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

Supreme Court, Us.

GREEN TREE FINANCIAL CORP.—ALABAMA,

AND GREEN TREE FINANCIAL CORPORATION,

Petitioners,

v.

LARKETTA RANDOLPH,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

BRIEF OF AMERICAN BANKERS ASSOCIATION,

AMERICAN FINANCIAL SERVICES ASSOCIATION,

AND CONSUMER BANKERS ASSOCIATION AS

AMICI CURIAE IN SUPPORT OF PETITIONERS

CHRISTOPHER R. LIPSETT

Counsel of Record

ERIC J. MOGILNICKI

TODD ZUBLER

MICHAEL D. LEFFEL

WILMER, CUTLER &

PICKERING

2445 M Street, N.W.

Washington, DC 20037

(202) 663-6000

Counsel for Amici Curiae

June 8, 2000

SS a SSNS SSNS

40ee

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TABLE OF CONTENTS

THE ELEVENTH CIRCUIT’S INVALIDA-

TION OF THE PARTIES’ ARBITRATION

AGREEMENT WAS INCONSISTENT WITH

THE FEDERAL ARBITRATION ACT...

PLACING THE BURDEN ON THE PARTY

SEEKING TO INVALIDATE ITS

AGREEMENT TO ARBITRATE IS LOGICAL,

WORKABLE, AND PAIR o5...0..00..0.0scscesssccscesccccsscsss...

A. Placing the Burden on the Party Opposing

Arbitration Is Logical and Workable...

1. Placing the Burden on the Party

Opposing Arbitration Is Consistent with

Standard Contract Law ..0...0....6...0.cccccccccccc-...

2. Placing the Burden on the Party

Opposing _ Arbitration Conserves

Judicial and Litigant Resources.....................

\ TABLE OF CON TS -- Continued

Page

\ 3. Arbitration Fees Costs Would in

\ Any Event Be Awarded to a Prevailing

\ Plaintiff in this Case, in Accordance

\ wits it TIA GEO octets 11

3 4. Any Potential Defects in Arbitration

| Proceedings Are Subject to Correction

through Judicial Review ....................cc000000+ 13

B. Placing the Burden on |the Party Opposing

Arbitration Is Justified Because Arbitration

Works Well for Coming. oobi ceccscsesescessecccine 4

1. Congress Has | Recognized that

Arbitration Helps Consumers .....................+- 14

2. Arbitration Is Inexpensive, Fast, and

POF cckiceainee Be eee ea 15

3. Consumers Are | Generally More

Successful in Arbitration Than through

Traditional Litigation in Vindicating

Their Statutory Rights... 19

C. Placing the Burden on the Party Opposing

Arbitration Is Supported by Economic

WE sisscincntitinim tare eae oa 20

Ill. CONTRACT PRINCIPLES REQUIRE THAT

DOUBTS SHOULD BE RESOLVED BY

INTERPRETING AN ARBITRATION

AGREEMENT TO UPHOLD ITS VALIDITY .......... 26

CONCLUSION

iii

TABLE OF AUTHORITIES

CASES Page

Allied-Bruce Terminix Cos. v. Dobson, 513

Fae ee eter er 4,5, 14, 15

Aviall, Inc. v. Ryder Systems, Inc., 110 F.3d

“cotter! merlas och SR a en 14

Barber Pure Milk Co. v. Alabama State Milk

Control Board, 156 So. 2d 351 (Ala.

a ACES eC CSE Nal a 27

Board of School Commissioners of Mobile

County v. Hahn, 22 So. 2d 91 (Ala.

cen NEE CRANES ER 20 ee 27

Bush v. Greer, 177 So. 341 (Ala. 1937) ......c.cccccccceses. 27

Campbell v. United States, 365 U.S. 85

a RE SEES SES CEN On Ce af OF eT 10

Cole v. Burns International Security

Services, 105 F.3d 1465 (D.C. Cir.

a 28

Dobbins v. Hawk’s Enterprises, 198 F.3d

FR EI BID oasis cones vecsecvnsesnserveess 6, 10, 12, 16

Dorsey v. Dorsey, 66 So. 2d 135 (Ala.

ee ESTOS RESO CSOT ERE 10

Ex parte Napier, 723 So. 2d 49 (Ala. 1998) ................. 9

General Motors Corp. v. Romein, 503 U.S.

aaa EOE SESS a eee 27

Gilmer v. Interstate/Johnson Lane Corp.,

NN osu b cote desar-canecsens:. Ae

Green Tree Financial Corp. v. Wampler,

749 So. 2d 409 (Ala. 1999) ooo ccccccccceeeee 12

Homes of Legend, Inc. v. McCollough, No.

1980921, --- So. 2d. ---, 2000 WL 92255

I 26

Howard v. Anderson, 36 F. Supp. 2d 183

of a eee 12

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985) ........... 5, 13, 18

iV

TABLE OF AUTHORITIES -- Continued

Page

Moses H. Cone Memorial Hospital vy.

Mercury Construction Corp., 460 U.S. 1

cepa Re TE RE ATC sR, 4,5

Paladino v. Avnet Computer T: echnologies,

Inc., 134 F.3d 1054 (11th Cir. 1998) 0.0... 7

Perry v. Thomas, 482 U.S. 483 SEA hom emcre 9

Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989) oo..o-cccccccccccceeee. 5

Rollins, Inc. v. Foster, 991 F. Supp. 1426

ee a ee 10, 12, 13

Rosenberg v. Merrill Lynch, Pierce, Fenner

& Smith, Inc., 170 F.3d 1 (lst Cir.

as gigs. ETN NO Derren a ey PAO Cnet a 6, 11, 12

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

hee SE End ae EE ARI ee 9

Selcke v. New England Insurance Co., 995

AO PM ADI oovsctsc scien iscnccs 27

Shearson/American Express vy. McMahon,

DO Iie BTID oo oorvcssey. coopacheaveseesec cack, 5, 6, 13

Sims v. Blanchris, Inc., 648 F. Supp. 480

SE ait kee tn 9

Smith v. Odell, 108 So. 400 (Ala. Ct. App.

| UREN Pere On OY RRP OT RES 9

United Companies Lending Corp. v. Autrey,

723 So. 2d 617 (Ala. 1998) ooo ccccccccceeececeee. 26

Vimar Seguros y Reaseguros, S.A. v. M/V

Sky Reefer, 515 U.S. 528 (1995) o.oo 6

Volt Information Sciences, Inc. v. Board of

Trustees of Leland Stanford Junior

University, 489 U.S. 468 DOE séaciwiouc co. 8,.26

Walker v. MDM Services Corp., 997 F.

Supp. 822 (W.D. Ky. 1998) ooo 12

Walsh v. Schlecht, 429 U.S. 401 cS | Sac lRROe tae 9, 26

Vv

TABLE OF AUTHORITIES -- Continued

Page

Wells v. Chevy Chase Bank F.S.B., No. 24-

C-99-000202 (Cir. Ct. for Baltimore

City Aug. 16, 1999) (order compelling

gsr apes, ee 11

Wolffe v. Perryman, 9 So. 148 fe | 2 | San 27

STATUTES

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

hci ek TS EET tis 4,7

Steg he ee RS nC an ii ie 13, 14

thd. rc. 5. eR CIS 13

Ae Lage. OES 13

pba gicestc tT Sige: SCR eR a a EEE 13

Whee. ig. en ea a RNs 22

15 U.S.C. §§ 1601 EMD esl viniseeaden ses date ee 4

eb esdecd fog Sn, -, aE RSE: 22

esses icon. A RS 22

IS US.C. § 1640(8)(3) ooo. cccccccccccsseecc 11,12

ao EE 4

plea bs Lacan, , eC NEE 22

Shee A Loci’, eR ETS 22

BS USC. § 16980) ccc escccccscs 11, 12

bp dh Qo NE S05 18

wiht. aa a ORT EN 15

Y2K Act, Pub. L. No. 106-37, 113 Stat. 185

(1999) (codified at 15 USC §§ 6601-

sl, Fn Oh OO NE Si ey 15

LEGISLATIVE MATERIALS

S. Rep. No. 68-536 cies Fe EAE eT Ie 14

vi

TABLE OF AUTHORITIES -- Continued

Page

AGENCY MATERIALS

Board of Governors of the Federal Reserve

System, 85th Annual Report (1998),

available at <http://www.federalreserve.gov

/boarddocs.RptCongress/annual98/> ..................... 22

Federal Trade Commission, Fleet Finance and

Home Equity U.S.A. Agree to Pay $1.3

Million Settling Charges of Deceptive

Disclosures and Truth in Lending Violations

in Fleet Finance Loans, News Release, July

26, 1999, available at <http://www.ftc.gov/

opa/1999/9907/fleet.htm> ooo... cee eecessesecseees 23

Federal Trade Commission, Letter to Dolores S.

