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

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No. 02-634 a mene Coa, US i

nana Os

In The | MAR 26 2003

Supreme Court of sit Gnited States

CLERK

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,

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 OF LAW PROFESSORS AS AMICI CURIAE

IN SUPPORT OF RESPONDENTS

Davip S. SCHWARTZ RICHARD M. ALDERMAN

Assistant Professor of Law Dwight Olds Chair in Law

(Counsel of Record) Executive Director, Center

University of Wisconsin for Consumer Law

Law School University of Houston

975 Bascom Mall Law Center

Madison, WI 53706 100 Law Center

(608) 262-6708 Houston, TX 77204-6060

(713) 743-2165

Counsel for Amici Curiae Law Professors

(Additional amici listed on inside cover. Institutional

affiliations listed for identification purposes only.)

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831

ROBERT BELTON

Professor of Law

Vanderbilt University Law

School

131 21st Ave. South, Ste. 207

Nashville, TN 37203-1181

(615) 322-2615

RICHARD B. CAPPALLI

First Charles Klein

Professor of Law and

Government

Temple University School

of Law

1719 N. Broad Street

Philadelphia, PA 19122

(610) 649-7653

DONALD F. CLIFFORD

Aubrey Brooks Professor

University of North

Carolina School of Law

Chapel Hill, NC 27599-3380

(919) 962-8511

DWIGHT GOLANN

Professor of Law

Suffolk University Law

School

120 Tremont Street

Boston, MA 02108-4977

(617) 573-8000

JEAN BRAUCHEEF

Roger Henderso.: Professor

of Law

Uvsversity of Arizona,

James E. Rogers

College of Law

1201 E. Speedway

Tucson, AZ 85721-0176

(520) 626-7251

PAUL D. CARRINGTON

Harry R. Chadwick Sr.

Professor of Law

Duke University School

of Law

Science Drive and

Towerview Road

Box 90362

Durham, NC 27708-0362

(919) 613-7000

CATHERINE FISK

Professor of Law &

William Rains Fellow

Loyola Law School

919 South Albany Street

Los Angeles, CA 90015

(213) 736-1036

JOSEPH R. GRODIN

John F. Digardi

Distinguished Professor

of Law

University of California,

Hastings College of

the Law

200 McAllister Street

San Francisco, CA 94102

(415) 565-4654

ee a

PAUL H. HAAGEN

Professor of Law

Duke University School

of Law

Science Drive and

Towerview Road

Box 90360

Durham, NC 27708-0360

(919) 613-7088

PETER LINZER

Professor of Law

University of Houston

Law Center

100 Law Center

Houston, TX 77204-6060

(713) 743-2200

STEPHEN E. MEILI

Clinical Associate Professor

University of Wisconsin —

Law School

975 Bascom Mall

Madison, WI 53706

(608) 265-2058

EDWARD F. SHERMAN

Professor of Law

Tulane University School

of Law

JOHN A. KIDWELL

Kathleen M. & George I.

Haight Professor of Law

University of Wisconsin

Law School

975 Bascom Mall

Madison, WI 53703

(608) 262-2240

STEWART MACAULAY

Malcolm Pitman Sharp

Professor of Law &

Theodore W. Brazeau

Professor of Law

University of Wisconsin

Law School

975 Bascom Mall

Madison, WI 53703

(608) 262-2240

RICHARD C. REUBEN

Associate Professor of Law

University of Missouri-

Columbia School of Law

Missouri Ave. &

Conley Ave.

Columbia, MO 65211

(573) 882-4984

JEFFREY W. STEMPEL

Professor of Law

William S. Boyd School

of Law

John Giffen Weinmann Hall University of Nevada

6329 Freret Street

Las Vegas

New Orleans, LA 70118-5670 4505 Maryland Pkwy.,

(504) 865-5939

Box 451003

Las Vegas, NV 89154-1003

(702) 895-2361

JEAN R. STERNLIGHT KATHERINE VAN WEZEL

John D. Lawson Professor STONE

of Law Professor of Law and

University of Missouri- Anne E. Estabrook

Columbia School of Law Professor of Dispute

Missouri Ave. & Conley Ave. Resolution

Columbia, MO 65211 Cornell Law School and

(573) 882-3614 Cornell School of

Industrial and Labor

Relations

Myron Taylor Hall

Ithaca, NY 14853

(607) 255-3626

CLYDE W. SUMMERS GERALD J. THAIN

Jefferson B. Fordham Consumer Law Professor

Professor of Law Emeritus University of Wisconsin

University of Pennsylvania Law School

Law School 975 Bascom Mall

3400 Chestnut Street Madison, WI 53703

Philadelphia, PA 19104 (608) 262-2240

(215) 898-7483

MAUREEN WESTON WILLIAM WHITFORD

Associate Professor Professor of Law Emeritus

Pepperdine University University of Wisconsin

School of Law Law School

24255 Pacific Coast Highway 975 Bascom Mall

Malibu, CA 90263 Madison, WI 53703

(310) 506-6313 (608) 262-2240

WILLIAM J. WOODWARD, JR.

James Beasley Schoo) of Law

Temple University

1719 N. Broad Street

_ Philadelphia, PA 19122

(215) 204-8984

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ..............::-::ssseeseeeeeeeeseees iv

INTEREST OF AMICI CURIAE................:0cscceseeeseees 1

SUMMARY OF ARGUMENT................::-:seseceeceeseeeees 1

MID. :s:::iricisiitiniinsapmaiiaibiuieanandiiniaiibtiinimeaiii 4

I. THIS CASE PRESENTS THE PROPER OCCA-

SION TO OVERRULE SOUTHLAND............-+-: 4

A. Green Tree’s Proposed Federal “Enforce

as Written” Rule Would Create a Stag-

gering Expansion of FAA Preemption

That Must Be Rejected ....................0eeee008 4

B. Rejection of Green Tree’s Position on Nar-

row Grounds, While Appropriate, Will Leave

Numerous Southland-Created Problems Un-

II. “PROPER APPLICATION OF STARE DECISIS

DOES NOT PREVENT CORRECTION OF THE

A. Southland’s Unworkable Test for Pre-

emption Has an Unsettling Effect on the

Law That Outweighs Any Legitimate Re-

liance Interests by Private Contracting

1. Inherent Contradictions in the South-

land Preemption Rule Put the FAA in

Tension with Itself ........................000+ i]

2. The Southland-Based Distinction Be-

tween “General” and “Specific” Contract

Law Creates Confusion Among Lower

Courts about When State Contract Law

Be Peete ....ccccccccccccccssecccccccsccsesccees 13

TABLE OF CONTENTS - Continued

Page

3. Southland Has Created Too Much

Legal Uncertainty to Create Signifi-

cant Reliance by Private Parties ........

. Southland’s Basic Premise That the FAA

Is Substantive Law Is Contradicted by

this Court’s Consistent Holdings Since

1985 That the FAA Is Fundamentally

Procedural and Affects No Substantive

. Southland’s Imposition of a “National Policy

Favoring Arbitration” on the States In-

trudes on the State-Federal Balance, Raises

Constitutional Doubts and Violates the

Fundamental Federalism Principles Es-

tablished in Gregory v. Ashcroft ..............

1. Southland’s Effect of Restructuring

State Dispute Resolution Processes

Without the Justification of a Strong

Federal Interest Raises Doubts about

the FAA’s Constitutionality ................

2. Federalism Principles Reaffirmed Since

Southland Caution against Courts Find-

ing Preemption in Reticent Statutes ....

3. This Court's “Clear Statement” Rule An-

nounced in Gregory v. Ashcroft Under-

mines Any Contention that Southland

TABLE OF CONTENTS - Continued

Page

4. Southland Suffers from Constitutional

Infirmities Comparable to Swift v.

TYSON .....2.seesecesereessreccesssnenensnnsnsanenenenss 29

TABLE OF AUTHORITIES

Page

CASES

Alexander v. Gardner Denver Co., 415 U.S. 36

SS initiate iat iia 18

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265

SSuITI ali hetesnsesiiasensinantnatinianbinicibtainintiimartnnasstaatieaaamaiasis iinet passim

Amchem Prod. v. Windsor, 521 U.S. 591 (1997).........000.... 5

Armendariz v. Foundation Health Psychare Servs.,

24 Cal. 4th 83, 99 Cal. Rptr. 745 (2000) ..0.......cccccccceeees 14

Arnold v. United Companies Lending Co 204

W.Va. 29, 511 S.E.2d 854 (1998) .o.......... mice 14

Bazzle v. Green Tree Financial Corp., 351 S.C. 244

569 S.E.2d 349 (2002) o..ccccccscccccecsessossevsensevsnseeseee —

Bradley v. Harris Research, 275 F.3d 884 (9th Cir.

