arbitrable claims. The FAA therefore does not

preempt the state contract law and procedural rules applied by

the court below to resolve this disagreement in favor of

allowing the parties to arbitrate class claims.

Il. THE COURT SHOULD NOT REACH ISSUES

RAISED BY PETITIONER’S AMICI REGARDING

STATE UNCONSCIONABILITY LAW.

Green Tree argues that this is a case where the Court

must interpret contract terms. Br. at 18-45. Several amici

supporting Green Tree ask the Court to go beyond questions of

contract interpretation, however, and to opine upon the FAA's

impact on state law relating to a contract defense not raised by

either party. These amici ask the Court to declare that the FAA

preempts application of state laws regarding unconscionability

to contractual bans on class actions that are included in some

question, which is not presented here and was not addressed by

the state court below, on the basis of the highly selective and

often erroneous arguments offered by Green Tree’s amici.

First, the issue of unconscionability law is not presented

in the Petition, which poses the question of whether the FAA

> See, e.g., Brief of the Chamber of Commerce at 5, n. 2 (this case

is an opportunity to “dispatch [the] shibboleth” that contract bans on class

actions are unconscionable); Brief of Directv, Inc. at 4-5 (attacking

unconscionability cases); Brief for American Bankers Association, ef ai., at

6 (case holding that a contractual ban on class actions was unconscionable

failed to recognize that the FAA requires enforcement of all arbitration

clauses according to their terms).

“prohibits class-action procedures from being superimposed

onto an arbitration agreement that does not provide for class

action arbitration.” Pet. at i. This is a question of contract

enforcement and interpretation as to what meaning should be

given toa contract's terms. The amici ’'s question regarding the

intersection of the FAA and state laws of unconscionability,

however, does not focus on the contract's language or how it

should be enforced. The unconscionability question involves

application of an entirely different set of state laws relating to

defenses seeking the revocation of a contract.

. The Court should refuse to address this new question.

This Court does not, in all but the most “exceptional cases,”

address questions raised after certiorari is granted. Kentucky v

Stincer, 482 U.S. 730, 747 n.22 (1987). That rule applies with

“peculiar force” in “cases coming here from state courts.”

McGoldrick v. Companie Generale Transatlantique, 309 U.S.

430, 434 (1940). Here, there is nothing “exceptional” about the

issues raised by amici. Cf TRW Inc. v. Alexander, 534 U.S. 19.

34 (2001) (refusing to decide new issue first raised by

respondent in its brief on the merits); South Central Bell

Telephone Co. v. Alabama, 526 U.S. 160, 171 (1999) (“We

would normally expect notice of an intent to make so far-

reaching an argument in the respondent’s opposition to a

petition for certiorari, cf. this Court’s Rule 15.2, thereby

assuring adequate preparation time for those likely affected and

wishing to participate.”).

Amici argue that the issues of contract interpretation and

contract defenses are inextricably linked, suggesting that their

Proposition that the FAA creates a presumptive prohibition

against class arbitration when a contract is silent on the subject

necessarily implies that arbitration clauses are exempt from

generally applicable contract defenses. This is a non sequitur

— these are separate sets of laws that serve different purposes.

Whether or not the FAA requires particular contract language

to allow arbitration of class claims does not answer the question

of whether generally applicable state contract law can be used

to strike down clauses that expressly ban these procedures.

Another reason for the Court not to address the issue

raised by Green Tree’s amici is that the issue was not raised

before or actually decided by the South Carolina Supreme

Court.® The failure of the state court to decide this issue is

crucial here because it is unclear on this record how that issue

might have been decided, and therefore it is unclear exactly

what type of state law amici are trying to preempt. First, there

is no indication as to the South Carolina law requirements for

a finding of procedural unconscionability in contract formation.

While the court below noted that the arbitration clause was

promulgated as a contract of adhesion, that does not always

equate to a finding of procedural unconscionability. In many

states, procedural unconscionability requires a showing of some

additional element, such as “surprise.” There are no facts in the

record on whether the contract at issue was promulgated in such

a manner as to constitute a “surprise” for the consumer

plaintiffs, as that concept might be interpreted by the South

Carolina Supreme Court.’