Smith, Director of Division of Consumer

and Community Affairs, Board of

Governors of the Federal Reserve System

(FRR: S, FE eit eee 23

Suntrust Banks, Inc., 84 Fed. Res. Bull. 1115

(EID sbvcsiintteianc edd tren oe a 24

BOOKS, ARTICLES & TREATISES

Frank A. Bennack, Jr., A Report on the National

Survey (May 14, 1999), available at <http://

www.ncsc.dni.us/PTC/results/report.htm> ............ 17

Lisa Bingham, Employment Arbitration: The

Repeat Player Effect, 1 Employment Rts. &

Employment Pol’y J. 189 (1997) oo.o.o.ccccccceeeeeee 19

Anne Brafford, Arbitration Clauses in

Consumer Contracts of Adhesion: Fair Play

or Trap for the Weak and Unwary?, 21 J.

RD. Tins DOE SR on Givens acer cue 16

Jill Schachner Chanen, Pumping Up Small

Claims, A.B.A. J., Dec. 1998, at 18 ........cccccccccceee. 17

vii

TABLE OF AUTHORITIES -- Continued

Page

David Charny, Nonlegal Sanctions in

Commercial Relationships, 104 Harv. L.

sig Nea capes Eo eee Gs 24

R.H. Coase, The Problem of Social Cost, 3 J. L.

teleptecoaiy Pakage ai, 22

Code of Judicial Conduct, Canon 3B... 18

Robert Cooter & Thomas Ulen, Law and

Economics 213 (3d ed. PE hii cecan te ee 24

Federal Deposit Insurance Corporation, /998

Annual Report (Aug. Sac: - SAARI tei 23

Kiplinger’s Pers. Fin. Mag., May 1, 1999, at

see Se A FN 24

Robert A. Gorman, The Gilmer Decision and

the Private Arbitration of Public Law

Disputes, 1995 U. Ill. L. Rev. 635... 16

Dilemmas: Pursuing Public Goals jor

Private Gain, RAND Institute for Civil

Justice, Executive Summary (1999),

available at <http://www.rand.org/

publications/MR/MR969. |. ee Me AEE ET 17

Berthold H. Hoeniger, Commercial Arbitration

Handbook (1st ed. 1990, rev. 1-199}) ............. 16, 18

Analysis, 8 Sup. Ct. Econ. Rev.

(forthcoming July POPE ska idibinn cts ewes 20, 21, 22, 25

Ron Leuty, Providian CEO Fighis To Regain

Respect, S.F. Bus. Times, Mar. 24, 2000,

WE setctinsstaoitnsinantisis sdaliasiie, Aad dbase ee dock 25

Lewis L. Maltby, Private Justice: Employment

Arbitration and Civil Rights, 30 Colum.

Hum. Rts. L. Rev. 29 (1998) 16, 17, 19

viii

TABLE OF AUTHORITIES -- Continued

Page

National Center for State Courts’ 1999 National

Survey: How the Public Views the State

RP FI iekisia So iecanstcenctisavsssnntcens 17

The New Face of Banking, Consumer Reports,

BE MEE eninieoncacalamontmnucceua 24

Rochelle Olson, U.S. Bancorp Settles Privacy

Suit, Seattle Times, July 1, 1999, at C2 oo... 23

Jessica Pearson, An Evaluation of Alternatives

to Court Adjudication in Consumer Dispute

Resolution, ABA Special Comm. on Dispute

PO, ee CPN, UII oases ceecssnculnciesachenunacderseccacexs 19

Richard A. Posner, An Economic Approach to

the Law of Evidence, 51 Stan. L. Rev. 1477

SIE connaissances aegis necketaueaiseue 10

Richard A. Posner, Economic Analysis of Law 8

fh Ra he Mane ey NAY ier Riek ebaB hes 21

Restatement (Second) of Contracts (1979) ......00..00.00. 26

Edmund Sanders, Credit Card Choices Abound;

Industry Consolidation Is Giving Customers

More Options, Fla. Times Union, May 31,

RO MI sipscateicbasttd acess as ee cases 24

Kevin W. Saunders, The Mythic Difficulty in

Proving a Negative, 15 Seton Hall L. Rev.

PT sini sectenstcni redeem idaanaciiaic odes 10

Alan Schwartz and Louis L. Wilde, Intervening

in Markets on the Basis of Imperfect

Information: A Legal and Economic

Analysis, 127 U. Penn. L. Rev. 630 (1979) ............ 25

Steven Shavell, Damage Measures for Breach

of Contract, 11 Bell J. Econ. 466 (1980) ............... 27

ix

TABLE OF AUTHORITIES -- Continued

Gary Tidwell et al., Party Evaluation of

Arbitrators: An Analysis of Data Collected

from NASD Regulation Arbitrations (Aug. 5,

1999) (presented to the National Meeting of

the Academy of Legal Studies in Business) ...........

Amber Veverka, Bank Reputations Suffer from

Poor Service; Curbing Complaints,

Breakdowns Now a Ti op Priority, Kan. City

Star, Dec. 13, sini ogee PE

OTHER AUTHORITIES

Administrative Office of the United States

Courts, News Release, Dec. 9, 1998,

available at <http://www.us.courts.gov/

CTE POO IE io cccoseceveeoescc.....

American Arbitration Association, Rules/

Procedures, Arbitration Rules for the

Resolution of Consumer-Related Disputes,

available at <http://www.adr.org> ...... 11, 16, 18,

JAMS Minimum Standards of Procedural

Fairness Policy on Financial Services

Arbitrations, Standard 6, available at

<http://www jamsadr.com/arbitrationrules/in

i ae

JAMS/Endispute Financial Services Arbitration

Rules and Procedures... 11, 16, 18,

National Arbitration F orum, Arbitration Bill of

Rights (1999), available at <http://www.

24

19

16

19

ON i 18, 19

x

TABLE OF AUTHORITIES -- Continued

Page

National Arbitration Forum Code of Procedure,

available at <http://www.arb-forum.com

Mibrary/code.html> ...00........0.00...... 11, 15, 16, 18, 19

IN THE

— Supreme Court of the United States

No. 99-1235

GREEN TREE FINANCIAL CORP.—ALABAMA,

AND GREEN TREE FINANCIAL CORPORATION,

Petitioners,

V.

LARKETTA RANDOLPH,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Eleventh Circuit

BRIEF OF AMERICAN BANKERS ASSOCIATION,

AMERICAN FINANCIAL SERVICES ASSOCIATION,

AND CONSUMER BANKERS ASSOCIATION AS

AMICI CURIAE IN SUPPORT OF PETITIONERS

This amici curiae brief is submitted in support of the

Petitioners, Green Tree Financial Corp.—Alabama and

Green Tree Financial Corporation. By letters filed with the

Clerk of the Court, Petitioners and Respondent have

consented to the filing of this brief !

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

prepared in its entirety by amici curiae and their counsel. No monetary

contribution toward the preparation or submission of this brief was made

by any person other than amici curiae, their members, or their counsel.

a

ca)

2

STATEMENT OF INTEREST OF AMICI CURIAE

The American Bankers Association (“ABA”) is the

principal national trade association of the banking industry in

the United States. It has members located in each of the fifty

States and the District of Columbia and includes banks of all

types and sizes -- money center banks, regional banks and

community banks. ABA members hold approximately 90

percent of the domestic assets of the United States banks.