Enero NSE E OTE 8, 14, 15, 16

Circuit City Stores v. Adams, 532 U.S. 105 (2001)............ 19

Discover Bank v. Superior Court, 105 Cal. App. 4th

326, 129 Cal. Rptr. 2d 393 (2003) ...........ccccccscccsceeceeceevees 5

Doctors Associates v. Casarotto, 517 U.S. 681

SGIsTaTaa a bassseouptaneorsineenbtnenteenbeesnenissieibenaaiesaniasiniinmaniaaeiina nies 7, 9, 13, 15

Doctors Associates v. Hamilton, 150 F.3d 157

Se Siete einesdieicthisenirementicnmemesincecasinaitedeestnieinaes = ve senseed 15

Duffield v. Robertson Stephens & Co., 144 F.3d 1182

(9th Cir.), cert. denied, 525 U.S. 996 (1998) hiuetinnseeenmsoans 18

Eastman v. Conseco Financing Servs. Co Wis.

Sup. Ct. No. 01-1743 (2003) ..0......cccccccese- na sdnemenesemamaenes 8

EEOC v. Waffle House, 534 U.S. 279 (2002)......ccccccccee- 3,19

Egelhoff v. Egelhoff, 532 U.S. 141 (2001) .....ccccccccccccceoceceee 27

= eT)

ee ee

TABLE OF AUTHORITIES — Continued

Page

English v. General Electric Co., 496 U.S. 72 (1990).......... 27

Erie R. Co. v. Tompkins, 304 U.S. 64 (1938).........0006 29, 30

First Options of Chicago v. Kaplan, 514 U.S. 938

(BBBED. ..cccccocccocccccvccosccnsossescossncnsossososcoosossssossoncsossosoosoossoees 7

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

BO (1GB1) ...cccccrccccccccccccscccesocccccescccssossoosessoessoossoosoosess 18, 19

Graham v. Scissor Tail, Inc., 28 Cal.3d 807, 171

Cal. Rptr. 604 (1981) .........cccccccssceseseeenesseseessrersresnensnnsnes 14

Gregory v. Ashcroft, 501 U.S. 452

| | eee 4, 21, 26, 27, 28, 29

Johnson v. Fankell, 520 U.S. 911 (1997) .......::cccccceeeeeeeeees 23

KKW Enterprises v. Gloria Jean’s Gourmet Coffees

Franchising Corp., 184 F.3d 42 (1st Cir. 1999).............. 15

Mastrobuono v. Shearson Lehman Hutton, Inc., 514

Ol |) 7,8

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) .........c0eee0+ 3, 18, 19

Moses H. Cone Memorial Hospital v. Mercury

Constr. Corp., 460 U.S. 1 (1983)........-ererereree 18, 20, 25

New State Ice Co. v. Liebmann, 285 U.S. 262 (1932) ........ 26

New York v. United States, 505 U.S. 144 (1992)..............+. 26

Patterson v. McLean Credit Union, 491 U.S. 164 (1989)......... 21

Perry v. Thomas, 482 U.S. 483 (1987)........... 2, 9, 12, 13, 22

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388

TID, BOG (1087) .cccccccccccccccccccsccccceccccscccsccsccsscossesoooooses 11, 20

de Quijas v. Shearson/American Ex-

press, Inc., 490 U.S. 477 (1989)........:0ceeeeeee 3, 10, 17, 19

TABLE OF AUTHORITIES — Continued

Page

Santa Fe Industries v. Green, 430 U.S. 462 (1977) ........... 21

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974)............ 19

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

Se RUE i nccitietiiinieinheeai einai 10, 22

Southern Pacific Co. v. Jenson, 244 U.S. 205 (1917)............ 12

_ Southland Corp. v. Keating, 465 U.S. 1 (1984) ......... passim

Steelworkers v. American Mfg. Co., 363 U.S. 564

SEeea rele ieesianicincemiacitiiiaiaasaiaani chia 24, 25

Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S.

Ee ee eT 24

Stewart Organization v. Ricoh Corp., 487 U.S. 22

SSID Uieneieeceseeeeieiehletieiaiesineei iil iste 20

Stirlen v. Supercuts, 51 Cal. App. 4th 1519, 60 Cal.

SEER ere a EN 17

Swift v. Tyson, 42 U.S. (16 Pet.) 1 (1842) ................ 4, 29, 30

Textile Workers Union v. Lincoln Mills, 353 U:S.

Se GUNTTED esiiscineehieeiieiietettineahaiihi tacts 25

Ting v. AT&T, 2003 U.S. App. LEXIS 2395 (9th

Re A Cis ME icirieiacieinietiieticiatineeraniatieintictiaiaiia staal 15,17

Ting v. AT&T, 182 F. Supp. 2d 902 (N.D. Cal. 2002),

aff’d in part, rev’d in part, 2003 U.S. App. LEXIS

2395 (9th Cir., Feb. 11, 2008).............cccccccssccsssssccesessccees 17

United States v. Lopez, 514 U.S. 549 (1995)................ 26, 29

United States v. Morrison, 529 U.S. 598 (2000).......... 26, 29

Volt Info. Sciences v. Stanford Univ., 489 U.S. 468

Si vea eid iesccricantinereseicariernisecsiieitpesbiatdetiaataialiciiiiniitieaiia 8,11

vii

TABLE OF AUTHORITIES — Continued

Page

Washington v. W.C. Dawson & Co., 264 U.S. 219 -

oa ECE a

Meee Cia va) cert denied, 128 8. Ct 695 (2002).....6, 17

Wilko v. Swan, 346 U.S. 427 (1953)..............0008 3, 10, 18, 19

STATUTES AND LEGISLATIVE MATERIALS

QB U.S.C. § 1441 ........ccccccccessssssreesessereeessesrenssssnenneesesenaeenans 22

Cal. Corp. Code § 31512..........ccscesseesesessereserneneneneennnsnennes i)

Cal. Lab. Code § 229 .............cccccccceseeeeeseeeneeenenenneeeseeseeeeeees 22

Federal Arbitration Act, 9 U.S.C. § 1, et seq. ............ passim

PAA § 1. on...c.cccccccccsscscssssscccccssesssersesesssnnsssncnssssnesensesenssens 2

RAR 8 B nncocccccevscccececescvessososeccoscsssconssens 3, 10, 11, 13, 14, 19

H.R. Rep. No. 96, 68th Cong., 1st Sess. 1 aa 1l

Judiciary Act of 1789, § 34..........ccceeeesseeeeeeneneeeneeteeneesees 30

Labor Management Relations Act of 1947, § 301(a),

QO U.S.C. § 185.........cccecsssssscssssssssssceccseessssenecssessssceesessons 13

National Labor Relations Act

§ 1, 29 U.S.C. § 151 0.0... eee eeeeeeeeeeeeeenees hnicabcisnanaanmmeamsanii 24

§ 3, 29 U.S.C. § 158 ........cccccceeeerneeueeeeneeneenneteeeenenennennenes 24

§ 10, 29 U.S.C. § 160.000... ccccceeeseeeseeeneesrenteenenneeeensnnenneens 24

Securities Act of 1933, § 14, 15 U.S.C. § 77n............000+: 3, 10

Securities Exchange Act of 1934, 15 U.S.C. § 78aa........... 24

viii

TABLE OF AUTHORITIES - Continued

Page

Wisconsin Statutes

I 11

CN 12

IRIs I 12

ies I iii scicitaicnearsiarainiteoiseiicnnelniecaiieiitnaie 12

I NC 12

OTHER AUTHORITIES

P. Bator, P. Mishkin, D. Shapiro, & H. Wechsler,

Hart and Wechsler’s The Federal Courts and the

Federal System 731-732 (2d ed. 1973) ...........cccceeeeeeeeeeee 20

Anthony J. Bellia, Jr., Federal Regulation of State |

Court Procedures, 110 Yale L. J. 947 (2001)............ | aiel 23

Paul D. Carrington & Paul H. Haagen, Contract

and Jurisdiction, 1996 Sup. Ct. Rev. 331................ sends 5

William N. Eskridge, Jr., Overruling Statutory

Precedents, 76 Geo. L. Rev. 1361 (1988) .................... ‘ .29

1 E. Allan Farnsworth, Farnsworth on Contracts

ON a '

Stephen A. Gardbaum, The Nature of Preemption,

A it GEREN SI ee awicitiecteseionsttiioasienttteiomsentiicesinesatcealis 26

1 Stewart Macaulay, John Kidwell, William Whit-

ford & Marc Galanter, Contracts: Law in Action

Ee TTT eT 16

5 Ian R. Macneil, et al. Federal Arbitration Law

Agreements, Awards & Remedies Under the Fed

eral Arbitration Act app. I:41-44 (5th ed. 1994)... — 25

TABLE OF AUTHORITIES -— Continued

Wendy E. Parmet, Stealth Preemption: The Pro-

posed Federalization of State Court Procedures,

44 Vill. L. Rev. 1, 42-62 (1999) .................cccsssossrrrrreerees 23

Restatement (Second) of Contracts § 178............++. 10, 11, 16

Restatement (Second) of Contracts § 195............c::eeseeeeeeees 10

David S. Schwartz, Correcting Federalism Mistakes

in Statutory Interpretation: The Supreme Court

and the Federal Arbitration Act, __ Law & Con-

temp. Probs. __ (forthcoming 2003), manuscript

on-line at <http://www.law.wisc.edu/facstaff/pubs.

asp?ID=453> [click on “FAA and Federalism —

NNT Ts aaiatareantinenmnainessinibinieeiiia 20, 21, 25, 28

Jean R. Sternlight, As Mundatory Binding Arbitra-

tion Meets the Class Action, Will the Class Action

Survive?, 42 Wm. & Mary L. Rev. 1 (2000).................. 5

Revised Uniform Arbitration Act, National Confer-

ence of Commissioners on Uniform State Laws,

Adhesion Arbitration Agreements and the RUAA,

(last modified Aug. 23, 2000) <http://www.law.

upenn.edw/blV/ulc/uarba/arbr0500. htm.>...............0000+ 21

U.C.C. preamble, reprinted in Contract Law: Selected

Course Materials 7 (Burton & Eisenbezg, eds.

