Amicus Curiae Brief — Green Tree Financial Corp.-Ala. v. Randolph

} oupreme Court, U.S. |

FILED

‘JUN - 5 2000

No. 99-1 245 CLERK

In the

Supreme Court of the United States

GREEN TREE FINANCIAL CORP.-ALABAMA

AND GREEN TREE FINANCIAL CORPORATION,

Petitioners,

VS.

LARKETTA RANDOLPH,

Respondent.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

BRIEF OF NATIONAL ARBITRATION FORUM

AS AMICUS CURIAE IN SUPPORT

OF NEITHER PARTY

David F. Herr Edward C. Anderson

Counsel of Record National Arbitration Forum

Michael C. McCarthy 500 Rosedale Tower

MASLON EDELMAN 1700 West Highway 36

BORMAN & BRAND, LLP Saint Paul, MN 55113

3300 Norwest Center (651) 631-1105

90 South Seventh Street

Minneapolis, MN 55402

(612) 672-8200

TABLE OF CONTENTS

Be dpe a EERE TORT Ee er ree ili

Statement of Interest of Amicus Curiae ................ l

Summary of the Argument......................004. 3

WE ade Cao ect ce a by Oe Wa eee hoe kes ncun 4

I. Arbitration Serves an Important Public

Purpose by Providing Inexpensive

PRODI so Sein Sec hbase be cove csecs 4

A. High costs of litigation keep many

Americans from seeking justice in

PE I oe eee eka oskesiaue 4

B. The Forum offers arbitration

grounded in substantive law ............... 6

C. Millions of Americans have chosen

to resolve their disputes through

ISS Bee oe ee 7

II. The FAA’s Preference for Arbitration

Should Result in Courts Rarely Voiding

Agreements to Arbitration ................... 9

A. The Court has held that the FAA

States a preference for arbitration ........... 9

Il.

IV.

B. The FAA prefers arbitration over

litigation because arbitration provides

for practical and effective dispute

IN 5 oso s neem hake kent ves

C. The Court has held that arbitration

agreements can be voided only on

universal contract law grounds ......

The District Court Found the Parties Had

Agreed to Arbitrate Their Dispute; After

Taking Interlocutory Review, the Court

of Appeals Reversed ..........-.-s0+.

Federal and State Courts Have Addressed

Thousands of Similar Disputes Over the

Validity of Agreements to Arbitrate in the

Laet Seve SOE so x ices nena oe se

Under the FAA, Pre-Arbitration Judicial

Review of Agreements to Arbitrate Should

Be Narrowly Limited ................

A. Consistent with the FAA, state-law

contract challenges should be resolved

expetiowly . ..« 6. scxxsvsiaseey xs

B. The FAA provides for ample post-

arbitration review after the facts of the

arbitration have been fully developed

-ii-

C. If, after arbitration has been ordered,

facts develop that warrant judicial

resolution of a defense to the arbitration

agreement before the arbitration has been

completed, the parties should first be

required to exhaust the arbitration-related

options before returning to court .......... 18

D. The FAA provides dissatisfied parties

with an opportunity for post-arbitration

judicial review of an arbitration award ...... 21

Sra Aae Ute sa cee cp he ge cis eWevisanles 23

TABLE OF AUTHORITIES

FEDERAL CASES

Allied-Bruce Terminix Cos., Inc. v. Dobson,

BS Be | er 9,10, 11, 12, 16

Altman Nursing, Inc. v. Clay Capital Corp.,

ee RGAE, BOER ok even ek cece ce we wees 13

Brown v. ITT Consumer Financial Corp.,

No. 99-10506, 2000 WL 556757

Se I odd ak see bebs vet ee 19

Cole v. Burns International Security Services,

Peer ee BO GRP KOM: TOPE ic vc icecnceeacess 7

-lii-

Commonwealth Coatings Corp. v.

Continental Casualty Co., 393 U.S. 145 (1968) ...... 21

Dobbins v. Hawk's Enterprises,

PPO Oe Fee CRs CORE brane RUSS iver bak eee 20

Doctor’s Associates, Inc. v. Casarotto,

ee Ft en 11, 12, 14

First Options of Chicago, Inc. v. Kaplan,

Fee Al NED 6555s a Cie Ss 5 hab oes 11,12

Gammaro v. Thorp Consumer Discount Co.,

TS Fe BO 8 NA acid aw ecas hekaceus 13

Gateway Tech., Inc. v. MCI Telecomm. Corp.,

GO Fe ee Ch te x os oe eb eRe hau eae 22

Gilmer v. Interstate/Johnson Lane Corp.,

FO ti PLEO - 654 0 cae CS heen ee 6, 7, 19, 22

Lapine Tech. Corp. v. Kyocera Corp.,

ope eo lt ei ee ee reer 22

Mastrobuono v. Shearson Lehman Hutton, Inc.,

peak De) Re ere een Pay toe ee ore 17

McCarthy v. Providential Corp.,

eee Gr ee} Pee Tere es Tete 13

Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) .... 16,17

-iv-

Moses H.Cone Mem'l Hospital v. Mercury

Construction Corp., 460 U.S. 1 (1983) ............. 16

Napleton v. General Motors Corp., 138 F.3d 1209

(7th Cir.), cert. denied, 525 U.S. 931 (1998)......... 13

Perry v. Thomas, 482 U.S. 483 (1987) ............ 11,12

Randolph v. Green Tree Finance Corp., 991 F. Supp.