The ABA frequently appears in litigation as an amicus curiae

where the issues raised are of widespread importance and

concern to banks or consumers of banking services. Some

ABA members include arbitration agreements in theit

consumer loan documents and deposit contracts.

The American Financial Services Association (“AFSA”)

was organized in 1916 and represents more than 300

companies operating more than 10,000 offices engaged in the

extension of consumer credit throughout the United States.

These companies range from independently owned consumer

finance offices to the nation’s largest financial services, retail

and automobile companies. AFSA’s membership includes

national and state banks that operate multi-state consumer

credit programs. Some AFSA members include arbitratio

agreements in their consumer loan documents. ‘

The Consumer Bankers Association (“CBA”) was

founded in 1919 to provide a progressive voice for the retail

banking industry. CBA members hold more than 900 bank

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

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

and education finance, bank sales of investment products,

small business services and community development. Some

CBA members include arbitration agreements in their

consumer loan documents and deposit contracts.

2

QUESTIONS PRESENTED

This brief addresses question two in the petition for a

writ of certiorari.

SUMMARY OF ARGUMENT

Members of the amici organizations rely upon arbitration

to resolve disputes with their Customers in a fair,

inexpensive, and efficient manner. These banks and other

financial institutions therefore rely on the enforceability of

arbitration agreements in this Nation’s courts, in keeping

with the strong federal policy in favor of arbitration

embodied in the Federal Arbitration Act (“FAA”), 9 U.S.C.

§§ 1-16,

This Court has repeatedly held that the FAA establishes

a federal policy in favor of arbitration, and that therefore a

party seeking to invalidate an arbitration agreement has the

burden of establishing that the agreement should not be

enforced. The Eleventh Circuit, however, has ruled that an

arbitration agreement is unenforceable unless there is a

specific demonstration of the affordability of arbitration.

This decision undermines the policy in favor of arbitration,

and creates an inappropriate burden upon a party seeking to

enforce an arbitration agreement.

Placing the burden on the party opposing arbitration is

logical and workable. It recognizes that an arbitration

agreement is a contract or a part of a contract, and that a

party seeking to invalidate a contract bears the burden of

establishing that a contract is invalid. This rule conserves

judicial and litigant resources: it is much more efficient to

require that the objecting party identify the flaws in the

agreement, rather than requiring that another party prove the

agreement is flawless.

Here, the proper application of the burden would have

delayed or avoided the need for judicial involvement.

Instead of entertaining conjecture, the Eleventh Circuit

4

should have required that the plaintiff find out the exact fees

it would be charged to proceed with arbitration, demonstrate

why the fee-shifting provisions of the Truth-in-Lending Act

(“TILA”), 15 U.S.C. §§ 1601 ef seg., and Equal Credit

Opportunity Act (“ECOA”), 15 U.S.C. §§ 1091-1691f, did

not provide adequate protection, and establish that the costs

associated with arbitration rendered the agreement to

arbitrate unenforceable.

The presumption in favor of arbitration is based on

sound principle and is fair to consumers. Congress and

empirical studies have found that arbitration is an

inexpensive, efficient, and fair means of resolving disputes.

Economic theory also supports the presumption in favor of

arbitration because enforcing arbitration agreements allows

contracting parties and society to capture the benefits and

efficiencies that those agreements allow.

Finally, the Court of Appeals erred because, under the

FAA and contract law, any doubts regarding the validity of

terms of an arbitration agreement should have been resolved

by interpreting the agreement to uphold its validity.

For all of these reasons, the Court of Appeals’ judgment

should be reversed.

ARGUMENT

I. THE ELEVENTH CIRCUIT’S INVALIDATION OF

THE PARTIES’ ARBITRATION AGREEMENT

WAS INCONSISTENT WITH THE FEDERAL

ARBITRATION ACT.

Congress adopted the FAA to ensure that written

agreements to arbitrate are “valid, irrevocable, and

enforceable” in contracts involving interstate commerce. 9

U.S.C. §2. The FAA reflects “a liberal federal policy

favoring arbitration agreements.” Moses H. Cone Mem’l

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).

“[T]he basic purpose of the [FAA] is to overcome courts’

“9 AO

5

refusals to enforce agreements to arbitrate.” Allied-Bruce

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

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

500 U.S. 20, 24 (1991),

In keeping with the FAA, this Court has emphatically

rejected “the old judicial hostility to arbitration.” Rodriguez

de Quijas v. Shearson/American Express, Inc., 490 U.S. 477,

480-81 (1989) (internal quotations and citations omitted).

“[G]eneralized attacks on arbitration,” Gilmer, 500 U.S. at

30, and the “suspicion of arbitration as a method of

weakening the protections afforded in the substantive law .. .

[have] fallen far out of step with our current strong

endorsement of the federal statutes favoring this method of

resolving disputes,” Rodriquez de Quijas, 490 US. at 481

(citation omitted). Instead, “as a matter of federal law, any

doubts concerning the scope of arbitrable issues should be

resolved in favor of arbitration, whether the problem at hand

is the construction of the contract language itself or an

allegation of waiver, delay, or a like defense to arbitrability.”

Moses H. Cone, 460 US. at 24-25 (citations omitted).

The FAA places the burden on the party seeking to

invalidate an arbitration agreement. “The Arbitration Act,

Standing alone . . . mandates enforcement of agreements to

arbitrate statutory claims.” Shearson/American Express v.

McMahon, 482 U.S. 220, 226 (1987). A party seeking to

avoid that mandate must prove that there are adequate

grounds for doing so. For example, “[t]he burden is on the

party opposing arbitration . . . to show that Congress intended

to preclude a waiver of judicial remedies for the statutory

rights at issue.” Jd. at 227 (citation omitted). Similarly, the

burden is on parties seeking to invalidate their arbitration

Clauses on the grounds that arbitrators are biased. See

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 U.S. 614, 634 (1985) (“We decline to indulge the

presumption” that a forum will not find competent and

unbiased arbitrators); see also Gilmer, 500 U.S. at 30 (same).

6

The same burden applies to parties that claim that arbitrators

might fail to follow the law. See Vimar Seguros y

Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 539

(1995); McMahon, 482 U.S. at 232. Following this

reasoning, Courts of Appeals have placed the burden on

parties who allege that the fees and costs for arbitration are

so high that they prevent plaintiffs from vindicating their

statutory rights through arbitration. See Dobbins v. Hawk’s

Enters., 198 F.3d 715, 717 (8th Cir. 1999); Rosenberg v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 16

(Ist Cir. 1999).

The plaintiff below sought to invalidate her arbitration

agreement mainly on the ground that the costs of arbitration

would prevent her from vindicating her statutory rights under

the TILA. See Br. for Appellant at 34. However, the

plaintiff did not establish that she was facing excessive fees

or costs that prevented her from arbitrating her dispute.

Indeed, plaintiff could only speculate about whether the fees

and costs would prevent her from vindicating her statutory

rights because she did not even attempt to agree on an

arbitrator with the defendants, as she was required to do by

her contract. See Pet. App. at 57a.? In light of plaintiff's

failure, the Eleventh Circuit’s decision to invalidate the

arbitration agreement was inconsistent with the FAA and this

Court’s decisions.

In place of proof from the plaintiff, the Eleventh Circuit

offered its own “serious concerns with respect to filing fees,

arbitrators’ costs and other arbitration expenses.” Pet. App.

at 17a-18a. The arbitration agreement itself raised no such

concerns -- the relevant provision simply left the issue to be

resolved by the parties at a later date in ac¢ordance with the

law underlying plaintiffs statutory claims, when the parties

jointly agreed on an arbitrator. See Pet. App. at 57a. But the

“Pet. App.” refers to the appendix to the petition for a writ of

certiorari in this case.

7

Eleventh Circuit noted that fees and costs “may curtail or bar

a plaintiff's access to the arbitral forum,” see Pet. App. at 17a

(citing Paladino v. Avnet Computer Techs., Inc., 134 F.3d

1054 (11th Cir. 1998)) (emphasis added), and then declared

that the arbitration agreement would therefore defeat the

remedial purpose of the TILA, see Pet. App. at 18a. This

imposition of judicial distrust of the parties’ contracted-for

arbitration structure constituted an improper shifting of the

burden to the party seeking to enforce the arbitration

agreement.