ID seccccccnsscnccnssccsocessesscccenssnsesvsneseussssneseesensssososssosooseonees 16

WIG. BBD, Ti cccccccccccccccccececescecesconecseneevovseseossovsesessvncessooscoes 16

U.S.C. 8 B-BGB 0nccccccccccecceccccceecececceseseccnvecevevcvscssescssesesccooscees 16

INTEREST OF AMICI CURIAE

Amici are law professors whose teaching and scholar-

ship involve the fields of alternative dispute resolution,

contracts, consumer law, employment law, and civil proce-

dure.’ Having studied the history and fundamental princi-

ples that underlie mandatory arbitration doctrine, and the

application of the Federal Arbitration Act in state courts,

amici are concerned tlat the preemption doctrine estab-

lished in Southland Corp. v. Keating, 465 U.S. 1 (1984),

has had an unsettling effect on the law, particularly the

substantive and remedial state law of contract, that is only

increasing over time as Southland is expanded into new

areas. Amici believe that sound principles of federalism

and statutory interpretation compel the conclusion that

Southland was, and remains, an ill-advised and aberrant

decision; and that “proper application of stare decisis does

not prevent correction of the mistake.” Allied-Bruce Terminix

Cos. v. Dobson, 513 U.S. 265, 284 (1995) (Scalia, J., dis-

senting).

SUMMARY OF ARGUMENT

Petitioner Green Tree Financial Corp. wrote an

adhesion contract insisting upon arbitration as a condition

of its customers doing business with it. Arbitration is what

Green Tree got. This Court could simply say “be careful

what you wish for” and send Green Tree on its way. But

Green Tree’s case is a symptom of a larger problem that

' Letters of consent to the filing of this brief have been lodged with

the Clerk of the Court pursuant to Rule 37.3. Pursuant to Rule 37.6,

counsel for amici state that no counsel for a party authored this brief in

whole or in part and no person other than amici or their counsel have

made a monetary contribution to the preparation or submission of this

brief.

will continue to plague lower courts and this Court as long

as Southland Corp. v. Keating, 465 U.S. 1 (1984), remains

the law. Southland lends itself to misapplication by lower

courts, and to misguided arguments that the Federal

Arbitration Act, 9 U.S.C. § 1, et seq., preempts any state

law that would regulate any matter that can be written

into an arbitration agreement. This Court should overrule

Southland and hold that the FAA does not apply in state

court or preempt state law.

Southland’s current vitality has more to do with stare

decisis policies than with that decision’s merits. Five

current members of this Court have written or joined

opinions stating that Southland was wrongly decided. See

Southland, 465 U.S. at 24 (O’Connor, J., joined by

Rehnquist, J., dissenting) (Southland is “unfaithful to

congressional intent, unnecessary, and. . . inexplicable”);

Perry v. Thomas, 482 U.S. 483, 493 (1987) (Stevens, J.,

dissenting) (“the Court has effectively rewritten the [FAA]

to give it a pre-emptive scope that Congress certainly did

not intend”); Allied-Bruce Terminix Cos. v. Dobson, 513

U.S. 265, 284-85 (1995) (Scalia, J., dissenting) (“I will,

however, stand ready to join four other Justices in overrul-

ing it, since Southland will not become more correct over

time”); id. at 285 (Thomas, J., dissenting) (“In my view, the

Federal Arbitration Act does not apply in state courts”). No

current member of this Court has had much good to say

about Southland apart from pointing to the values of stare

decisis. For example, Justice O’Connor reluctantly con-

curred with the Southland preemption principle, after

twice dissenting from it, because “considerations of stare

decisis ... have special force in the area of statutory inter-

pretation” and there appeared to be no “special justification”

to overrule Southland. Allied-Bruce, at 285 (O’Connor, J.,

concurring) (internal quotations omitted); see id. at 272

(majority opinion reaffirming Southlaiid on stare decisis

grounds without defending decision on its own merits).

Weighty as such stare decisis concerns are, special

circumstances do exist for overruling Southland. Indeed,

the special circumstances are far stronger than those

which supported this Court’s decision, in the FAA area, in

Rodriguez de Quijas v. Shearson/American Express, Inc.,

490 U.S. 477 (1989), to overrule the statutory interpreta-

tion precedent of Wilko v. Swan, 346 U.S. 427 (1953)

(construing § 14 of the Securities Act of 1933 to prevent

enforcement of pre-dispute agreement to arbitrate securi-

ties fraud claims).

First, Southland has proven unworkable. Due to its

inherent tensions with the FAA §2 “savings clause,”

Southland has generated a host of preemption questions,

has been very difficult to apply with any consistency, and

has invited contract drafters to engage in aggressive

experimentation in grafting lopsided advantages onto

arbitration agreements, thereby unsettling far more

private expectations than it has settled.

Second, later cases have in fact eroded Southland’s

authority by undermining its basic premise, that the FAA

is substantive law binding on the states. This Court’s

arbitrability holdings from Mitsubishi Motors Corp. v.

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

EEOC v. Waffle House, 534 U.S. 279, 295 (2002), have

consistently held that arbitration is not substantive, but is

“procedural” in nature, Rodriguez, 490 U.S. at 482, and

‘es not affect substantive rights.

Third, despite the frequent repetition of the phrase

“national policy favoring arbitration,” it remains wholly

unexplained just what the federal interest is in dictating

to states how they will structure their dispute resolution

systems for the resolution of state law claims. Yet that is

the impact of Southland, and the constitutionality of such

an interpretation of the FAA seems highly questionable.

Moreover, FAA preemption nullifies state policy choices on

a broad swath of contract issues. By so interpreting the

FAA, Southland violates the principle established in

Gregory v. Ashcroft, 501 U.S. 452 (1991), that federal

statutes will not be construed to upset the federal/state

balance without a clear statement from Congress of such

an intent. Southland’s use of a quaint 1925 procedural

statute as e |. licial springboard for the creation of a body

of federal su*.antive law rivals Swift v. Tyson, 42 U.S. (16

Pet.) 1 (1842), as one of the great federalism mistakes in

the history of this Court’s statutory interpretation cases.

ARGUMENT

I. THIS CASE PRESENTS THE PROPER OCCA-

SION TO OVERRULE SOUTHLAND

A. Green Tree’s Proposed Federal “Enforce

as Written” Rule Would Create a Stagger-

ing Expansion of FAA Preemption That

Must Be Rejected

Green Tree’s argument here presses the Southland

preemption rule to its very limit. According to Green Tree,

the FAA creates a substantive rule of contract law that

arbitration agreements must be enforced as written,

notwithstanding any state law which may vary the effect

or meaning of specified terms. Pet. Br. at 24-25. This is a

truly extraordinary assertion. The net effect would be to

give contract drafters like Green Tree a permanent federal

exemption from any state contract regulation that could be

argued to be waived in an arbitration clause. Today, Green

Tree asserts that an arbitration agreement purportedly

(though, in fact, not) written to exclude class actions must,

as a matter of judge-made FAA law, be enforced in exactly

those terms: arbitration without a class action. This in

itself would be an extraordinary exemption from state

consumer contract regulation, since “[tJhe policy at the

very core of the class action mechanism is to overcome the

problem that small recoveries do not provide the incentive

for any individual to bring a solo action prosecuting his or

her rights.” Amchem Prod. v. Windsor, 521 U.S. 591, 617

(1997) (internal quotations omitted); see Jean R. Sternlight,

As Mandatory Binding Arbitration Meets the Class Action,

Will the Class Action Survive?, 42 Wm. & Mary L. Rev. 1, 28-

33 (2000).

Next term, Red Tree will be before this Court, arguing

that it is functionally exempt from state-law claims for

injunctive relief, or punitive damages or emotional distress

damages, because the arbitration agreement precludes

such claims and must be enforced “according to its terms.”