1410 (M.D. Ala. 1997), rev'd, 178 F.3d 1149

(11th Cir. 1999), cert. granted,

Se Oe Ue, RO oss eA ee bees 13

Randolph v. Green Tree Finance Corp.-Ala.,

SIG Ee OG EERO TE, BOO bie oo hee ks 13,14

Seacoast Motors v. Chrysler Corp., 143 F.3d 626

(Ist Cir.), cert. denied, 525 U.S. 965 (1998) ......... 13

Syncor International Corp. v. McLeland, 120 F.3d 262

(4th Cir. 1997), cert. denied, 522 U.S. 1110 (1998) ... 22

United Paperworkers International Union

AFL-CIO v. Misco, Inc., 484 U.S. 29 (1987) ........ 21

Volt Information Sciences, Inc. v. Board

of Trustees, 489 U.S. 468 (1989) ............... 17, 21

Walsh v. Schlecht, 429 U.S. 401 (1977) .............. 17

-Y-

STATE CASES

Faherty v. Faherty, 477 A.2d 1257 (N.J. 1984) ......... 22

Metropolitan Waste Control Commission v. City of

Minnetonka, 242 N.W.2d 830 (Minn. 1976) ......... 22

Stifel, Nicolaus & Co., Inc. v. Francis,

872 S.W.2d 484 (Mo. Ct. App. 1994) .............. 22

UNREPORTED CASE

Marsh v. First USA Bank, No. 3:99-CV-0783-T

QLD. Tes. Mee SOM 3 as es As 1

FEDERAL STATUTES

SUSC. 6 IORI 5S ee 21

GUST 6IANME i... eae 11

NISC. 440008 occ ian ee 16

9U.S0. 4500 0.5.55 eRe ae 19

SUSE 900 6k cee 21

USC CC MOME: |. hic. a 18, 23

CULES: SU1TIHON 5 xe ace 18, 23

IS USC. § 100 een COME ..5 6 awe 3

-vi-

MISCELLANEOUS

pe bs Se eer ee 17

Edward J. Brunet & Charles B. Craver, Alternative

Dispute Resolution: The Advocate’s

I CME Svcd cate eeead oboe eeers 7

Edward Brunet, Replacing Folklore Arbitration

with a Contract Model of Arbitration,

Oe BA RK SRN POOD 4 655 So Sas v peas onder 6,7

Jill Schachner Chanen, Pumping Up Small Claims:

Reformers Seek $20K Court Limits - With No

Lawyers, A.B.A. J., Dec. 1998, at18 ............ 5, 10

CPA WebTrust Now Most Comprehensive Seal of

Assurance for Electronic Commerce Web Sites,

a Pe kh BE oa bb be ok eda eae vb ecsa 8

How The Public Views The State Courts: A 1999 National

Survey. National Conference on Public Trust and

Confidence in the Justice System (May 14, 1999) ..... 4

Lubna Kably, JCANN Names 4th Agency to Settle

Domain Disputes, The Economic Times,

EE C6 ee F.C ik ONE OCs is 9

Lewis Maltby, Private Justice: Employment Arbitration and

Civil Rights, in Arbitration Now 25 (Paul H. Haagan

& ABA Section of Dispute Resolution eds. 1999) ..... 5

-Vii-

Richard Nadler, The Rise of Worker Capitalism,

Cato Policy Analysis, Nov. 1, 1999, atl............. 8

|

ee RPE AD Eos tip aint aia tne g |

National Arbitration Forum, |

Code of Procedure (Sept. 1, 1999) ....... Be Dy oy a |

Jessica Pearson, An Evaluation of Alternatives to Court )

Adjudication, in Consumer Dispute Resolution 344 |

(ABA Special Comm’n on Dispute Resolution 1983) .. 6 )

Poll Shows Most See Broker-Client Arbitration Process

as Fair, Knight-Ridder News Service (Aug. 6, 1999)... 5

Public Loses as Lawyers Block Access to Cheaper Legal

Help, USA Today, Feb. 19, 1999, at14A ............ 4

Restatement (Second) of Contracts § 203(a) (1979) ..... 17

Roper Starch Worldwide, Inc., Legal Dispute Study

CE: TIRED asi vo ERG Tein Sees 5

Supreme Court of Texas, Office of Court Administration

and State Bar of Texas, Public Trust and Confidence in

the Courts and the Legal Profession in Texas

Summary Report’ (1999) .. ccc ccctnvaccevvcceses +

U.S. Department of Commerce, Domain Name

System Statement of Policy, |

Docket No. 980212036-8146-02 ..............-008- 9 |

-Vili-

—..eeeeeeeeee eee eee

The National Arbitration Forum (“the Forum”) submits

this amicus curiae brief in support of neither party. By letters

filed with the Clerk of the Court, Petitioners and Respondent

have consented to the filing of this brief.'