The Eleventh Circuit’s reasoning was not made more

appropriate by the fact that the parties here entered into their

arbitration agreement before their dispute arose. Such pre-

dispute agreements are commonplace. As a general matter,

arbitration favors all parties who seek a speedy and

inexpensive method to resolve their disputes. It is on that

basis that parties jointly agree to enter into a general pre-

dispute arbitration agreement. After a particular dispute

arises, however, one side or the other may decide it would be

advantageous (e.g., for settlement leverage or other tactical

reasons) to employ judicial procedures, instead of arbitration,

for resolving that particular dispute. But the arbitration

agreement was made a contract, intentionally binding the

parties, and is not just an expression of expectations. And a

party’s inability to foresee whether circumstances would later

make judicial procedures more desirable for a particular

dispute than arbitration are not in principle any different from

(and in the vast majority of cases less consequential than) a

party’s inability to foresee that she might benefit, say, from a

floating interest rate rather than a fixed one. Indeed, the

FAA is explicit that a pre-dispute arbitration agreement is

equally binding as a post-dispute agreement. See 9 USC

§ 2 (“A written provision in any ... contract evidencing a

transaction involving commerce to settle by arbitration a

controversy thereafter arising out of such contract or

transaction ...~ shall be valid, irrevocable, and

enforceable... .” (emphasis added)).

iii isi

8

If the parties in this case had entered into the identical

arbitration agreement post-dispute, it clearly would be fully

enforceable. Plaintiff's arguments about the potential costs

of arbitration constituting a forfeiture of her rights under the

TILA, or any of the other arguments she advanced in the

courts below for avoiding arbitration, would be obviously

unpersuasive grounds for disregarding an arbitration contract

she had just made. Considered as a post-dispute arbitration

agreement, for example, it would surely have been

permissible for her to enter into an agreement to arbitrate that

did not expressly address how costs would be allocated, but

gave her the opportunity to veto an arbitrator whose costs

were unacceptable. And, as noted above, the fact that this

arbitration agreement was entered into pre-dispute does not

justify any different analysis or conclusion under the FAA.

Il. PLACING THE BURDEN ON THE PARTY

SEEKING TO INVALIDATE ITS AGREEMENT

TO ARBITRATE IS LOGICAL, WORKABLE,

AND FAIR.

As noted above, both the FAA and this Court’s

precedents place the burden on the party seeking to invalidate

an arbitration agreement. This placement of the burden is

logical, workable and justified. It is a burden that is

supported by general principles of contract and evidence, and

justified as a matter of judicial procedure and common sense.

In addition, empirical data and economic theory alike support

placing the burden on the party opposing arbitration.

A. Placing the Burden on the Party Opposing

Arbitration Is Logical and Workable.

1. Placing the Burden on the Party Opposing

Arbitration Is Consistent with Standard

Contract Law.

The FAA requires that courts enforce arbitration

agreements “like other contracts.” Volt Info. Sciences, Inc. v.

9

Board of Trustees of Leland Stanford Junior Univ., 489 U.S.

468, 478 (1989): see also Scherk vy. Alberto-Culver Co., 417

U.S. 506, 510-11 (1974) (FAA places arbitration agreements

“upon the same footing as other contracts” (internal

quotations and citations omitted)). Thus, courts must apply

ordinary state contract law to arbitration agreements. See

Perry v. Thomas, 482 US. 483, 492-93 n.9 (1987). Under

ordinary contract law, a party seeking enforcement of a

contract must first demonstrate the existence of a contract.

See, e.g., Sims v. Blanchris, Inc., 648 F. Supp. 480, 484-85

(S.D.N.Y. 1986). After that has been shown, however, “[a]

party asserting the invalidity of a contract has the burden of

proving such invalidity.” Smith y. Odell, 108 So. 400, 401

(Ala. Ct. App. 1926); see also Walsh v. Schlecht, 429 U.S.

401, 408 (1977) (“{A] general rule of construction presumes

the legality and enforceability of Contracts.” (citation

omitted)). For example, a party that wants a contract

declared unconscionable has the burden of establishing

unconscionability. See Ex parte Napier, 723 So. 2d 49, 53

(Ala. 1998). Similarly, it is appropriate to place the burden

of establishing invalidity on a party seeking to avoid an

arbitration agreement.

2. Placing the Burden on the Party Opposing

Arbitration Conserves Judicial and Litigant

Resources.

Sound reasons underlie the rule that the burden is on the

party seeking to avoid her arbitration agreement to establish

that it is invalid, rather than placing a burden on the party

seeking to enforce the agreement to establish that there are no

grounds for challenge. It would be extremely burdensome

and wasteful -- and contrary to the Congressional purpose of

establishing arbitration as an expeditious alternative to

litigation -- to require that the Party seeking to enforce the

arbitration agreement develop and proffer evidence and legal

grounds in support of the Propriety of every aspect (fee

structure, arbitrator selection, location of proceedings, rules

10

of procedure and evidence, etc.) of the agreement. See

Richard A. Posner, An Economic Approach to the Law of

Evidence, 51 Stan. L. Rev. 1477, 1503 (1999) (“[I]t would be

inefficient to require [one party] to anticipate and produce

evidence contravening the indefinite number of defenses that

[the other party] might plead in a given case.”); Kevin W.

Saunders, The Mythic Difficulty in Proving a Negative, 15

Seton Hall L. Rev. 276 (1985) (explaining that courts should

place burden of production on the party that can resolve the

issue by presenting less evidence).

Furthermore, the party objecting to enforcement of the

arbitration agreement should bear the burden because that

party often will possess relevant information that is uniquely

within its control. In the arbitration context, a party claiming

that arbitration is improper will typically be in the best

position to explain what prevents her from obtaining relief.

For example, in cases where parties have asserted that

arbitration is improper because they cannot afford it, courts

have required the parties to document the fees and their

financial condition. See, e.g., Dobbins, 198 F.3d at 717;

Rollins, Inc. v. Foster, 991 F. Supp. 1426, 1438-39 (M.D.

Ala. 1998). When matters are peculiarly within one party’s

knowledge, it is routine to place a presumption against that

party on the relevant issue until it offers evidence to the

contrary. See Campbell v. United States, 365 U.S. 85, 96

(1961); Dorsey v. Dorsey, 66 So. 2d 135, 139 (Ala. 1953);

Posner, supra, at 1502-03.

This allocation of burden is especially apt here. The

arbitration agreement that plaintiff and Green Tree adopted

did not expressly address the costs associated with the

arotre.ion proceeding, but it did give plaintiff the

Opporwnity to veto an arbitrator who was unacceptable to

her. See Pet. App. at 57a. There is no reason why plaintiff,

in light of her burden to establish the invalidity of the

arbitration agreement, should not have been required to

establish that she was unable to satisfy her concerns about

1]

costs by rejecting any arbitrator whose costs were

unacceptable.

3. Arbitration Fees and Costs Would in Any

Event Be Awarded to a Prevailing Plaintiff in

this Case, in Accordance with the TILA and

ECOA.

Placing the burden on the party seeking to avoid

arbitration is particularly appropriate here, where plaintiff s

claims are under the TILA and ECOA. Both the TILA and

ECOA explicitly provide that “in the case of any successful

action . . . the costs of the action” shall be awarded to a

prevailing plaintiff 15 U.S.C. § 1640(a)(3) (TILA); id

§ 1691e(d) (ECOA). As the Eleventh Circuit acknowledged,

when there is evidence that “most successful arbitral

claimants were awarded fees and costs,” such fees and costs

cannot serve as grounds for invalidating an arbitration

agreement. Pet. App. at 19a (citing Rosenberg, 170 F.3d at

15-16); see also Wells v. Chevy Chase Bank F.S.B., No. 24-

C-99-000202 (Cir. Ct. for Baltimore City Aug. 16, 1999)

(order compelling arbitration). The arbitration clause in this

case requires that the arbitrator enforce the law, and the

relevant law here includes fee-shifting requirements. See Pet.