See, e.g., West Virginia ex rel. Dunlap v. Berger, 567 S.E.2d

265, 279-80 (W. Va.), cert. denied, 123 S. Ct. 695 (2002)

(drafting party argued that FAA preempts application of

state unconscionability doctrine to arbitration agreement

purporting to waive punitive damages). Next, Blue Tree

will come before the Court arguing that any general state

contract law doctrine — be it unconscionability, mutuality

of obligation, duress — which would operate to bar en-

forcement of an arbitration agreement “according to its

terms” is nullified by FAA preemption. See Discover Bank

v. Superior Court, 105 Cal. App. 4th 326, 129 Cal. Rptr. 2d

393, 408 (2003) (suggesting that FAA preempts any depar-

ture from enforcing arbitration agreements as written).

Adhesion contracts are often abused by drafting

parties who seek unduly to control the rules of future

disputes against them, see, e.g., Paul D. Carrington & Paul

H. Haagen, Contract and Jurisdiction, 1996 Sup. Ct. Rev.

331, 334-36, and the most common forms of contract

regulation are judicial and legislative responses to limit

such abuse of bargaining power. 1 E. Allan Farnsworth,

Farnsworth on Contracts 517 (3d ed. 1990) (“{I)ncreasing

awareness of the need to protect contracting parties

against unfair terms has resulted in a plethora of legisla-

tion, both state and federal, to supplement the protection

afforded by the common law and the Uniform Commercial

Code.”). The FAA has been authoritatively construed to

permit drafting parties to control only one particular

aspect of dispute resolution — the choice of arbitration or

court. But it has always been clear — in this Court, if not

the lower courts — that the FAA expresses no “national

policy” against state laws which protect consumers (or

employees or other adhering parties) from having unfavor-

able dispute rules imposed on them distinct from the simple

choice of arbitration over litigation. There is no “national

policy” favoring oppressive venue clauses, waiver of class

action remedies, waiver of damages remedies, one-sided

arbitration procedures or other unconscionable terms, even if

such terms can be grafted onto an arbitration agreement.

Green Tree’s argument proves far too much. A rule

requiring enforcement of an agreement literally “according

to its terms” does conflict with a rule holding that, for

instance, unconscionable terms will not be enforced. And

since the enforcement rule is federal and the unconscion-

ability rule state, federal law trumps. Because only a

federal common law of contract defenses would withstand

this preemption doctrine, Green Tree in effect offers a

choice of two unacceptable futures: one in which arbitra-

tion agreements are exempt from any review whatsoever

for fairness, or, at best, one in which contractual fairness

review is completely federalized. Green Tree’s argument

must be rejected.

- Rejection of Green Tree’s Position on Narrow

Grounds, While Appropriate, Will Leave Nu-

merous Southland-Created Problems Unre-

solved

Southland is plainly at issue in this case, as it is in

any case claiming FAA preemption of state law. To be sure,

the Court could reject Green Tree’s argument without

reconsidering Southland. First, the Court could find that

_—— —

Green Tree’s arbitration clause does not in fact preclude

class arbitrations: The contract strongly implies that class

actions are permitted, and under Mastrobuono v. Shearson

Lehman Hutton, Inc., 514 U.S. 52, 62 (1995), any ambigu-

ity in the agreement should be construed against the

drafter.’ Second, the Court could announce that Green

Tree’s federal “enforce as written” rule misconstrues the

FAA.* This Court has never adopted a blanket federal rule

of contract law that arbitration agreements are to be

enforced “according to their terms” irrespective of general

state contract law. On the contrary, this Court has been

careful to point out that “commercial arbitration agree-

ments, like other contracts, are enforced according to their

terms and according to the intentions of the parties.” First

Options of Chicago v. Kaplan, 514 U.S. 938, 947 (1995)

(emphasis added, internal quotations omitted). This

means that, like other contracts, arbitration agreements

are subject to a state’s “generally applicable contract

defenses” and rules that “arose to govern ... contracts

generally[.]” Doctors Associates v. Casarotto, 517 U.S. 681,

687 (1996).*

* “The parties agree and understand that the arbitrator shall have

all powers provided by the law and the contract. These powers shall

include all legal and equitable remedies, including but not limited to,

money damages, declaratory relief, and injunctive relief.” Pet. Br. at 8

(emphasis added). Since South Carolina law gives arbitrators the power

class claims, the contract is most plausibly construed as

* Green Tree relies entirely on its proposed federal “enforce as

written” rule; notably, Green Tree does not argue that the FAA itself,

independently of contract terms, should be construed to bar class action

arbitrations. Indeed, the FAA by its terms takes no position on class

actions.

* Green Tree misconstrues this Court's decisions when it suggests that

this Court intended to make arbitration agreements more enforceable than

(Continued on following page)

However, by resolving the case strictly on contract

interpretation grounds, the Court would leave unresolved

whether Green Tree’s proposed federal “enforce as written”

rule is implicit in the FAA and will settle no preemption

questions at all. By rejecting the “enforce as written” rule

without reconsidering Southland, the Court would fail to

address the nagging, persistent questions about whether

federal or state law appliés to a host of enforceability

questions, such as unconscionability, oppressive venue

provisions, and mutuality of obligation. Even the class

action question itself would return, with an arbitration

clause expressly forbidding class actions: In other FAA

cases, Green Tree has argued that a class action right

bestowed on consumers by a consumer protection law is

preempted by the FAA because Southland saves from

preemption only “general” contract law, whereas a con-

sumer protection statute is not “general.” See Brief of

Appellant in Eastman v. Conseco Financing Servs. Corp.,

Wis. Sup. Ct. No. 01-1743, bankruptcy stay entered (2003).

Some lower courts have bought into this argument, due to

confusion about Southland preemption doctrine. See, e.g.,

Bradley v. Harris Research, 275 F.3d 884, 890 (9th Cir. 2001).

Regrettably, this Court will be called upon repeatedly to

other contracts by fully immunizing them from any state regulation on

matters peripheral to the arbitration choice itself. While the “according

to their terms” language is echoed in Volt Info. Sciences v. Stanford

Univ., 489 U.S. 468, 477-78 (1989) and Mastrobuono v. Shearson

Lehman Hutton, Inc., 514 U.S. 52, 59 (1995), neither of those cases can

be read to hold that federal law prevents any reliance on state law to

determine the enforceability of arbitration agreements. On the contrary

both cases applied state law to resolve the issue presented: Volt holding

that the FAA allowed state law arbitration procedures to be chosen by

the partics, and Mastrobuono applying the state contract principle that

ambiguities will be construed against the drafter. See Volt, 489 U.S. at

476-77; Mastrobuono, 514 U.S. at 62.

rectify these misapplications of preemption doctrine so

long as Southland is controlling law.

II. “PROPER APPLICATION OF STARE DECISIS

DOES NOT PREVENT CORRECTION OF THE

MISTAKE” OF SOUTHLAND

A. Southland’s Unworkable Test for Preemp-

tion Has an Unsettling Effect on the Law

That Outweighs Any Legitimate Reliance

Interests By Private Contracting Parties

1. Inherent Contradictions in the South-

land Preemption Rule Put the FAA in

Tension with Itself

Southland has been construed by this Court as creat-

ing a rule that state laws that target arbitration agree-

ments for special barriers to enforcement are preempted,

whereas “generally applicable contract defenses” and rules

that “arose to govern ... contracts generally” may be

applied to arbitration agreements “without contravening

{FAA] § 2.” Doctors Associates v. Casarotto, 517 U.S. 681,

687 (1996) (quoting Perry v. Thomas, 482 U.S. 483, 492 n.9

(1987)). This distinction between “general contract law”

and “arbitration-specific” rules, which reflects internal

contradictions in Southland, is incoherent and has defied

consistent application in all but the clearest cases.

The law held preempted in Southland was, in fact,

general contract law. The antiwaiver provision in the

California Franchise Investment Law provides that “[a)ny

condition, stipulation or provision purporting to bind any

person acquiring any franchise to waive compliance with

any provision of this law or any rule or order hereunder is

void.” Cal. Corp. Code § 31512 (emphasis added). The

antiwaiver provision does not single out arbitration

agreements at all. Adhesion contracts that force the

weaker party to waive rights in advance have long been

disfavored under the general judge-made principle that

contracts against public policy are void. See Restatement

(Second) of Contracts §§ 178, 195. When a legislature

attaches such an antiwaiver provision to a statute, it does

nothing more than exercise its sovereign prerogative to

declare public policy, and thereby remind a court to apply

the “void as against public policy” doctrine. Construing a

generic antiwaiver provision to preclude arbitration of —

claims under the statute simply applies a general contract

principle to the specific instance of arbitration.

Indeed, since Southland, this Court has held that

such an antiwaiver provision does not specifically target

arbitration. In Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989), this Court overruled its

earlier holding in Wilko v. Swan, 346 U.S. 427 (1953), to

the effect that a generic antiwaiver provision in § 14 of the

Securities Act of 1933, 15 U.S.C. § 77n (a provision virtu-

ally identical to the one in Southland) precluded enforce-

ment of pre-dispute agreements to arbitrate securities

fraud claims. The issue in Rodriguez was not preemption,

since a federal law was involved, but whether the generic

antiwaiver provision was evidence of a specific Congres-

sional intent to preserve the judicial forum against arbi-

tration agreements. See Shearson/American Express, Inc.

v. McMahon, 482 U.S. 220, 226 (1987) (federal statutory

claim not arbitrable if Congress evinces an intent to

preclude arbitration). The Rodriguez Court determined, in

essence, that the antiwaiver language does not specifically

target arbitration: “the language prohibiting waiver. . .

could easily have been read to relate to substantive provi-

sions of the Act” rather than arbitration. 490 U.S. at 480

(internal quotations omitted). Rodriguez thus contradicts

Southland on this key point.