® The only time that the state court below mentioned issues

regarding the legality and equity of explicit class action bans in adhesion

contracts, the court concluded that “this present case dose not raise this

question ....” Pet App. at 22an.21.

? Several of Green Tree’s amici excoriate the case of Ting v.

AT&T, 319 F.3d 1126 (9" Cir. 2003), and ask this Court to say something

that would reverse the decision in Ting and various other cases like it.

Among the many facts developed in that case not mentioned by these amici

is an enormous body of evidence establishing that AT&T communicated to

ent ED TEL re

The law of South Carolina is also unclear on some of

the central legal questions underlying any claim that a

contractual ban on class actions is substantively

unconscionable. In the states that have held these bans to be

unconscionable in some circumstances, those holdings have

often been based on general state laws relating to exculpatory

clauses. Typical of these cases is State ex rel. Dunlap v. Berger,

567 S.E.2d 265 (W.Va.), cert. denied, 123 S. Ct. 695 (2002),

where the court reviewed a number of longstanding state cases

relating to exculpatory clauses (none of which involved

arbitration clauses) and concluded that:

Based on all of the foregoing and in fidelity to

the approach that we have long taken in this

area, we recognize and hold that exculpatory

provisions in a contract of adhesion that if

applied would prohibit or substantially limit a

person from enforcing and vindicating rights

and protections or from seeking and obtaining

Statutory or common law relief and remedies

that are afforded by or arise under state law that

exists for the benefit of the public are

unconscionable; unless the court determines that

exceptional circumstances exist that make the

provisions conscionable.

its Customers about its arbitration clause in a manner that company officials

knew would ensure that very few customers would inceentiieaianen After

a full trial on the merits, the district court there held that the terms of the

arbitration clause (including its ban on class actions) would be a surprise to

the class there, citing to a wealth of documents and testimony. Ting v.

AT&T, 182 F. Supp. 2d 902, 911-13, 929-30 (N.D. Cal. 2002). Conseco’s

amici would like this Court to pass on the unconscionability of contractual

bans on class actions without actually hearing a case containing such a

factual record on questions like surprise.

Id. at 275-76. After reviewing the facts before it, the Dunlap

court found that a contract provision barring class actions

would effectively act as an exculpatory clause in that case, and

thus held it to be unconscionable. Here, however, there is no

statement of South Carolina law on exculpatory clauses, much

less on how such law would apply to this setting.

The Court should also refuse to decide or comment on

the issue of whether contractual bans on class actions included

in arbitration clauses may ever be found unconscionable

because the issue has not been fully or fairly briefed. The

importance of such briefing is clear from the fact that amici

make a number of dubious or incorrect statements of law in

support of their effort to have the Court decide this issue. The

New England Legal Foundation asserts, for example, that any

state law striking down a contractual ban on class actions would

violate the FAA because it fails to recognize the “sanctity of

contract.” Brief at 15, n.18. The American Bankers

Association, similarly, insists that cases holding that contractual

bans on arbitration are unconscionable ignores a requirement in

the FAA that all contracts be enforced “according to their

terms.” Brief at 6. These arguments ignore the fact, discussed

above, that the FAA contains a savings clause providing that

particular arbitration clauses will not be enforced if there are

grounds under state contract law for their invalidation. The

Court has thus recognized that the defense of unconscionability

is available to parties challenging arbitration agreements.

Casarotto, 517 U.S. at 687. Accordingly, to the extent that

state contract law recognizes a defense of unconscionability,

there is an important and well-recognized exception to the

amici's blanket assertion that any conceivable contract term

imposed by a drafter is sacred and must always be enforced.

Similarly, Green Tree’s amici incorrectly assert that

state laws applying the doctrine of unconscionability to bans on

class actions in arbitration are necessarily rooted in a hostility

to arbitration. See, e.g , American Bankers Association Brief at

7. This argument overlooks the fact that many states sharply

limit the use of exculpatory clauses in a// conwacts, whether or

not they contain arbitration clauses. See, e.g. Dunlap, 567

S.E.2d at 275-76. For example, before any of the California

cases cited by amici were decided, the rule that contractual class

action bans can be unconscionable based on their exculpatory

effects was applied in a case that had nothing to do with

arbitration. See American Online, Inc. v. Superior Court, 108

Cal. Rptr. 2d 699 (Cal. Ct. App. 2001) (striking down retailer’s

out-of-state forum selection clause based in part on prohibition

of consumer class actions).