App. at 57a.° Therefore, even if the Eleventh Circuit’s

speculation about the potential for high arbitration costs and

fees was appropriate -- which it was not -- the presumption in

— tules of the major arbitration forums also explicitly require that

arbitrators follow the statutory law. See National Arbitration Forum

(“NAF”) Code of Procedure, Rule 20A, available at <http://www.arb-

forum.com/library/code.htmI> [hereinafter NAF Code R.];_ American

Arbitration Association (“AAA”), Rules/Procedures, Arbitration Rules

for the Resolution of Consumer-Related Disputes, Rule 13, available at

<http://www.adr.org> [hereinafter AAA Consumer Disputes R.];

JAMS/Endispute Financial Services (“JAMS/Endispute”) Arbitration

Rules and Procedures, Rule 20(c) [hereinafter JAMS/Endispute Rule].

12

favor of arbitration still applies here because a prevailing

plaintiff will recover any costs and fees through arbitration.“

If an excessive fee actually materialized, and was

improperly imposed on plaintiff, she would have access to

the courts to address that problem. Parties that face such an

obstacle may challenge the agreement on this ground after

they have attempted to bring a claim in arbitration. See, e.g.,

Dobbins, 198 F.3d at 717 (requiring the party opposing

arbitration to attempt to arbitrate the claim and prove that he

or she cannot afford the fees in question);° see also

Rosenberg, 170 F.3d at 15-16 (holding that any objection to

costs of arbitration could be raised with court reviewing

arbitration award); Howard v. Anderson, 36 F. Supp. 2d 183,

186 (S.D.N.Y. 1999) (upholding arbitration agreement

because plaintiff had not demonstrated that excessive fees

had been demanded); Walker v. MDM Servs. Corp., 997 F.

Supp. 822, 826 (W.D. Ky. 1998) (upholding arbitration

agreement because plaintiff never proved she would be

required to pay a fee); Rollins, 991 F. Supp. at 1439

(upholding arbitration agreement because plaintiff “failed to

show she is effectively locked out” of arbitration). At no

time should a court indulge, as the Eleventh Circuit did here,

“an assumption that the proof would support a ‘worst case’

scenario.” Green Tree Fin. Corp. v. Wampler, 749 So. 2d

409, 415 (Ala. 1999) (upholding an arbitration agreement in

the face of challenges based on excessive fees).°

A prevailing plaintiff would also recover “a reasonable attorney’s

fee” pursuant to the TILA and the ECOA. See 15 U.S.C. § 1640(a)(3)

(TILA), id. § 169le(d) (ECOA).

Indeed, the Eighth Circuit Court of Appeals in Dobbins suggested

that if the plaintiff did prove that the arbitration costs in question were so

excessive that they prevented access to arbitration, the district court

should accept the defendant’s offer to pay these costs. See Dobbins, 198

F.3dat717&n4.

See, e.g., Dobbins, 198 F.3d at 717; Rosenberg, 170 F.3d at 16;

Howard, 36 F. Supp. 2d at 186; Walker, 997 F. Supp. at 826; Rollins, 991

13

4. Any Potential Defects in Arbitration

Proceedings Are Subject to Correction

through Judicial Review.

Placing the burden on the party seeking to avoid

arbitration is also appropriate because post-arbitration

judicial review can remedy defects in the arbitration process

when appropriate. The FAA provides for court review of an

arbitration award for manifest disregard of the substantive

law. See 9 U.S.C. § 10(a)(4). This Court has held that “such

review is sufficient to ensure that arbitrators comply with the

requirements of the statute.” McMahon, 482 U.S. at 232; see

also Gilmer, 500 U.S. at 32 n.4 (quoting McMahon, 482 U.S.

at 232). Here, the Eleventh Circuit should have recognized

that if the arbitrators failed to shift fees and costs in keeping

with the TILA and ECOA, plaintiff would have had an

opportunity to seek judicial review of that decision.

Similarly, if an individual arbitrator proves to be biased

or improperly excludes evidence, the Federal Arbitration Act

provides for judicial review. See 9 U.S.C. § 10(a)(2), (3)

(permitting courts to vacate arbitration awards “[w]here there

was evident partiality or corruption in the arbitrators” or

“[w]here the arbitrators . . . refuse[ed] to hear evidence

pertinent and material to the controversy”); see also Gilmer,

500 U.S. at 31 (reviewing the standards for determining

arbitrator bias). As an initial matter, courts must “decline to

indulge the presumption that the parties and arbitral body

conducting a proceeding will be unable or unwilling to retain

competent, conscientious, and impartial arbitrators.”

Mitsubishi, 473 U.S. at 634. But if a party proves that an

arbitrator is partial, the court may appoint a new neutral

arbitrator to hear the dispute. See 9 U.S.C..§ 5 (permitting

courts to appoint a new arbitrator “if for any . . . reason there

F. Supp. at 1438-39. Cf Gilmer, 500 U.S. at 30 (declining to presume

that arbitration forum will not find competent and unbiased arbitrators);

McMahon, 482 U.S. at 232 (declining to presume that arbitrator will not

follow law).

SE ERT EST cen? et ane ee ee

14

Shall be a lapse in the naming of an arbitrator”); see also

Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892, 896 (2d Cir.

1997) (appointing a neutral arbitrator).’

B. Placing the Burden on the Party Opposing

Arbitration Is Justified Because Arbitration

Works Well for Consumers.

Congress has expressly recognized arbitration’s benefits

to individuals, and empirical studies support Congress’s faith

in arbitration. Thus, before closing the door on the

efficiencies and other benefits of arbitration, it is perfectly

appropriate that courts put to the test any party that opposes

enforcement of an arbitration agreement.

1. Congress Has Recognized that Arbitration

Helps Consumers.

“Congress, when enacting [the FAA], had the needs of

consumers . . . in mind,” Allied-Bruce Terminix, 513 US. at

280 (citation omitted), and was guided by the success of

arbitration in the United States. The Senate Judiciary

Committee Report prepared in connection with the FAA

noted that “[t]he desire to avoid the delay and expense of

litigation persists. The desire grows with time and as delays

and expenses increase. The settlement of disputes by

arbitration appeals to . . . business . . . as well as to

individuals.” S. Rep. No. 68-536, at 3 (1924). The Report

went on to document the fact that arbitration took weeks

where litigation took years; that the costs of arbitration were

“trifling” compared to the expense of litigation; and that the

participants in arbitration -- “winners and losers alike” --

were satisfied with the arbitration process. Jd.

Such cases are rare because, as discussed below, arbitration forums

have detailed rules that eliminate the potential for excessive fees or bias.

See infra Part IIB.

15

Congress has consistently reiterated its strong belief in

the benefits of arbitration. In 1982, a House of

Representatives Report stated that “[t]he advantages of

arbitration are many: it is usually cheaper and faster than

litigation; it can have simpler procedural and evidentiary

rules; it normally minimizes hostility and is less disruptive of

Ongoing and future business dealings among the parties;

[and] it is often more flexible in regard to scheduling ... .”

H.R. Rep. No. 97-542, at 13 (1982); see also Allied-Bruce

Terminix, 513 U.S. at 280. As recently as last year, the

federal policy favoring arbitration was reaffirmed by

Congress in the Y2K Act, which “encourage[s] . . . parties

... to resolve disputes [relating to the millennium] ... by

alternative dispute mechanisms in order to avoid costly and

time-consuming litigation.” Y2K Act, Pub. L. No. 106-37,

§ 2(b)(3), 113 Stat. 185, 187 (1999) (codified at 15 U.S.C.

§§ 6601-6617). Congress justified the use of arbitration by

citing the “delays, expense, uncertainties, loss of control,

adverse publicity, and animosities that frequently accompany

litigation,” id. § 2(a)(3)(B)(iv), adding that “small businesses

and individuals . . . already find the legal system inaccessible,

because of its complexity and expense,” id. § 2(a)(5).

Accord id. § 2(a)(3)(B)(iii).

