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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0917%3A11

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2000
- **Citation:** 531 U.S. 79

## Text

} 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 .

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 ; 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 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 ; 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 .

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

‘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 .

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.

-18-

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).

-19-

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0917%3A11. Public record. Not legal advice.