Southland’s holding that a generic statutory anti-

waiver provision was preempted also creates an internal

conflict in FAA § 2 between the enforcement language and

the modifying proviso “save upon such grounds as exist at

law or in equity fer the revocation of any contract.” FAA

§ 2.° State legislatures’ sovereign prerogative to declare

public policy has always provided a basis “at law” for “the

revocation of any contract.” See Restatement (Second) of

Contracts § 178. By holding otherwise, Southland contra-

vened the recognized purpose of the FAA to place arbitration

agreements “upon the same footing as other contracts,” H.R.

Rep. No. 96, 68th Cong., 1st Sess. 1 (1924); accord Volt Info.

Sciences v. Stanford Univ., 489 U.S. 468, 479 (1989), and

“make arbitration agreements as enforceable as other

contracts but not more so.” Prima Paint Corp. v. Flood &

Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967).

To resolve this contradiction, Southland asserted that

“the defense to arbitration found in the California Fran-

chise Investment Law is not a ground that exists at law or

in equity ‘for the revocation of any contract’ but merely a

ground that exists for the revocation of arbitration provi-

sions in contracts subject to the California Franchise

Investment Law.” 465 U.S. at 16-17 n.11. But this inter-

pretation of § 2 makes no sense. State legislatures do not

typically legislate in the “general” terms suggested by

Southland. Instead, they focus on specific categories of

contracts marked by unequal bargaining power and other

market failures: consumer contracts, franchise agreements

and employment contracts, for example.* It would be

* This language becomes a “savings clause” — in the sense of saving

state law from preemption — only as a result of Southland’s general rule

of preemption. Without Southland preemption, the proviso would

function simply as a reminder to federal courts to apply state law

contract defenses to arbitration agreements, rather than to create

federal law.

* Any state code provides numerous examples demonstrating that

most contract law is subject-specific, rather than “general.” For

example, Chapters 214 through 221 of the Wisconsin Statutes regulate

(Continued on following page)

inappropriate to make “one-size-fits-all” contract rules for

the fundamental reason that, in contract, one size does not

fit all. Rules protecting individual consumers or employees

from overreaching may be wholly unnecessary to apply to

agreements between two large business firms.

Southland’s misguided notion of “general contract

law” strongly implies that FAA preemption doctrine

disfavors state legislation, compared to state judge-made

rules. See Southland, 465 U.S. at 16 (holding that the FAA

was “intended to foreclose state legislative attempts to

undercut the enforceability of arbitration agreements”). To

the extent that “general contract law” means judge-made

principles to the exclusion of statutory public policies,

Southland’s distinction is reminiscent of the now-

discredited view of contract law of 100 years ago, in which

universal or general principles of common law were

“discovered” by courts, and legal rules enacted by legisla-

tures were deemed inferior and dangerous. This view of

the law, of course, has been rejected, and wisely so, ever

since Holmes first pointed out that “[t]he common law is

not a brooding omnipresence in the sky but the articulate

voice of some sovereign or quasi sovereign that can be

identified.” Southern Pacific Co. v. Jenson, 244 U.S. 205,

222 (1917) (Holmes, J., dissenting).

The fundamental incoherence of Southland’s distinc-

tion between general and specific contract law has defied

this Court’s subsequent efforts to clarify it. In Perry v.

Thomas, 482 U.S. 483 (1987), the Court stated that “state

a variety of business entities — banking institutions, finance companies,

car dealers, collections agencies, and others — in ways that control the

terms of their contracts. The Wisconsin legislature has created special

contracting rules to deal with insurance contracts, real estate contracts,

landlord-tenant agreements and consumer contracts. See Wis. Stat.

§§ 421.101 et seq., 631 et seq., 704.01 et seq., Chs. 706-709.

law, whether of legislative or judicial origin” is saved from

preemption if it “arose to govern issues concerning the

validity, revocability, and enforceability of contracts

generally,” id. (emphasis added), whereas the FAA pre-

empts only laws targeting arbitration agreements per se:

“A state-law principle that takes its meaning precisely

from the fact that a contract to arbitrate is at issue does

not comport with this requirement of § 2.” Id.; accord

Doctors Associates, 517 U.S. at 687; Allied-Bruce, 513 U.S.

at 281. Unfortunately, in correcting Southland’s inconsis-

tency with the FAA, the Perry, Doctors and Allied-Bruce

decisions give rise to a contradiction between themselves

and Southland. If general contract law “of legislative or

judicial origin” is saved from preemption by § 2, why

would an antiwaiver provision — like the one struck down

in Southland itself — be preempted?

2. The Southland-Based Distinction Be-

tween “General” and “Specific” Con-

tract Law Creates Confusion Among

Lower Courts about When State Con-

tract Law Is Preempted

Courts and litigants have been turning somersaults to

apply the distinction between a “general contract law” and

a law which “takes its meaning” from the arbitration

clause. This distinction — resulting from the clarification of

Southland’ s basic preemption rule in Perry and Doctors —

has a tendency to break down. Perhaps an arbitration

agreement written to preclude class actions or punitive

damages can be held unconscionable without having that

application of unconscionability doctrine “take its mean-

ing” from the existence of the arbitration clause: Such

terms could be unconscionable whether they were at-

tached to an arbitration agreement or not. But what about

a state-law principle that an arbitration agreement is

unconscionable or otherwise unenforceable because the

obligation to arbitrate is not mutual? See, e.g., Armendariz

v. Foundation Health Psychare Servs., 24 Cal. 4th 83, 99

Cal. Rptr. 745, 769 (2000); Arnold v. United Companies

Lending Corp., 204 W.Va. 29, 511 S.E.2d 854, 861 (1998).

Provisions holding that the drafting party has the exclu-

sive right to choose the arbitrator have also been held

unconscionable under general state contract law. See, e.g.,

Graham v. Scissor Tail, Inc., 28 Cal.3d 807, 171 Cal. Rptr.

604, 615-17 (1981). These applications of unconscionability

doctrine clearly “take their meaning” from the existence of

the arbitration clause. Are they preempted?’

Moreover, the concept of “generally applicable contract

law” lends itself to misapplication. For example, in Bradley

" The difficulty in applying the “general/specific” distinction is

reflected in the difficulty courts have had in explaining it. Amici

respectfully submit that this Court’s explanatory effort in Allied-Bruce,

for example, is itself potentially confusing:

States may regulate contracts, including arbitration clauses,

under general contract law principles and they may invali-

date an arbitration clause “upon such grounds as exist at

law or in equity for the revocation of any contract.” 9 U.S.C.

§ 2 (emphasis added). What States may not do is decide that

a contract is fair enough to enforce all its basic terms (price,

service, credit), but not fair enough to enforce its arbitration

clause.

513 U.S. at 281. The second sentence simply cannot mean what it

sounds like. An arbitration agreement may be unfair under general

contract law principles even if its basic terms are fair: a consumer

contract may establish a reasonable sales price, but provide that future

disputes will be arbitrated in Borneo before a panel of arbitrators

chosen by the seller, with the consumer to pay a $1 million forum fee for

his arbitration claim. Unconscionability doctrine recognizes that facts

creating substantive contractual unfairness may differ not only from

case to case, but also from term to term within a single contract. A great

deal of unfairness in contracts stems not from the basic price bargain,

but from subsidiary terms buried in the fine print — typically, terms

seeking to gain an unfair advantage in potential future disputes.

~~ -~_—>.> -~. ~——_—

v. IJarris Research, 275 F.3d 884 (9th Cir. 2001), the court

misapplied the concept to hold that a state statute barring

unfair venue provisions in franchise agreements was

preempted by the FAA. The court acknowledged that the

state venue statute did not “single out” arbitration and

would have applied irrespective of the presence of an

arbitration agreement. But the court nevertheless con-

cluded that “general” contract law under Doctors Associ-

ates means a law that applies to every contract, whereas

the California statute “applies only to forum selection

clauses and only to franchise agreements; it therefore does

not apply to ‘any contract.’” 275 F.3d at 890. Accordingly

the court held the venue statute preempted by the FAA.

Bradley errs by extending Southland’s “general/

specific” distinction to a provision that does not apply

directly to the basic contractual arbitration-over-litigation

choice at all. A growing number of cases make this same

error. See Ting v. AT&T, 2003 U.S. App. LEXIS 2395, at

*59 (9th Cir., Feb. 11, 2003) (provision of California con-

sumer protection statute prohibiting contractual waiver of

class action remedy is preempted because consumer

protection statute is not “general contract law”); KKW

Enterprises v. Gloria Jean’s Gourmet Coffees Franchising

Corp., 184 F.3d 42, 50 (1st Cir. 1999) (holding FAA preempts

venue provision in state franchise law); Doctors Associates v.