2. Arbitration Is Inexpensive, Fast, and Fair.

Congress’s faith in the benefits of arbitration is well

justified. First of all, arbitration is demonstrably

inexpensive, and therefore “helpful to individuals...

complaining about a product, who need a less expensive

alternative to litigation.” Allied-Bruce Terminix, 513 U.S. at

280 (citation omitted). The three major national arbitration

agencies that hear consumer claims all offer small-dispute fee

structures that compare favorably with the $150 filing fee for

claims in federal court. See 28 U.S.C. § 1914(a). For

example, the maximum filing fee for a consumer filing a

claim valued at under $5000 before the National Arbitration

Forum is $49. See NAF Code, Filing Fees, Fee Schedule.

on a

16

Consumers filing claims of up to $15,000 pay a maximum

filing fee of only $100. See id. The American Arbitration

Association offers a similar fee structure for consumer

claims. See AAA Consumer Disputes R., Administrative

Fees ($125 arbitrator’s fee for consumer disputes under

$10,000). And the rules of JAMS/Endispute require that the

fee structure agreed to by the parties “allocate costs in a way

that does not preclude access by the consumer to the

procedures.” JAMS Minimum Standards of Procedural

Fairness Policy on Financial Services Arbitrations, Standard

6, available at <http://www jamsadr.com/arbitrationrules/

index.htm>. Furthermore, each major national arbitration

forum will waive its fees upon a showing of hardship. See,

e.g., NAF Code R. 45 (permitting the waiver of fees in

hardship cases); JAMS/ Endispute R. 28(c); see also

Dobbins, 198 F.3d at 717 (noting that AAA permits the

waiving of fees in hardship cases and holding that the

plaintiff should first seek the waiver before objecting in court

to arbitration fees).

Arbitration also offers simple and informal procedures

that allow an individual to pursue a claim without having to

pay a lawyer to shepherd it through the complexities of our

court system. See Lewis L. Maltby, Private Justice:

Employment Arbitration and Civil Rights, 30 Colum. Hum.

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

Gilmer Decision and the Private Arbitration of Public Law

Disputes, 1995 U. Ill. L. Rev. 635, 646. Thus, “for smaller,

simpler, more routine cases, it is hard to beat administered

arbitration.” Berthold H. Hoeniger, Commercial Arbitration

Handbook §3.10 (lst ed. 1990, rev. 1-1991). “Many

consumer disputes, which often involve simple factual issues,

can be resolved quickly and relatively cheaply through

arbitration.” Anne Brafford, Arbitration Clauses in

Consumer Contracts of Adhesion: Fair Play or T: rap for the

Weak and Unwary?, 21 J. Corp. L. 331, 333 (1996) (citation

omitted).

17

By contrast, litigation is often prohibitively expensive

and prevents many individuals from obtaining relief. The

ABA Journal reports that most lawyers will not even take

cases worth less than $20,000. See Jill Schachner Chanen,

Pumping Up Small Claims, A.B.A. J., Dec. 1998, at 18.

Thus, it is not surprising that only one in three Americans

agrees that taking a case to court is affordable and “[n]early

nine of ten point to the costs of legal representation as the

main barrier” to the adjudication of claims. Frank A.

Bennack, Jr., A Report on the National Survey (May 14,

1999), available at <http://www.ncsc.dni.us/PTC/results/

report.htm> (referring to National Center for State Courts’

1999 National Survey: How the Public Views the State

Courts (June 28, 1999)).®

Arbitration is also faster than litigation. Although there

are no major studies analyzing arbitration in the consumer

context, the impact of arbitration in other settings

demonstrates the benefits of arbitration for resolving

individuals’ claims. A study that compared employment

claims filed through the AAA with similar claims filed in

federal court found that, on average, arbitration resolved

cases in half the time of litigation. See Maltby, supra, at 55.

The relative speed of arbitration is not surprising. Cases are

delayed in litigation because “the workload of the federal

Judiciary has increased dramatically . . . [a]nd all indications

are that . . . future caseloads will be larger and the demands

on judicial resources even greater in the years to come.”

Administrative Office of the United States Courts, News

= Class actions are not an effective remedy for these high litigation

costs because the strict standards for class certification mean that most

actions still must be pursued on an individual basis, where arbitration can

be most helpful. See Deborah R. Hensler et al., Class Action Dilemmas:

Pursuing Public Goals for Private Gain, RAND Institute for Civil

Justice, Executive Summary 5 (1999), available at <http://www.rand.org/

publications/MR/MR969. | pdf> (finding that a large number “of cases in

which class action status is sought are dropped when the plaintiff attorney

concludes that the case cannot be certified or settled for money”).

18

Release, Dec. 9, 1998, available at <http://www.uscourts.gov

/Press_Releases/ Syr.htm> (internal quotations omitted). As

one commentator has noted, “[o]Jur court systems, inundated

by narcotics and other criminal cases and required to dispose

of them quickly under federal and state speedy trial acts,

must increasingly relegate ordinary civil litigation to second-

class status.” Hoeniger, supra, § 1.02 (citations omitted).

Importantly, the cost and time efficiencies of arbitration

do not sacrifice fairness. A review of the nationally

recognized arbitration forums demonstrates that each has

explicit requirements designed to ensure that all appointed

arbitrators be unbiased. See, e.g., AAA Consumer Disputes

R. 4; JAMS/Endispute R. 12; NAF Code R. 20. Arbitrators

are generally former judges, practicing attorneys, or law

professors, and must have many years of relevant experience.

See, e.g., NAF, Arbitration Bill of Rights, Commentaries to

Principles 3-4 (1999), available at <http://www.arb-

forum.com>; see also AAA Consumer Due Process Protocol,

Principle 4, available at <http:// www.adr.org/education/

education/consumer_protocol.html>. These facts confirm

this Court’s observation that courts must “decline to indulge

the presumption that the parties and arbitral body conducting

a proceeding will be unable or unwilling to retain competent,

conscientious, and impartial arbitrators.” Mitsubishi, 473

U.S. at 634.’

9 Arbitration forums also have additional protections against

arbitrator bias. First, AAA and NAF require their arbitrators to disclose

any circumstances that might preclude them from being impartial. See

AAA Consumer Disputes R. 4(b); NAF Code R. 23. Second, all three

major arbitration forums allow parties to challenge arbitrators for cause.

See AAA Consumer Disputes R. 4(b); JAMS/Endispute R. 12(c); NAF

Code R. 23(C). Indeed, the NAF also permits each party to make one

peremptory challenge of arbitrators. NAF Code R. 21. Finally,

arbitration forum procedures regulating recusal of an arbitrator are very

similar to the judicial canon of ethics and federal statutes regulating the

conduct of federal judges. Compare NAF Code R. 21, 23 with 28 U.S.C.

§ 455 and Canon 3E, Code of Judicial Conduct.

19

In addition to these protections against arbitrator bias,

modern arbitration provides other procedures to ensure that

the rights and interests of consumers are protected. The

arbitration rules, for example, generally provide for

discovery, including document production requests,

interrogatories, and depositions. See, e.g., AAA Consumer

Disputes R. 8; JAMS/Endispute R. 13; NAF Code R. 29.

Arbitrators may subpoena documents, and in some cases

witnesses, for hearings, see AAA Consumer Disputes R.

8(a); JAMS/Endispute R. 16; NAF Code R. 30, and prior to a

hearing, the parties are required to exchange information

regarding anticipated witnesses and documents that they

intend to use at trial, see JAMS/Endispute R. 13; NAF Code

R. 31.

3. Consumers Are Generally More Successful in

Arbitration Than through Traditional

Litigation in Vindicating Their Statutory

Rights.

An analysis of arbitration results demonstrates that

consumers are more successful in vindicating their statutory

rights through arbitration than through traditional litigation.

Indeed, one study that compared the results in arbitration and

litigation for similar cases found that individuals are four

times more likely to prevail in arbitration. See Maltby,

supra, at 46-48 (comparing Lisa Bingham, Employment

Arbitration: The Repeat Player Effect, 1 Employee Rts. &

Employment Pol’y J. 189 (1997), with data from federal

district courts); see also Jessica Pearson, An Evaluation of

Alternatives to Court Adjudication in Consumer Dispute

Resolution, ABA Special Comm. on Dispute Res. 332 (ABA

1983) (citing study finding that civil arbitration awards were

virtually identical to verdicts rendered by judges and juries in

similar cases). Similarly, NAF materials indicate that

individuals win 70 percent of the claims brought against

corporate entities before the NAF. See Arbitration Bill of

Rights, supra, Principle 1 Commentary. And even when

20

individuals lose in arbitration, they typically feel that they

nonetheless have had a fair hearing. One recent study of

securities arbitration indicated that well over 90 percent of

the participants in arbitration believed their cases were

handled fairly. See Gary Tidwell et al., Party Evaluation of

Arbitrators: An Analysis of Data Collected from NASD

Regulation Arbitrations at 25 (Aug. 5, 1999) (presented to

the National Meeting of the Academy of Legal Studies in

Business).