STATEMENT OF INTEREST OF AMICUS CURIAE

The Forum consists of a nationwide network of more than

500 independent arbitrators — former members of the

judiciary, law professors, and senior attorneys — and a

professional staff, based in Saint Paul, Minnesota, that

processes the claims much like a court clerk’s office. In a

recent decision upholding an agreement that provided for

Forum-administered arbitration, the Forum was characterized

as being “‘an impressive assembly of qualified arbitrators.””

Forum legal professionals serve as arbitrators in cases

where the contract of the parties incorporates the Forum Code

of Procedure’ (“the Forum Code”) or where the parties

otherwise elect to submit their case to the Forum for

' Pursuant to Supreme Court Rule 37.6, the Forum states that this brief

was authored in its entirety by the Forum and its counsel. No person

other than the Forum made a monetary contribution toward the

preparation or submission of this brief.

? Marsh v. First USA Bank, No. 3:99-CV-0783-T, slip op. at 29 (N.D.

Tex. May 23, 2000).

> See National Arbitration Forum, Code of Procedure, Rule 1A (Sept. 1,

1999) (hereinafter Forum Code), available at <http://www.arb-

forum.com>.

me

resolution.* Hundreds of thousands of parties have entered into

contracts that choose Forum-administered arbitration as the

exclusive means for resolving disputes. Included among those

contracts are many credit agreements between banks and

consumers.

The Forum has a long-standing interest in seeing that

arbitration is made available to all Americans as a simpler, less

expensive, and faster alternative to litigation, as was envisioned

by the drafters of the Federal Arbitration Act’ (“FAA”). One

means by which that objective can be met is consistent

application of the FAA throughout the United States. Uniform

application of the FAA to arbitration agreements should result

in relatively limited judicial proceedings in advance of any

arbitration, consistent with the purpose of the FAA.

Inconsistent and incorrect interpretations of the FAA have

fostered protracted judicial proceedings in advance of any

arbitration, including discovery from providers of arbitration

services such as the Forum, with the result that the path to

arbitration can become as slow and expensive as if the entire

dispute had been litigated.

Based on its years of experience as a provider of arbitration

services, the Forum offers to the Court insights on the

arbitration process and suggests a refinement of the processes

used by courts to implement the FAA and its objectives. It has

offered similar insights into the workings of arbitration and the

proper application of the FAA as an amicus in federal trial and

appeals courts.

4 See id. Rule 1B.

59 U.S.C. §§ 1-16 (1994).

SUMMARY OF THE ARGUMENT

In applying and interpreting the FAA, this Court has

repeatedly affirmed the importance of arbitration as an

alternative to litigation. The Court has outlined a variety of

advantages that arbitration has over litigation, the principal

advantages being that it is cheaper, simpler, and faster. The

Forum’s first-hand experience and numerous studies of the

means of dispute resolution confirm that arbitration provides

many persons with access to justice that, for a variety of

reasons, these same persons could not obtain in the courts.

Although the issues presented in this case are arguably

somewhat narrow — the availability of appellate review of

federal court orders compelling arbitration and the arbitrability

of claims brought under the Truth in Lending Act® (“TILA”) —

this case and these issues present an opportunity for the Court

to reaffirm the importance of parties’ honoring their agreements

to arbitrate disputes and doing so in a manner, consistent with

the terms of the FAA, that permits arbitration to proceed

without parties first being subjected to protracted judicial

proceedings.

In furtherance of these objectives, the Forum urges that the

Court clarify the procedure for judicial review of an arbitration

agreement that should occur under the FAA. Specifically, the

Court should require that (1) pre-arbitration review be limited

to determining whether the agreement to arbitrate satisfies

applicable state contract-law standards; (2) intra-arbitration

review of such matters as arbitration fees be permitted only

when the parties have exhausted the means for resolving the

© 15 U.S.C. § 1601 et seg. (1994).

a:

matter within the confines of the arbitration; and (3) all other

issues be reserved to post-arbitration review.

By reaffirming a standard procedure for judicial review of

arbitration agreements that provides for very limited and

expeditious pre-arbitration judicial proceedings, this Court will

further the FAA’s objectives of providing inexpensive, simple,

and fast dispute resolution to all Americans.

ARGUMENT

I. Arbitration Serves an Important Public Purpose by

Providing Inexpensive Access to Justice.

A. High costs of litigation keep many Americans

from seeking justice in the nation’s courts.

As an “adjunct” to the courts, arbitration provides

Americans with access to justice that has otherwise become

increasingly inaccessible. The American Bar Association

(“ABA”) calculates that 100 million Americans are locked out

of court by high legal costs.’ Objective surveys suggest that

almost twice that number of Americans believe they cannot

afford the cost of justice.*

” See Public Loses as Lawyers Block Access to Cheaper Legal Help,

USA Today, Feb. 19, 1999, at 14A.

* See How The Public Views The State Courts: A 1999 National Survey.

National Conference on Public Trust and Confidence in the Justice

System (May 14, 1999), available at <http://www.ncsc.dni.us/

PTC/results/report.htm>; Supreme Court of Texas, Office of Court

Administration and State Bar of Texas, Public Trust and Confidence in

the Courts and the Legal Profession in Texas Summary Report 6 (1999).