Hamilton, 150 F.3d 157, 163 (2d Cir. 1998) (same).

These holdings threaten to undermine broad swaths

of state contract regulation. Like Green Tree’s proposed

federal “enforce as written” rule, Bradley’s application of

the “general/specific” distinction would have the effect of

turning arbitration agreements into blanket exemptions

from consumer protection and other statutes aimed at

preventing contractual overreaching. An arbitration

agreement could be written to mandate a waiver of injunc-

tive relief, compensatory damages or attorneys fees guar-

anteed by a state consumer or antidiscrimination statute:

because those statutes are not “general contract law,” they

would be preempted and the arbitration agreement “en-

forced as written” under the Bradley analysis.’

The Bradley definition of “general contract law” is

incoherent, because even apparently general contract

defenses take their meaning from application to specific

factual settings. A court is no more likely than is a legisla-

ture to find the need to apply protective doctrines like

unconscionability to agreements freely negotiated be-

tween, say, Green Tree and Citibank, yet both the court

and the legislature might well seek to apply an uncon-

scionability protection to an individual consumer doing

business with either of those firms. Moreover, the sugges-

tion that there are general contract defenses that are

wholly distinct from statutes creating public policies as to

specific categories of contracts makes no sense. “General”

contract law holds that “[a] promise or other term of an

agreement is unenforceable on grounds of public policy if

legislation provides that it is unenforceable.” Restatement

(Second) of Contracts § 178(1).

* The Uniform Commercial Code, which has been adopted in some

form in 49 states, is about as “general” as contract law gets. See 1

Stewart Macaulay, John Kidwell, William Whitford & Marc Galanter,

Contracts: Law in Action 37 (1995). Yet even the U.C.C. would fail the

“test” for generality adopted in Bradley and similar cases: the U.C.C.

does not apply to “all contracts” — even taking all nine of its articles

together — but rather is limited to “certain” commercial transactions.

See U.C.C. preamble, reprinted in Contract Law: Selected Course

Materials 7 (Burton & Eisenberg, eds. 2002). The limited scope of the

U.C.C. is even more apparent when viewing its various articles

separately: Article II of the U.C.C., of course, limits its scope to

transactions in goods. See U.C.C. § 2-102.

3. Southland Has Created Too Much Le-

gal Uncertainty to Create Significant

Reliance by Private Parties

Few legitimate expectations are settled by Southland.

On the contrary, it is clear that, in the past several years,

corporate drafters of arbitration agreements have not been

resting on settled expectations, but have been aggressively

experimenting with arbitration agreements to find new

ways to use them to limit their customers’ or employees’

remedies against them. See, e.g., Ting v. AT&T, 182

F. Supp. 2d 902, 924-28 (N.D. Cal. 2002), aff’d in part,

rev'd in part, 2003 U.S. App. LEXIS 2395 (9th Cir., Feb.

11, 2003) (arbitration agreement purported to limit liabil-

ity for willful misconduct, limit or bar compensatory and

punitive damages, preclude class actions, and impose

secrecy requirements); Stirlen v. Supercuts, 51 Cal. App.

4th 1519, 60 Cal. Rptr. 2d 138, 142-43 (1997) (arbitration

agreement purported to require adhering party to waive

tort damages and attorneys fees, while leaving drafting

party free to pursue claims in court). The case at bar

provides a telling illustration. Green Tree cannot reasona-

bly have a “settled expectation” about whether its arbitra-

tion agreement will prevent class actions being brought

against it, because the issue has produced contrary re-

sults. Compare Bazzle v. Green Tree Financial Corp., 351

S.C. 244, 569 S.E.2d 349 (2002) (allowing class arbitra-

tion); Berger, 567 S.E.2d at 279-80 (same), with Ting, 2003

U.S. App. LEXIS 2395, at *59 (FAA preempts state law

preserving right to class action). Between drafting parties’

efforts to “push the envelope,” and confusion in the lower

courts, Southland has put the law of arbitration too much

in flux to create settled expectations.

Finally, it is worth pointing out that the “settled expec-

tations” of the adhering parties have not prevented this

Court from overruling other FAA precedents. In Rodriguez,

490 U.S. 477, this Court overruled the 36-year-old statutory

interpretation case of Wilko v. Swan, 353 U.S. 427 (1953),

on the ground that Wilko had fallen out of step with the

Court’s subsequent views about arbitration, notwithstand-

ing the settled expectations of securities customers that

their fraud claims against brokerages could be brought in

court. In Gilmer v. Interstate/Johnson Lane Corp., 500

U.S. 20 (1991), the Court did not pause over the expecta-

tions of employees that had formed over 17 years around

the near-unanimous understanding of the lower courts

that Alexander v. Gardner Denver Co., 415 U.S. 36 (1974),

preserved the judicial forum for statutory civil rig ts

claims. See, e.g., Duffield v. Robertson Stephens & Co., 144

F.3d 1182, 1188 (9th Cir.), cert. denied, 525 U.S. 996 (1998)

(citing cases applying Alexander to bar enforcement of

non-union predispute arbitration clauses in employment

discrimination cases); see also Mitsubishi Motors Corp. v.

Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 655-56 (1985)

(Stevens, J., dissenting) (majority decision overrules

unanimous view of Courts of Appeals that antitrust claims

not arbitrable).

B. Southland’s Basic Premise That the FAA

Is Substantive Law Is Contradicted by

this Court’s Consistent Holdings Since

1985 That the FAA Is Fundamentally Pro-

cedural and Affects No Substantive Rights

A fundamental premise of Southland is that the FAA

binds the states because it creates substantive rights. See

Southland, 465 U.S. at 12 (quoting Moses H. Cone Memo-

rial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 25 &

n.32 (1983)) (FAA “‘creates a body of federal substantive

law’... applicable in state and federal courts”); 465 U.S.

at 15 n.9 (FAA “creates federal substantive law”). Yet, in a

consistent line of holdings on arbitrability of various statu-

tory claims beginning in 1985, this Court has held, on the

contrary, that the FAA’s rule of enforcement of arbitration

agreements does not affect substantive rights. Rather,

arbitration agreements are “in effect, a specialized kind

of forum selection clause,” Rodriguez, 490 U.S. at 482-83

(quoting Scherk v. Alberto-Culver Co., 417 U.S. 506, 519

(1974)), and a party compelled to arbitrate “does not forgo

... Substantive rights,” but “only submits to their resolu-

tion in an arbitral, rather than a judicial, forum.” E.g.,

Gilmer v. Interstate/ Johnson Lane Corp., 500 U.S. 20, 26

(1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 628 (1985)); accord EEOC v.

Waffle House, 534 U.S. 279, 295 (2002) (arbitration agree-

ment is “effectively a forum selection clause”); Circuit City

Stores v. Adams, 532 U.S. 105, 123 (2001) (“by agreeing to

arbitrate ... a party does not forgo . . . substantive rights”).

Southland’s determination that the FAA is substantive law

traces back to Wilko v. Swan, 346 U.S. 427, 435-38 (1953),

which held that arbitration affects substantive rights.

That holding of Wilko was expressly overruled in Rodri-

guez, 490 U.S. at 481, which specifically held that the

selection of an arbitral versus a judicial forum was merely

“procedural.” Id. at 482.

These holdings vitiate one of Southland’s two primary

rationales for imposing FAA § 2 on the states: the pur-

ported need to impose a uniform federal rule to prevent

forum shopping. Southland, 465 U.S. at 15.° Forum

shopping is a concern only where the parties are able to

shop for favorable substantive rules that are likely to af¥-ct

the outcome. But because the enforcement vel non of the

arbitration agreement should not affect the outcome of a

case, there is no forum shopping problem -— any more than

with any forum selection clause, where the same substantive

* The other rationale for imposing § 2 on the states — the “national

policy favoring arbitration” — is discussed in the following section.

law would be applied by the alternate fora. The possibility

of a different arbitration-enforcement decision being made

by a state court and a federal court in the same state

should be no more troubling than is a situation where the

state and federal courts would follow different conflict of

laws rules in deciding whether to enforce a forum selection

clause. The Court has found this very situation to be

entirely unproblematic. See Stewart Organization v. Ricoh

Corp., 487 U.S. 22 (1988).”°

” The notion that the FAA creates federal substantive law first

appeared in dicta the term before Southland, in Moses H. Cone Memo-

rial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 25 & n.32 (1983); see

Southland, 465 U.S. at 24 (O’Connor, J., dissenting) (Moses H. Cone’s

“dictum concerning the law applicable in state courts was wholly

unnecessary to its holding”). Previously, in Prima Paint Corp. v. Flood

& Conklin Mfg. Co., 388 U.S. 395 (1967), this Court had “carefully

avoided any explicit endorsement of the view that the Arbitration Act

embodied substantive policies{.]” Southland, 465 U.S. at 24 (O’Connor,

J., dissenting) (quoting P. Bator, P. Mishkin, D. Shapiro, & H. Wechsler,

Hart and Wechsler’s The Federal Courts and the Federal System 731-

732 (2d ed. 1973).) Prima Paint had addressed an apparent Erie

problem in the FAA by holding that where, as here, Congress has

commerce power to regulate substantively, Congress may exercise a

lesser-included power to make procedural rules for federal courts in

diversity cases (“prescribe how federal courts are to conduct them-

selves”), even if the procedural rule is “outcome determinative” in the

Erie sense. See Prima Paint, 388 U.S. at 404-05. But this Erie problem

has disappeared since Southland: by holding that the FAA does not

affect substantive rights, this Court has dispelled any notion that the

FAA is “outcome determinative” for Erie purposes. See David S.