Thus, arbitration should be seen as a catalyst -- not an

obstacle -- for TILA and ECOA enforcement. Because

arbitration has proven itself to be inexpensive, quick, and fair

for individuals, it furthers goals of deterrence and

compensation found in the TILA and ECOA by encouraging

individuals to pursue claims under those statutes that they

otherwise might have forfeited because of the expense of

traditional litigation. By reducing the hurdle of litigation

costs, arbitration “lead[s] to an increase in the number of

victims who will litigate their claims, which in turn enhances

[a] potential defendant’s incentive to take care.” See Keith

N. Hylton, Agreements to Waive or to Arbitrate Legal

Claims: An Economic Analysis, 8 Sup. Ct. Econ. Rev.

(forthcoming July 2000).'°

C. Placing the Burden on the Party Opposing

Arbitration Is Supported by Economic Theory.

Economic theory also counsels that courts should

enforce arbitration agreements. By enacting the TILA and

ECOA, Congress enabled consumers to enforce their

substantive rights under the statutes by litigation. The threat

of litigation helps deter lenders from violating the substantive

rights of borrowers. But the threat and reality of litigation

10 "A draft version of this article was made available to amici by the

editor of the Supreme Court Economic Review, Professor Larry Ribstein

of the George Mason University School of Law. Precise page citations

therefore were unavailable when this brief was filed.

21

also involve dispute resolution costs that are visited on

borrowers and lenders alike, and credit costs reflect the costs

of lawyers and litigation. Neither the TILA nor ECOA states

or suggests that traditional litigation maximizes the

difference between the benefits and costs of dispute

resolution.

. It is a basic principle of economic theory -- as well as a

bedrock of the legal theory of contract -- that individuals and

society may be made better off through contractual

modifications of their legal rights. Arbitration agreements

are such a contract. As demonstrated above, arbitration

lowers the cost of resolving disputes, and may increase

deterrence by removing cost-related barriers to initiating a

dispute under the TILA or ECOA. Accordingly, parties may

decide to agree to arbitration because “the difference between

the deterrence benefit and the expected total litigation costs is

greater than in the default court.” Hylton, supra. Consumers

will capture much of this gain in joint wealth because

competition tends to align the price of a service with the cost

of providing it. See Richard A. Posner, Economic Analysis of

Law 8 (Sth ed. 1998). This bargain benefits the larger society

as well, since arbitration also saves government resources

through fewer traditional court proceedings. See Hylton,

supra. Agreements regarding other alternate dispute

resolution mechanisms, such as mediation, have the same

salutary effect on the parties and society, which is precisely

why many courts have adopted mediation programs as a

preferred alternative for dispute resolution.

The ability of parties to make agreements that increase

their joint wealth is enhanced and safeguarded by placing the

burden on parties’ opposing enforcement of arbitration

agreements. The presumptions favoring arbitration are

consistent with the famous Coase Theorem, which holds that

parties will contract around inefficient allocations of property

rights so long as the transaction costs of doing so are low.

See R.H. Coase, The Problem of Social Cost, 3 J. L. & Econ.

ie

22

1 (1960). In the arbitration context, the Coase Theorem

predicts that parties will contract around a system of

litigation rights if litigation is inefficient and the transaction

costs of agreeing to a more efficient alternative system of

dispute resolution are low. See Hylton, supra. The

transaction costs of agreeing to arbitration will remain low

only so long as the courts continue to place the burden on

parties that seek to invalidate arbitration agreements.

Otherwise, the costs of litigating over whether the arbitration

agreement is valid will erode or cancel altogether the benefits

of such an agreement.

The benefits of arbitration agreements in the financial

services context are substantial in part because eliminating |

traditional litigation does not significantly reduce the

deterrent value of the relevant substantive law. In particular,

the absence of class actions does not weaken the deterrence

effect of the federal statutes involved here because class

action litigation already plays a relatively small role in

policing the practices of financial institutions. See generally

Brief for Amicus Chamber of Commerce of the United States

of America, Part IV. Congress has assigned the primary role

in the enforcement of consumer finance laws to the federal

banking agencies and the Federal Trade Commission

(“FTC”). See, e.g., 15 U.S.C. § 1607(a), (c) (TILA); id.

§ 1691c(a), (c) (ECOA). Financial institutions are regularly

examined for compliance with numerous consumer laws and

regulations by federal agencies, including the Office of the

Comptroller of the Currency, the Board of Governors of the

Federal Reserve System, the Office of Thrift Supervision,

and the Federal Deposit Insurance Corporation (“FDIC”).

See 12 U.S.C. § 481; see also Board of Governors of the

Federal Reserve System, 85th Annual Report 220-24 (1998),

available at <http://www.federalreserve.gov/boarddocs/

RptCongress/annual98/>. In addition, each of the federal

agencies has established consumer complaint divisions that

investigate consumer complaints. Violations of law

identified in this way can lead to the initiation of an

Se

23

enforcement action against the institution to compel

compliance and to provide restitution to consumers where

appropriate. In 1998, FDIC examination, supervision, and

enforcement actions alone resulted in the reimbursement of

over $1 million to 31,222 consumers for violations of the

TILA by 161 FDIC-supervised banks.’ The FTC also

engages in enforcement activities that | protect consumer

rights in the area of consumer credit. Alongside these

federal agencies, state attorney generals and state agencies

also engage in the enforcement of consumer rights.’

Consumers can rely on these other forces -- together with the

threat of arbitration -- to maintain deterrence against an

institution’s misbehavior.

Furthermore, economic forces in the financial services

industry maintain deterrence against firm misbehavior. See

'l See Federal Deposit Insurance Corporation, 1998 Annual Report 34

(Aug. 1999).

'2 Federal Trade Commission, Letter to Dolores S. Smith, Director of

Division of Consumer and Community Affairs, Board of Governors of

the Federal Reserve System (Jan. 6, 2000). The FTC engages in

enforcement activities under the Truth in Lending, Consumer Leasing,

Equal Credit Opportunity, Fair Debt Collection Practices, and Electronic

Fund Transfers Acts. For example, in Fleet Finance, Inc. and Home

Equity U.S.A., Inc. (“Fleet Finance”), the FTC charged Fleet Finance in

its complaint with violations of the TILA and Regulation Z, and

deceptive practices in violation of the FTC Act. The final decision and

order require Fleet Finance and its successor companies to pay $1.3

million for consumer redress and administrative costs. See Federal Trade

Commission, Fleet Finance and Home Equity U.S.A. Agree to Pay $1.3

Million Settling Charges of Deceptive Disclosures and Truth in Lending

Violations in Fleet Finance Loans, News Release, July 26, 1999,

available at <http://www.ftc.gov/opa/1999/9907/fleet.htm>.

For example, the Minnesota Attorney General recently filed a

complaint against U.S. Bancorp, accusing the bank of violating the Fair

Credit Reporting Act, consumer fraud, deceptive trade practices, and false

advertising. U.S. Bancorp agreed to settle the lawsuit with payment of a

$500,000 fine to the state, refunds to dissatisfied customers, and $2.5

million to charitable organizations. See Rochelle Olson, U.S. Bancorp

Settles Privacy Suit, Seattle Times, July 1, 1999, at C2.

GO ge

24

generally David Charny, Nonlegal Sanctions in Commercial

Relationships, 104 Harv. L. Rev. 373 (1990). For example,

contracts between credit card issuers and their customers are

what economists refer to as “relational” contracts, in which

the ongoing, repeated economic interactions are disciplined

significantly by nonlegal forces, such as the threat that the

consumer will cancel her credit card. See Robert Cooter &

Thomas Ulen, Law and Economics 213 (3d ed. 2000) (“The

parties to long-run relations often rely upon informal devices,

rather than enforceable rules, to secure cooperation.”). The

threat is quite real, because switching credit cards is easy.