-4-

The ABA Journal reports that most lawyers will not begin

a lawsuit worth less than $20,000.° Lewis Maltby, of the

National Work Rights Center, calculates that, for employees

who seek a lawyer, the minimum is closer to $60,000.'° Maltby

predicts that access to justice will be even worse in the future. '!

Conversely, Maltby estimates that the costs of some arbitrations

can be as little as five percent of the cost of an equivalent

lawsuit. '?

Arbitration is well received by Americans. Fifty-nine

percent of respondents to a Roper survey for the ADR Institute

selected arbitration over litigation as a way to resolve claims for

money.'* That percentage grew to 83% when respondents were

informed that arbitration could save 75% of the cost of

litigation.'* Ninety-two percent of participants in securities

arbitration responded favorably to tne experience.'* An ABA

See Jill Schachner Chanen, Pumping Up Small Claims: Reformers Seek

$20K Court Limits — With No Lawyers, A.B.A. J., Dec. 1998, at 18, 18.

0 See Lewis Maltby, Private Justice: Employment Arbitration and Civil

Rights, in Arbitration Now 25 (Paul H. Haagan & ABA Section of

Dispute Resolution eds. 1999).

'! See id. at 29.

'? See id. at 23.

'3 See Roper Starch Worldwide, Inc., Legal Dispute Study (Sept. 1999),

available at <http://www.arb-forum.com> in the Forum Library.

\4 See id.

'5 See Poll Shows Most See Broker-Client Arbitration Process as Fi air,

Knight-Ridder News Service (Aug. 6, 1999).

.

study of consumer attitudes toward arbitration reached similar

results. '®

B. The Forum offers arbitration grounded in

substantive law.

What sets the Forum apart from many providers of

arbitration services is that its arbitrators must apply the relevant

substantive law. In making their decisions, Forum arbitrators

— former judges, law professors, and attorneys with at least

fifteen years’ experience'’ — are bound by the Forum Code, the

Forum Bill of Rights, the Due Process Standard, the Forum

Code of Ethics, their local rules regarding professional

responsibility, and the substantive law that governs the

dispute.'* The Forum’s requirement that cases be decided under

the applicable substantive law is a significant addition to rules

common to arbitration organizations. '®

'© See Jessica Pearson, An Evaluation of Alternatives to Court

Adjudication, in Consumer Dispute Resolution 344 (ABA Special

Comm’n on Dispute Resolution 1983).

'? Communally, these arbitrators are by experience, training, and

disposition, models of the “competent, conscientious and impartial

arbitrators” to whom this Court has referred. Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20, 30 (1991) (quoting

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,473 U.S. 614,

634 (1985)).

'8 See Forum Code, supra note 3, Rules 1C, 20A, 20D.

'? See National Arbitration Forum, A Comparison of Arbitration Rules

and Practices (presented at the 2000 mid-year meeting of the ABA

Business Law Section, Jan. 2000), available at <http://www.arb-

forum.com>; see also Edward Brunet, Replacing Folklore Arbitration

vs

As Professor Edward Brunet (author of the leading

textbook on ADR”) states, “The Forum’s restriction on

subjective awards illustrates the growing acceptance of legally

based arbitral awards.””' In arbitration of statutory claims, this

Court has held that parties are entitled to their substantive

statutory rights.”” The United States Court of Appeals for the

D.C. Circuit has stated, at least in the case of contracts to

arbitrate statutory claims, that this Court “has assumed that

arbitration awards are subject to judicial review sufficiently

rigorous to ensure compliance with statutory law.”

C. Millions of Americans have chosen to resolve their

disputes through arbitration.

Arbitration has become an important component of the

justice system. Seventy-seven million Americans who now

own securities have committed themselves to arbitration,

with a Contract Model of Arbitration, 74 Tul. L. Rev. 39 (1999).

20 Edward J. Brunet & Charles B. Craver, Alternative Dispute

Resolution: The Advocate's Perspective (1997).

2! Brunet, supra note 19, at 57.

22 See Gilmer, 500 U.S. at 26.

23 Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465, 1468-69 (D.C. Cir.

1997).

4.

directly or indirectly.“ A growing number of “e-commerce”

web sites contain an arbitration provision.”°

Arbitration is used today in almost every type of

transaction. This universal acceptance is far beyond the limited

and narrow applications of the past. In the future, arbitration

will be a necessity in “on-line” transactions (i.e.,

“e-commerce”), and many of those arbitrations will be

administered by the Forum.

After an audit of the Forum’s procedures, the American

Institute of Certified Public Accountants (“AICPA”) selected

the Forum to provide arbitration services to resolve claims

resulting from on-line transactions in connection with web sites

that take part in AICPA’s CPA WebTrust program.” WebTrust

covers e-commerce in the United States, Canada, Puerto Rico,

England, Scotland, Ireland, and Wales.2’ E-commerce is

expected to generate hundreds of millions of transactions

annually.

24 See Richard Nadler, The Rise of Worker Capitalism, Cato Policy

Analysis, Nov. 1, 1999, at 1,4; NASD Rule 10101, “Matters Eligible for

Submission,” available at <http://www.nasdr.com/2820..htm#10101>.