Schwartz, Correcting Federalism Mistakes in Statutory Interpretation:

The Supreme Court and the Federal Arbitration Act, _ Law & Con-

temp. Probs. _ (forthcoming 2003), manuscript on-line at

<http://www.law. wisc.edu/facstaff/pubs.asp?1D=453> [click on “FAA and

Federalism Download”) 38-48.

C. Southland’s Imposition of a “National Pol-

icy Favoring Arbitration” on the States

Intrudes on the State-Federal Balance,

Raises Constitutional Doubts and Violates

the Fundamental Federalism Principles

Established in Gregory v. Ashcroft

Cases about arbitration agreements are fundamen-

tally contracts cases, and contracts are an area of tradi-

tional state regulation which federal courts should be

“reluctant to federalize.” Patterson v. McLean Credit

Union, 491 U.S. 164, 183 (1989) (quoting Santa Fe Indus-

tries v. Green, 430 U.S. 462, 479 (1977)). Since Southland,

scores of state laws have been held preempted or become

subject to FAA preemption." While this Court has held

that Congress may exempt a certain kind of claim from

" Last year alone, state laws were held preempted under South-

land in at least 16 cases. Erroneous extensions of Southland, such as

that pressed by Green Tree here, account for many instances of

preemption. In addition, even “correct” applications of the misbegotten

Southland decision cut a wide swath through state law. For example, at

least 30 states have one or more statutes containing antiwaiver

provisions of the kind held preempted in Southland. Many states have

tried to regulate arbitration agreements by creating specific exceptions

to a general state rule of specific enforcement of arbitration agree-

ments, but Southland preempts these laws. See Schwartz, supra, at 12-

13, and App. A, B.

Preemption stifles state law experimentation not only by nullifying

state laws on the books, but also by discouraging proposals to change

the law. For example, the National Conference of Commissioners on

Uniform State Laws was considering addressing issues relating to

adhesive arbitration agreements in its Revised Uniform Arbitration Act,

but determined that “the preemptive effect of the Federal Arbitration

Act, ... dramatically limits meaningful choices for drafters addressing

adhesion contracts[.]” NCCUSL, Adhesion Arbitration Agreements and

the RUAA (last modified Aug. 23, 2000) <http//wwwlaw.upenn.edwhbll/ulc/

uarba/arbr0500.htm.>

arbitration by an express provision or implication showing

such an intent, McMahon, 482 U.S. at 220, Southland

denies this authority to the states. See, e.g., Perry, 482

U.S. 483 (preempting Cal. Lab. Code § 229 preserving the

judicial forum for state wage and hour claims). Southland

is very much out of step with this Court’s federalism

decisions of the past decade: Its broad rule of preemption

comes at a very great cost to state lawmaking autonomy,

the primary value of federalism, but its purported federal

justification is illusory.

1. Southland’s Effect of Restructuring

State Dispute Resolution Processes

Without the Justification of a Strong

Federal Interest Raises Doubts about

the FAA’s Constitutionality

The effect of Southland is to restructure state dispute

resolution processes for state law claims. See Allied-Bruce,

513 U.S. at 285 (Scalia, J., dissenting) (Southland entails

“a permanent, unauthorized eviction of state-court power

to adjudicate a potentially large class of disputes”). Cases

in which a state would open its courts to litigants, are

compelled into arbitration under Southland, irrespective

of the presence of a substantive federal interest — that is, a

federal interest other than an interest in the dispute

resolution process itself.” The traditional means for

Congress to guarantee certain procedures for federal

claims is not to dictate procedure to state courts, but to

create federal question jurisdiction to open the doors of the

* To the extent there is a federal interest in protecting arbitration

for federal claims filed initially in state court, that interest is ade-

quately protected, even without Southland preemption, by removal

jurisdiction. See 28 U.S.C. § 1441.

federal courthouse to the claim. The authority of Congress

to restructure state dispute resolution procedures for

federal claims is far from clear. See Wendy E. Parmet,

Stealth Preemption: The Proposed Federalization of State

Court Procedures, 44 Vill. L. Rev. 1, 42-52 (1999) (canvass-

ing federalism problems in federal regulation of state court

procedures); Anthony J. Bellia, Jr., Federal Regulation of

State Court Procedures, 110 Yale L. J. 947 (2001) (same).

Does the commerce power authorize Congress to restruc-

ture state dispute resolution processes for state law

claims, even under the guise of “substantive” regulation of

interstate contracts?

Imagine Congress passing an Expeditious Dispute

Resolution Act of 2004. In the interest of the expeditious

resolution of disputes involving contracts relating to

interstate commerce, all such disputes in state court shall

follow certain federally-mandated rules. First, no jury trial

will be permitted; all such cases must be tried to the court.

Second, state appellate courts may only reverse trial court

judgments for “manifest disregard of the law.” Third,

denial of motions for summary judgment shall be immedi-

ately appealable, to the state appellate court, on an inter-

locutory basis, before the case is tried. The constitutionality

of such a statute is doubtful at best. “We have made it quite -

clear that it is a matter for each State to decide how to

structure its judicial system.” Johnson v. Fankell, 520 U.S.

911, 922 n.13 (1997). In Johnson, this Court was unani-

mous in observing that “respect [for federalism] is at its

apex when we confront a claim that federal law requires a

State to undertake something as fundamental as restruc-

turing the operation of its courts.” Jd. at 922.

Yet Southland permits a federal restructuring of state

dispute resolution procedures in very comparable ways. It

does not matter, from a federalism standpoint, that the

mechanism for this restructuring under the FAA, as opposed

to the hypothetical “EDRA,” relies on the mediating device

of a private contract. The EDRA could as well be written

as an authorization to contracting parties — including

parties to contracts of adhesion — to “agree” to an EDRA

clause, and then providing as a matter of federal law that

the EDRA clause will be “rigorously enforced” to bar jury

trial, limit the grounds for appellate review, and permit

interlocutory appeals of summary judgment denials. Yet

the federal intrusion on state dispute resolution processes

is in no way lessened by the presence of the contract term.

What exactly is the federal interest in restructuring

state dispute resolution procedures for state law claims or,

as in the case at bar, for dictating to a state whether its

arbitrations of state law claims should proceed on an

individual basis only or as a class action? It has become a

commonplace to respond to this question merely by waving

the flag of the so-called “national policv favoring arbitra-

tion,” Southland, 465 U.S. at 1U, as though that were an

explanation.

When Congress displaces state dispute resolution

procedures, in whole or in part, by creating exclusive

jurisdiction in federal district courts, e.g., Securities

Exchange Act of 1934, 15 U.S.C. § 78aa, or federal admin-

istrative tribunals, e.g., National Labor Relations Act §§ 3,

10, 29 U.S.C. §§ 153, 160, it does so by asserting plenary

substantive authority over a particular subject matter, and

at least implicitly identifying a strong federal interest in

that subject matter. See NLRA § 1, 29 U.S.C. § 151. Thus,

for example, collective bargaining agreements, although

private contracts in form, have long been regarded as

contracts carrying national public policy implications, due

to the history of labor strife. See Steelworkers v. American

Mfg. Co., 363 U.S. 564, 567-68 (1960); Steelworkers v.

Warrior & Gulf Nav. Co., 363 U.S. 574, 577-78 (1960).

The FAA, in contrast, evinces a Congressional intent

to bring private contractual arbitration agreements into

general contract law, not lift them out of it into a category

ts —_— s

of special federal concern.” Not only has Congress failed,

in the FAA or otherwise, to identify alternative dispute

resolution as a matter of pressing national concern that

must be imposed on all levels of government, but one

searches the FAA in vain for any substantive federal policy

that might be at stake in such matters as whether a state

will keep its courthouse doors open to state law wage and

hour claims.‘ Although the FAA identifies a federal nexus

— contracts involving interstate commerce or admiralty —

this Court has never found in the FAA an intent to assert

plenary substantive authority over all such contracts, even

those interstate commerce contracts containing arbitration

agreements. The absence of substantive federal policy

underlying the FAA explains why the FAA does not even

create federal question jurisdiction. See Southland, 465

US. at 15 n.9.