Although amici claim that various cases not before the

Court improperly single out arbitration clauses for suspect

treatment, these amici advocate an approach that itse/f singles

out arbitration clauses for different treatment from that given to

any other contract. The amici's analysis is as follows: even if

a state's general law of unconscionability would strike down

class action bans as illegal exculpatory clauses in contracts that

do not require arbitration, that state law is overridden by the

FAA any time these provisions are included in a section of a

contract that does require arbitration. This notion contradicts

the Court's instruction that the FAA’s main purpose is to

“place arbitration agreements upon the same footing as other

contracts.’ Waffle House, 534 U.S. at 289 (emphasis added)

(citation omitted). Nothing in the Act permits parties to launder

otherwise illegal contract terms and make them legal merely by

inserting them under the heading “arbitration.” As one state

court recognized, the FAA does not allow for this kind of

escape from liability “merely because the prohibiting or limiting

provisions are part of or tied to provisions in the contract

relating to arbitration.” Dunlap, 567 S.E.2d at 280."

Similarly, amici suggest that the Court can hold that

class action bans are never unconscionable because the class

action is merely a procedural device, and arbitration clauses

may enact any procedures imaginable without being

unconscionable.’ This theory is plainly incorrect, however,

under this Court’s own teachings. Rules regarding filing fees

and other forum costs of arbitration are clearly procedural, not

substantive, in nature. Under these amici 's theory, therefore, an

arbitration clause could impose enormous fees against a

consumer and be immune from any state laws relating to

unconscionability. This Court has recognized, however, that

“the existence of large arbitration costs may well preclude a

litigant . . . from effectively vindicating [its] mghts.” Green

Tree Financial Corp. v. Randolph, 531 U.S. 79, 81 (2000).

Notwithstanding the false dichotomy suggested by Green Tree's

amici, if a procedural device (such as a contractual class action

ban) would in some cases “effectively” bar individuals from

vindicating their substantive nghts, and thus would have the

same impact as a more direct exculpatory clause, the procedural

quality of this contract provision does not save it from violating

state laws relating to unconscionable contracts. If every

contract term labeled “procedural” were beyond the reach of

state law, the drafters of adhesive contracts could easily evade

* These decisions involving state law anti-exculpatory principles

also comply with this Court's instruction that arbitration clauses are only

enforceable under the FAA if they allow parties to effectively enforce their

statutory rights. See, e.g, Waffle House, 534 U.S. at 295 0.10.

* See, e.g, Brief of New England Foundation at 21 n. 25; Brief of

Equal Employment Advisory Council at 12.

limits on exculpatory clauses by requiring persons with small

claims to travel to a completely inaccessible forum (perhaps the

outback of New Zealand) to arbitrate claims.

| As further proof of the dangers of resolving amici 's new

issue, the American Bankers Association suggests that

contractual class action bans would never bar persons from

vindicating their rights, citing several law review articles, as

well as snippets of legislative history and a few cases that do

not even involve class actions. Brief at 8. The practical effect

of a class action ban is a factual issue, one that the Court should

not address in the vacuum presented by the amici. In a case

where there was a significant record developed at trial, that

record demonstrated that a number of successful cases brought

on a class action basis against a corporate defendant could

never have been brought on an individual basis, whether in

court or in arbitration. Jing, 182 F. Supp. 2d at 918. At the

conclusion of that trial, the federal district court held that “the

prohibition on class actions will prevent class members from

effectively vindicating their rights in certain categories of

claims .. . .” Jd at 931. This Court should therefore reject the

suggestion, based largely on a few law review articles, that this

case presents a vehicle for resolving fact-intensive questions

that neither the court below nor the parties have addressed.

The state court below was correct to apply state law in

holding that the ambiguous terms of Green Tree’s arbitration

clause allowed the plaintiffs to arbitrate their class claims. In

light of the state court’s decision enforcing the arbitration

clause, this Court should not address questions about whether

or not different arbitration clause terms would be unenforceable

as a matter of state or federal law.

CONCLUSION

The judgment of the South Carolina Supreme Court

should be affirmed.

Respectfully submitted,