25 See, e.g., Dell Computer's “Terms and Condition of Sale,” available

at <http://www.dell.com>.

‘28 See CPA WebTrust Now Most Comprehensive Seal of Assurance for

Electronic Commerce Web Sites, Bus. Wire (Mar. 31, 1999). The

AICPA is the national association of CPAs in the United States with

more than 330,000 members in public practice, business and industry,

government and education. See id.

27 See id.

Arbitration has also been chosen as the preferred method

of dispute resolution with respect to the architecture of the

Internet. The Internet Corporation on Assigned Names and

Numbers (“ICANN”) was created by the United States

government to effectively manage the more than 10 million

“domain” names now on the Internet.”* As part of that effort,

ICANN has selected the Forum as one of four worldwide

providers of arbitration of disputes related to domain names and

trademark rights.”

II. The FAA’s Preference for Arbitration Should Result in

Courts Rarely Voiding Agreements To Arbitrate.

The limited pre-judicial review of arbitration agreements

advanced by the Forum finds support in the FAA’s preference

for arbitration over litigation as a means of dispute resolution.

A. The Court has held that the FAA states a

preference for arbitration.

In 1995, when this Court decided Allied-Bruce Terminix

Cos., Inc. v. Dobson, it restated a strong preference for

28 See U.S. Department of Commerce, Domain Name System Statement

of Policy, Docket No. 980212036-8146-02, available at <http//:

www.ntia.doc.gov/ntiahome/domainname/6_5_98dns.htm>.

29 See Lubna Kably, ICANN Names 4th Agency to Settle Domain

Disputes, The Economic Times, May 18, 2000, available at 2000 WL

16892861. The other approved providers are the Canadian eResolution

Consortium, the United Nations’ World Intellectual Property

Organization, and the CPR Institute. See id.

30 513 U.S. 265 (1995).

arbitration. Examining the legislative history of the FAA to

determine Congress’s intent, the Court ascertained that

Congress viewed the FAA as beneficial legislation for

consumers and businesses alike.*' It stated that the FAA, “by

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

big business and little business alike, . . . corporate interests

[and] . . . individuals.”

The Court went on to state its own opinion on the Act:

“Indeed, arbitration’s advantages often would seem helpful to

individuals, say, complaining about a product, who need a less

expensive alternative to litigation.””? In effect, the FAA was

drafted to provide all members of society access to justice,

which they may not be able to afford in the traditional lawsuit

system.*4

B. The FAA prefers arbitration over litigation because

arbitration provides for practical and effective

dispute resolution.

While examining the legislative history of the FAA in

Terminix, the Court listed the qualities of the arbitration process

that make it a preferred method of dispute resolution.** The

court stated that arbitration (1) is “cheaper and faster than

a See id. at 280.

32 Id.

33 See id.

*4 See Chanen, supra note 9, at 18.

*> Terminix, 513 U.S. at 280.

-10-

litigation,” (2) has “simpler procedural and evidentiary rules,”

(3) “minimizes hostility and is less disruptive of ongoing and

future business dealings among the parties,” and (4) is “more

flexible in regard to scheduling of times and places of hearings

and discovery devices.’*®

In the growing “on-line” world, where parties to

transactions may physically be a continent or a globe apart,

arbitration may be the only practical method to resolve

disputes.

C. The Court has held that arbitration agreements can

be voided only on universal contract law grounds.

Section two of the FAA states that

a contract evidencing a transaction involving

commerce to settle by arbitration a controversy

thereafter arising out of such contract or transaction,

or the refusal to perform the whole or any part, thereof

... Shall be valid, irrevocable, and enforceable, save

upon such grounds as exist at law or in equity for the

revocation of any contract.*’

This Court, in determining how an arbitration agreement

shall be scrutinized, has continually held that state-law contract

principles guide the analysis.** In Perry v. Thomas, the Court

36 Td. (quoting H.R.Rep. No. 97-542, at 13 (1982)).

379 U.S.C. § 2 (1994).

38 See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 685 (1996);

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995);

i.

explained that “state law, whether of legislative or judicial

origin, is applicable if that law arose to govern issues

concerning the validity, revocability, and enforceability of

contracts generally.”’? The Perry Court also stated that “[a]

court may not, then, in assessing the rights of litigants to

enforce an arbitration agreement, construe that agreement in a

manner different from that in which it otherwise construes

nonarbitration agreements under state law.”

In Terminix, the Court stated that section two of the FAA

assures that states have “a method for protecting consumers

against unfair pressure to agree to a contract with an unwanted

arbitration provision.”*' It went on to explain that states may

regulate all contracts under “general contract law principles.”

The principle was also reiterated in First Options of Chicago,

Inc. v. Kaplan, when the Court explained that courts apply

“ordinary state-law principles that govern the formation of

contracts” when determining whether parties agreed to arbitrate

disputes.*’ The Court also implemented a state-law analysis in

Doctor's Associates, Inc. v. Casarotto, when it held that the

Terminix, 513 U.S. at 281; Perry v. Thomas, 482 U.S. 483, 492 n.9

(1987).

»° Perry, 482 U.S. at 492 n.9.

” id.