** Moses H. Cone’s assertion of a federal pro-arbitration policy is

based on an unsound analogy to labor arbitration. See Schwartz, supra,

at 49-55, 59-60. Compare Moses H. Cone, 460 U.S. at 24 (“the effect of

[FAA § 2] is to create a body of federal substantive law of arbitrability

applicable to any arbitration agreement within the coverage of the

act”), with Textile Workers Union v. Lincoln Mills, 353 U.S. 448, 450

(1957) (LMRA § 301(a) “authorizes federal) courts to fashion a body of

federal law for the enforcement of these collective bargaining agree-

ments”) and Steelworkers v. American Mfg. Co., 363 U.S. 564, 567

(1960) (judicial role is that “of developing a meaningful body of law to

govern the interpretation and enforcement of collective bargaining

agreements’).

* If Southland was motivated by a lack of confidence in the states’

ability to find their own way toward alternative dispute resolution,

such mistrust of the states is not only inconsistent with federalism

values, but also would have proven unjustified. Most states have, in

general, rigorously enforced arbitration agreements and promoted non-

binding ADR as well. See 5 Ian R. Macneil, et al. Federal Arbitration

Law: Agreements, Awards & Remedies Under the Federal Arbitration

Act app. 1:41-44 (5th ed. 1994)

2. Federalism Principles Reaffirmed Since

Southland Caution against Courts Find-

ing Preemption in Reticent Statutes

The values of federalism, articulated in Gregory v.

Ashcroft, 501 U.S. 452 (1991), provide a basis for evaluat-

ing Southlana’s federalism error:

This federalist structure of joint sovereigns pre-

serves to the people numerous advantages. It as-

sures a decentralized government that will be

more sensitive to the diverse needs of a hetero-

geneous society; it increases opportunity for citi-

zen involvement in democratic processes; it

allows for more innovation and experimentation

in government; and it makes government more

responsive by putting the States in competition

for a mobile citizenry.

Gregory, 501 U.S. at 458; accord United States v. Lopez,

514 U.S. 549, 552 (1995) (citing Gregory as setting forth

the “first principles” of federalism); id. at 581 (Kennedy, J.,

concurring) (quoting New State Ice Co. v. Liebmann, 285

U.S. 262, 311 (1932) (Brandeis, J., dissenting) (arguing

that states can serve as “laboratories for experimentation”

in social policy)). Each of these values of federalism as-

sumes a substantial degree of state lawmaking autonomy;

none would have much meaning if the states were merely

“regional offices { Jor administrative agencies of the federal

government.” New York v. United States, 505 U.S. 144, 188

(1992).

Preemption doctrine represents the most significant

and frequently applied limitation on substantive state

autonomy in our constitutional scheme. See Stephen A.

Gardbaum, The Nature of Preemption, 79 Corn. L. Rev.

767, 768 (1994). While federal commerce power still

potentially reaches most subjects of legislation even after

Lepez and United States v. Morrison, 529 U.S. 598 (2000),

preemption doctrine holds that Congress may nullify state

law on any subject within federal legislative jurisdiction.

Therefore,

the true test of federalist principle may lie, not in

the occasional effort to trim Congress’s commerce

power at its edges ... or to protect a state treas-

ury from a private damage action ... but rather

in those many statutory cases where courts in-

terpret the mass of technical detail that is the

ordinary diet of the law

— namely, preemption cases. Egelhoff v. Egelhoff, 532 U.S.

141, 160 (2001) (Breyer, J., dissenting).

Recognizing this, decisions of this Court have held

that federalism principles support a presumption against

preemption: “‘where .. . the field which Congress is said to

have preempted includes areas that have been tradition-

ally occupied by the States,’ congressional intent to super-

sede state laws must be ‘clear and manifest.’” Allied-

Bruce, 513 U.S. at 283 (O’Connor, J., concurring) (quoting

English v. General Electric Co., 496 U.S. 72, 78-79 (1990)).

“To the extent that federal statutes are ambiguous, we do

not read them to displace state law.” Allied-Bruce, 513

U.S. at 292 (Thomas, J., dissenting); accord Southiland,

465 U.S. at 18 (Stevens, J., concurring in part and dissent-

ing in part) (“The exercise of state authority in a field

traditionally occupied by state law will not be deemed pre-

empted by a federal statute unless that was the clear and

manifest purpose of Congress”). In Gregory, the Court

made this principle an even broader rule of statutory

construction: “If Congress intends to alter the usual

constitutional balance between the States and the Federal

Government, it must make its intention unmistakably

clear in the language of the statute.” 501 U.S. at 460

(internal quotations omitted).

3. This Court’s “Clear Statement” Rule

Announced in Gregory v. Ashcroft Un-

dermines Any Contention that South-

land Properly Construes the FAA

Does the FAA include a “clear statement” of Congres-

sional intent to preempt state law, as would be required

under Gregory? No. It is widely recognized that the “na-

tional policy favoring arbitration” was not the creation of

the FAA as written by Congress, but was instead a judicial

creation — federal common law — that took the FAA as a

point of departure. See Allied-Bruce, 513 U.S. at 283

(O'Connor, J., concurring) (“the Court has abandoned all

pretense of ascertaining congressional intent with respect

to the Federal Arbitration Act, building instead, case by

case, an edifice of its own creation”). As has been clearly

demonstrated in two scholarly dissenting opinions from

this Court, the Southland opinion flouted the FAA’s

historical record, which showed that Congress intended

the FAA to be a procedural statute that neither applied in

state court nor preempted state law. See Southland, 465

U.S. at 23-31 (O’Connor, J., dissenting); Allied-Bruce, 513

U.S. at 285-95 (Thomas, J., dissenting)."* But even the

Southland majority opinion conceded the absence of

anything that would meet the “clear statement” test, by

going outside the FAA's text to rely on a legislative history

that was “not without ambiguities.” 465 U.S. at 12. There

is no question that were Southland being decided for the

first time today, this Court would apply Gregory to reject

the argument that the FAA is substantive law binding on

the states.

* For additional historical evidence supporting the arguments in

the O’Connor and Thomas dissents, see Schwartz, supra, at 19-31.

4. Southland Suffers from Constitutional

Infirmities Comparable to Swift v. Ty-

son

Southland is not a garden variety error in statutory

interpretation, where the Court can rely on Congress to

clear up a disagreement over statutory intent. Southland

is a major federalism error that attributes to Congress an

intention to intrude on state autonomy to a degree that

pushes the FAA to the limits of Congressional power, if not

beyond, and thereby violates the precepts of Gregory v.

Ashcroft. If it is an important attribute of this Court’s role

to correct the federalism mistakes of Congress, see Lopez,

514 U.S. at 578 (Kennedy, J., concurring) (“the federal

balance is too essential a part of our constitutional struc-

ture and plays too vital a role in securing freedom for us to

admit inability to intervene when one or the other level of

Government has tipped the scales too far”); Morrison, 529

U.S. at 617 n.7, it seems paradoxical to say that the Court

cannot correct its own — that only Congress should do so.

Special circumstances warrant overruling Southland.

Stare decisis “is not an inexorable command. The instances

in which the court has disregarded its admonition are many.”

Washington v. W.C. Dawson & Co., 264 U.S. 219, 238 (1924)

(Brandeis, J., dissenting). Fourteen years later, a majority

of the Court joined Justice Brandeis, in Erie R. Co. v. Tomp-

kins, 304 U.S. 64 (1938), to overrule a 96-year-old statutory

interpretation precedent, Swift v. Tyson, 42 U.S. (16 Pet.) 1

(1842). Erie held that the judicial interpretation given to

* “Notwithstanding the rule [of statutory stare decisis), the

Supreme Court has overruled or materially modified statutory prece-

dents more than eighty times” between 1961 and 1988. William N.

Eskridge, Jr., Overruling Statutory Precedents, 76 Geo. L. Rev. 1361,

1427-39 (1988).

§ 34 of the 1789 Judiciary Act by Swift — not the statute

itself — was unconstitutional, because it allowed the

federal courts to make law on subjects outside the legisla-

tive power of Congress. Although Southland’s FAA is

narrower in scope than the general federal law considered

in Erie, its effect on the states goes deeper: federal com-

mon law under Swift was not applicable in state court, and

state statutes could in effect overrule federal common law

decisions. See Erie, 304 U.S. at 71 (quoting Swift, 42 U.S.

(16 Pet.) at 10) (“positive statutes of the state” are rules of

decision under § 34). But Southland holds that the federal

common law of the FAA binds state courts and nullifies

state statutes. Thus, Southland’s reliance on the FAA — a

fundamentally procedural law — as a basis to create a body

of federal judge-made law that preempts state lawmaking

is arguably even more constitutionally unsound than

Swift. It is time that Southland be overruled.

CONCLUSION

For the reasons stated above, this Court should affirm

the decision of the South Carolina Supreme Court.

Dated: March 26, 2003

Respectfully submitted,

DAVID S. SCHWARTZ

(Counsel of Record)

RICHARD M. ALDERMAN

Attorneys for Amici Curiae

Law Professors

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