*' 513 U.S. at 281.

ae |

*? 514 U.S. 938, 944 (1995).

«12.

FAA preempts state laws that place arbitration agreements

under greater scrutiny than other contract terms.“

III. The District Court Found the Parties Had Agreed To

Arbitrate Their Dispute; After Taking Interlocutory

Review, the Court of Appeals Reversed.

In the instant case, the district court reviewed the contract

under state contract law and determined that an “arbitration

agreement” existed.*° The district court ordered the parties to

arbitration, despite the fact that the agreement did not define all

of the details with respect to the arbitration.

The court of appeals entertained Randolph’s appeal,

contrary to the weight of authority.” In addressing whether the

parties had agreed to arbitrate their dispute, the court filled the

contract’s silence with the worst possible terms (from

Randolph’s perspective) and, with that reading, determined that

the contract was unenforceable because it “fails to provide the

“4517 U.S. 681, 685-87 (1996).

“5 See Randolph v. Green Tree Fin. Corp., 991 F Supp. 1410, 1425-26

(M.D. Ala. 1997), rev'd, 178 F.3d 1149 (11th Cir. 1999), cert. granted,

120 S. Ct. 1552 (2000).

“© See Randolph v. Green Tree Fin. Corp.-Ala., 178 F.3d 1149, 1154

(11th Cir. 1999); see also Seacoast Motors v. Chrysler Corp., 143 F.3d

626, 628-29 (1st Cir.), cert. denied, 525 U.S. 965 (1998); Napleton v.

General Motors Corp.,138 F.3d 1209, 1212 (7th Cir.), cert. denied, 525

U.S. 931 (1998); McCarthy v. Providential Corp., 122 F.3d 1242, 1244-

45 (9th Cir. 1997); Altman Nursing, Inc. v. Clay Capital Corp., 84 F.3d

769, 771 (Sth Cir. 1996); Gammaro v. Thorp Consumer Discount Co.,

15 F.3d 93, 95-96 (8th Cir. 1994).

-13-

minimum guarantees required to ensure that Randolph’s ability

to vindicate her statutory rights will not be undone by steep

filing fees, steep arbitrators’ fees, or other high costs of

arbitration.”*’

IV. Federal and State Courts Have Addressed Thousands

of Similar Disputes Over the Validity of Agreements To

Arbitrate in the Last Several Years.

Since this Court decided Casarotto” in 1996, the United

States Courts of Appeals have decided 277 cases involving

arbitration (including the case now before the court)” and the

state appellate courts have decided 339 such cases.” Trial

courts have been faced with thousands more. The procedural

posture of those cases has been almost as varied as the number

of cases.

The issue of interlocutory appeal in the instant case is only

one of hundreds of review issues addressed, explicitly and

implicitly, by these opinions. Many challenges have asserted

state-law contract defenses in attempts to avoid an arbitration

contract, as well as arguments that their claims are not subject

47 Randolph, 178 F.3d at 1158.

48 See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996).

49 Soe Westlaw Keynote Search conducted on May 24, 2000; Keynote

“33 Arbitration,” Jurisdiction “All United States Circuit Courts of

Appeal,” Additional Terms “da(aft 5/20/1996).”

50 Soe Westlaw Keynote Search conducted on May 24, 2000; Keynoie

“33 Arbitration,” Jurisdiction “All States,” Additional Terms “da(after

5/20/1996).”

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to arbitration because of their very nature, such as is made with

respect to TILA in this case.

When a challenge to an arbitration contract is raised, courts

use a wide variety of procedures and apply similarly varying

standards to resolve the arbitrability issue. Such inconsistent

approaches foster costly and time-consuming litigation that, in

turn, frustrates the purpose of the FAA and the agreements

made thereunder. Parties must repeatedly raise multiple claims,

because the effectiveness of each claim at any stage is unclear.

To give effect to the imprimatur Congress has given to

arbitration, to ease the burdens on the courts below and to

further the interests of justice, the Court should take this

opportunity to standardize the pre-arbitration review process to

be followed under the FAA and decisions of this Court.

V. Under the FAA, Pre-Arbitration Judicial Review of

Agreements to Arbitrate Should Be Narrowly Limited.

Although not at issue in this case, challenges to arbitration

agreements commonly are made under state contract law,

including such contract-law doctrines as unconscionability.

Review of how pre-arbitration challenges under state contract

law should be handled under the FAA illustrates the need for a

uniform procedure for all such pre-arbitration judicial review of

agreements to arbitrate.

A. Consistent with the FAA, state-law contract

challenges should be resolved expeditiously.

This Court has made it clear that only state-law challenges

applying to any contract term will negate an otherwise complete

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contract for arbitration.’' Particularly with regard to the

concepts of “unconscionability” and “Jack of mutuality,” lower

courts have taken a variety of tacks in examining the

relationship of these issues to the FAA. The most extensive

examinations of these defenses by trial courts often include

deposition and document discovery, resulting in pre-arbitration

judicial proceedings of far greater magnitude than any

arbitration of the merits that would have occurred under the

contract.”

Section four of the FAA provides that the court should

examine the “making of the agreement for arbitration” and

“being satisfied that [it] is not in issue,” shall order the parties

“to proceed to arbitration.”*> Congress clearly contemplated

that this would be a perfunctory examination. This Court has

said that the question “call[s] for an expeditious and summary

hearing, with only restricted inquiry into factual issues.”™

The FAA goes on to provide that, only “if the making of

the arbitration agreement . . . [is] in issue,” shall the court

proceed to a “trial” of that issue.’ Under section four, the

avoidance of the contract requires such a trial, unless the court

5! Soe Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265, 281 (1995).

52 See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 633 n.17 (1985) (describing the efficacy sought in arbitration).

533.9 U.S.C. § 4 (1994).

$4 Moses H.Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,22

(1983).

559 U.S.C. § 4 (1994).

can find, as a matter of law, that the agreement violates state-

law contract standards.

To give effect to section four, the trial court is. which the

section-four motion is brought should review the arbitration

agreement and the incorporated arbitration rules (if any) to

identify terms that would violate applicable contract law. If

none are apparent on the face of the documents, the court

should order the parties to arbitration. This examination should

be made with proper regard for the presumption of validity of

any contract*® and the strong presumption in favor of an

agreement for arbitration.*’

B. The FAA provides for ample post-arbitration

review after the facts of the arbitration have been

fully developed.

Like other contracts, agreements for arbitration may not

always expressly state all of the incidental terms of the

agreement or foresee all possible details of the arbitration.*®

The instant case is an example. It is not possible to know

exactly what all of the contract terms will mean, in practice,

until the arbitration process is begun. The arbitrator may be fair

%© See 17A Am. Jur. 2d Contracts § 333; see also Restatement (Second)

of Contracts § 203(a) (1979); Walsh v. Schlecht, 429 U.S. 401, 408

(1977).

°? See Mitsubishi Motors C orp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 615 (1985).

58 See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62

(1995); Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 476

(1989).

22.

or biased; the cost may be low or high; fee-waiver provisions

may or may not apply; the defending party may offer to pay all

of the fees or not.

Sections 10 and 11 of the FAA provide ample remedies for

most claims of arbitral unfairness.*’ Generally, parties to an

arbitration should assert their challenges in the arbitration and

avoid any return to court until the completion of the

arbitration.” At that point, petitions for relief under those post-

award sections are appropriate. This best preserves judicial

resources and, more importantly, provides the district court

with a complete record upon which to rule. Not incidentally,

many arbitrations will be resolved favorably to a party with a

potential procedural claim, obviating the necessity of court

intervention on behalf of the claimant.

C. If, after arbitration has been ordered, facts develop

that warrant judicial resolution of a defense to the

arbitration agreement before the arbitration has

been completed, the parties should first be required

to exhaust the arbitration-related options before

returning to court.

There may arise, in the course of the arbitration process,

circumstances creating violations of generally applicable state

contract law that a litigant would be unable to resolve by

asserting the objection in arbitration and pursuing it in post-

award procedures. Hypothetical examples would be a

prohibitive cost of the arbitration process or the unavailability

59 See 9 U.S.C. §§ 10, 11 (1994).

© See id.

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PRP NRE EME SID HEIN,

EERO TREN NS PUNE MTS OEY

PL

of an arbitrator. These issues would arise only after the court

had ordered the parties to arbitration under section four of the

FAA and after the claimant had filed the arbitration claim.

The failure of the selection process to produce a qualified

arbitrator would not necessarily be apparent until the arbitration

process has begun. The actions of the court upon failure of the

arbitrator selection process “for any reason” are defined by the

FAA.°' Either party may petition the court for an alternative

appointment.” If, for instance, the court determined that no

unbiased arbitrator (or no arbitrator at all®) could be selected

from the pool designated by the arbitration agreement, the court

can appoint an alternative.”

Prior to assertion of the arbitration claim, allegations of

prohibitively high costs would be completely speculative.

Although the court could earlier examine the published

arbitration fees, the actual application of fee payment, fee

sharing and fee waivers to the particular claim could occur only

after an arbitration claim was asserted.

®! See 9 U.S.C. § 5 (1994).

8 See id.

° See, e.g., Brown v. ITT Consumer Financial Corp., No. 99-10506,

2000 WL 556757 (11th Cir. May 5, 2000).

* This Court has made it clear that alleged “bias” of the arbitration

administrator will not prevent an arbitration, so long as the agreement or

incorporated rules provide, on their face, for an effective selection

process. See Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 30

(199i).

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The United States Court of Appeals for the Eighth Circuit

has addressed such circumstances internal to the arbitration

process and has provided guidance for the trial courts and

litigants in that circuit on how to handle these claims.® This

Court should apply that process to all pre-arbitration challenges

to an arbitration agreement. Litigants should be required to:

First, make every reasonable effort to resolve the

issue, without returning to the court;

Second, exhaust the remedies for the alleged

defect available within the arbitration structure; and

Third, accept the offer of other parties to the

contract to modify the contract or process to eliminate

the alleged flaw.

This escalating procedure will undoubtedly eliminate

almost every asserted imperfection of any arbitration process.

More importantly, it will prevent repeated petitions to the

district courts and allow the courts to effectively review

arbitration processes with a complete record. This Court should

apply this process to all “intra-arbitration” challenges under the

FAA.

®5 See Dobbins v. Hawk's Enterprises, 198 F.3d 715, 717 (8th Cir.

1999).

% See generally id.

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D. The FAA provides dissatisfied parties with an

opportunity for post-arbitration judicial review of

an arbitration award.

Enforcement of any arbitration award requires

confirmation of the award by a court.®’ Further, in adopting

section 10 of the FAA, Congress provided for broad post-

arbitration judicial review of arbitration decisions. The range

of review extends from even “evident” (not actual) partiality”

to “any other misbehavior.” Of particular interest in the

review of arbitration awards has been the review of the exercise

of power by the arbitrator(s).

Section 10(a)(4) empowers the court to act “[w]here the

arbitrators exceeded their powers.”’' Those powers are, of

course, defined by the arbitration agreement of the parties

and/or the submission to the arbitrators.” Where the parties

have given the arbitrators broad powers, the review is limited.”

67 See 9 U.S.C. § 9 (1994).

68 Id. § 10.

© Td. § 10(a)(2); see also Commonwealth Coatings Corp. v. Continental

Cas. Co., 393 U.S. 145, 147-49 (1968).

9 U.S.C. § 10(a)(3) (1994).

7! Td. § 10(a)(4).

” See Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 476

(1989).

® See, e.g., United Paperworkers Int'l Union AFL-CIO v. Misco, Inc.,

484 U.S. 29, 38 (1987) (“[A]s long as the arbitrator is even arguably

24.

But where the contract restricts the power of the arbitrators,

requiring them to follow the law,” the court may review the

arbitrators’ decision for legal accuracy.”

This Court has also held that parties are to be afforded all

of their substantive statutory rights in arbitration of statutory

claims.” The “powers” of the arbitrators are, therefore, further

restricted in arbitration of statutory claims.” The trial court

may review an arbitration award resulting from a claim of

statutory rights to determine if the arbitrators acted within those

constraints on the arbitrator’s powers.” in the case before the

Court, for instance, after the arbitration is complete, a section

10 (a)(4) petition would permit the district court to determine

if the arbitrator provided Respondent with her statutory nghts

under TILA.

construing or applying the contract and acting within the scope of his

authority, that a court is convinced he committed serious error does not

suffice to overturn his decision.” (emphasis added)).

74 See Forum Code, supra note 3, Rule 20.

’5 See Lapine Tech. Corp. v. Kyocera Corp., 130 F.3d 884 (9th Cir.

1997); Syncor Int'l. Corp. v. McLeland, 120 F.3d 262 (4th Cir. 1997),

cert. denied, 522 U.S. 1110 (1998); Gateway Tech., Inc. v. MCI

Telecomm. Corp., 64 F.3d 993 (Sth Cir. 1995); Stifel, Nicolaus & Co.,

Inc. v Francis, 872 S.W. 2d 484 (Mo. Ct. App. 1994); Faherty v.

Faherty, 477 A. 2d 1257 (N.J. 1984); Metropolitan Waste Control

Comm'n. v. City of Minnetonka, 242 N.W. 2d 830 (Minn. 1976).

76 See Gilmer, 500 U.S. at 26.

” See id.

78 See id.

-2.

After the arbitration, when all of the relevant events have

occurred and the record is before the court, the parties can

present to the court facts and applicable legal argument, rather

than speculation and innuendo. Moreover, many procedural

claims will be obviated by the results of the arbitration. Courts

will be required to address only real and necessary issues

related to an actual arbitration and will have a record available

for review.”

The FAA contemplates that the parties have wide latitude

in defining the matters submitted to the arbitrators and limiting

or expanding the powers of the arbitrators to act. Sections 10

and 11, in turn, provide the court with the power to modify,

correct or vacate awards of the arbitrators.*°

CONCLUSION

The FAA provides parties with access to justice that is

otherwise unavailable. To give effect to the goals of the FAA

and to assure a fair arbitration process, the Court should

establish the following review process:

First, trial courts should review the arbitration agreement

and assess the incorporated rules to assure the terms meet

minimum state contract law standards. If so, arbitration should

be ordered.

” For example, the Forum Code allows the parties to obtain both a

record of the proceedings and a written reasoned award. See Forum

Code, supra note 3, Rules 35F & 37G.

80 See 9 U.S.C. §§ 10, 11 (1994).

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Second, trial courts should require parties in the arbitration

process before returning to court to (1) make every reasonable

effort to resolve any issue, (2) exhaust all remedies within the

arbitration process, and (3) accept the offer of other parties to

modify the contract to eliminate the flaw.

Third, trial courts should exercise the review powers under

Sections 10 and 11 of the FAA to assure that parties received

every benefit for which they contracted.

Dated: June 8, 2000 David F. Herr

Counsel of Record

Michael C. McCarthy

MASLON EDELMAN

BORMAN & BRAND, LLP

3300 Norwest Center

90 South Seventh Street

Minneapolis, Minnesota 55402

Telephone: (612) 672-8200

Edward C. Anderson

National Arbitration Forum

500 Rosedale Tower

1700 West Highway 36

Saint Paul, Minnesota 55113

Telephone: (651) 631-1105

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