See Edmund Sanders, Credit Card Choices Abound; Industry

Consolidation Is Giving Customers More Options, Fla.

Times Union, May 31, 1998, at G6. Indeed, a small change

in any element of a card agreement can cause thousands of |

customers to cancel their cards and send an issuer’s stock

tumbling. See, e.g., Amber Veverka, Bank Reputations

Suffer from Poor Service; Curbing Complaints, Breakdowns

Now a Top Priority, Kan. City Star, Dec. 13, 1999, at B6.

More generally, bank behavior is disciplined by the fierce

competition for customers both among banks and between

banks and other financial institutions. See, e.g., Suntrust

Banks, Inc., 84 Fed. Res. Bull. 1115, 1120 (1998) (noting

that credit card and mortgage origination markets are

unconcentrated and contain numerous competitors).

Reputational constraints also deter lender misbehavior.

Cf Charny, supra, at 412-20. Information about the

practices of financial institutions is made readily available by

regulatory agencies and consumer watchdog organizations.

The Federal Reserve, for example, publishes surveys of

credit card rates and explanations of credit card terms, see

<http://www.bog.frb.fed.us/pubs/shop/>, and magazines such

as Consumer Reports and other private organizations provide

information about banks’ reputations and the lending terms

they offer, see, e.g., The New Face of Banking, Consumer

Reports, June 2000, at 19; Joan Goldwasser, Not-So-

Fantastic Plastic, Kiplinger’s Pers. Fin. Mag., May 1, 1999,

25

at 44 (recommending credit cards based on, inter alia,

interest rates, late fees, levels of customer complaints, and

other terms); Bankrate.com, available at <http://www.

bankrate.com>; HSH Assocs., Financial Publishers, available

at <http://www.hsh.com>. In light of this scrutiny, no bank

can afford to gain a reputation for exploiting customers. As

the chief executive officer of one credit-card company faced

with customer complaints recently lamented, “[i]t takes a

short time to create a bad image . . . and a long time to

recover.” Ron Leuty, Providian CEO Fights To Regain

Respect, $.F. Bus. Times, Mar. 24, 2000, at 1 (internal

quotations and citation omitted).

Finally, market forces also benefit consumers who are

entirely uninformed. The market for financial services

involves mass, standardized transactions. In such a market, a

firm cannot offer different terms to the informed consumer

and the uninformed consumer. Therefore, the uninformed

consumer benefits from terms that are included in

transactions in order to attract the business of informed

consumers. See Alan Schwartz & Louis L. Wilde,

Intervening in Markets on the Basis of Imperfect

Information: A Legal and Economic Analysis, 127 U. Penn.

L. Rev. 630, 638, 663-65 (1979). This process helps ensure

that arbitration agreements are fair -- and so provides another

basis for the presumption in favor of enforcing arbitration

agreements.

Thus, Congress’s determination that the burden should

remain on the party who objects to the enforcement of these

agreements is undergirded by both data and _ theory

demonstrating that consumers and society benefit from the

enforcement of arbitration agreements. As one economist

summarizes, the benefit of arbitration to the contracting

parties, together with “the added benefit that accrues when

courts are relieved of the burden of managing socially

undesirable litigation, suggests there should be a presumption

in favor of enforcement.” Hylton, supra.

26

I. CONTRACT PRINCIPLES REQUIRE THAT

DOUBTS SHOULD BE RESOLVED’ BY

INTERPRETING AN ARBITRATION

AGREEMENT TO UPHOLD ITS VALIDITY.

As discussed above, this Court’s precedent interpreting

the FAA provides two basic rules for interpreting arbitration

agreements. First, courts must give “due regard . . . to the

federal policy favoring arbitration.” Volt, 489 U.S. at 475-

76. Second, courts must in all other respects interpret

arbitration agreements “like other contracts” by applying

ordinary state contract law. /d. at 478. In this case, both the

federal policy favoring arbitration and standard principles of

contract law happily lead to the same conclusion -- that

ambiguities and gaps in arbitration agreements do not

preclude arbitration but rather should be interpreted to uphold

the agreement’s validity.

It is well-established that ambiguous contractual

provisions should be construed to uphold their validity.

“Under th[e] established rules of contract construction, where

there is a choice between a valid construction and an invalid

construction[,] the court has a duty to accept the construction

that will uphold, rather than destroy, the contract and that

will give effect and meaning to all of its terms.” Homes of

Legend, Inc. v. McCollough, No. 1980921, --- So. 2d ---,

2000 WL 92255, at *4 (Ala. Jan. 28, 2000) (citations

omitted). Accord Walsh v. Schlecht,-429 U.S. 401, 408

(1977); Restatement (Second) of Contracts § 203(a) (1979)

(“[A]n interpretation which gives a reasonable, lawful, and

effective meaning to all of the terms is preferred to an

interpretation which leaves a part unreasonable, unlawful, or

of no effect.”).

The foregoing principle of contract construction operates

in concert with a second principle -- that parties entering into

a contract are presumed to accept all the rights and

~ obligations imposed on their relationship by state or federal

law. “[E]very contract is made with reference to existing

27

law[,] and every law affecting the contract is read into and

becomes a part of the contract when made.” United Cos.

Lending Corp. v. Autrey, 723 So. 2d 617, 621-22 (Ala. 1998)

(quoting Barber Pure Milk Co. v. Alabama State Milk

Control Bd., 156 So. 2d 351, 355 (Ala. 1963), quoting in turn

Bush v. Greer, 177 So. 341, 341 (Ala. 1937)) (internal

quotations omitted). Accord General Motors Corp. v.

Romein, 503 U.S. 181, 188-89 (1992). Courts therefore

interpret contracts containing gaps and ambiguities to

encompass any relevant and necessary statutory or common

law. See, e.g., Board of School Comm'rs of Mobile County v.

Hahn, 22 So. 2d 91, 94 (Ala. 1945) (interpreting teacher’s

contract to include statutory tenure provision). Any gaps in

the arbitration agreement here may be filled with terms from

the FAA, TILA or ECOA.

These principles make sense. Courts, after all, cannot

“presume that parties to a contract intended to violate the

law.” Wolffe v. Perryman, 9 So. 148, 148 (Ala. 1891).

Furthermore, contracting parties should not be forced “to

specify every right and duty that they want[] to make legally

enforceable.” Selcke v. New England Ins. Co., 995 F.2d 688,

690 (7th Cir. 1993). Indeed, it is often the case that the

transaction costs of making terms of a contract explicit are

higher than the cost of the uncertainty from leaving the terms

vague. See Steven Shavell, Damage Measures for Breach of

Contract, 11 Bell J. Econ. 466, 468 (1980) (“[B]ecause of the

costs involved in enumerating and bargaining over

contractual obligations under the full range of relevant

contingencies, it is normally impractical to make contracts

which approach completeness.”). Parties to an arbitration

agreement, for example, may not spell out every last detail

because such terms would make the agreement very long,

and having more general arbitration clauses will make

enforcement easier as the substantive law may change.

Thus, ordinary principles of contract law and the FAA’s

policy favoring arbitration require that any doubts about the

28

terms of an arbitration agreement be resolved by interpreting

the agreement to incorporate whatever terms are necessary to

permit arbitration: Parties who have agreed to arbitrate are

presumed to have accepted the legal conditions that attach to

arbitration, and courts should read those conditions into the

contract so that the underlying agreement to arbitrate is

effectuated, not nullified. In this case, where the agreement

authorizes the arbitrator to exercise all authority under the

relevant law but is otherwise largely silent about the specifics

of arbitration, the Eleventh Circuit should have interpreted

the arbitration clause in a way that allowed arbitration to go

forward.

The Eleventh Circuit should have followed the example

of the D.C. Circuit in Cole v. Burns International Security

Services, 105 F.3d 1465 (D.C. Cir. 1997), where the court

upheld an arbitration agreement even though it lacked a term

the court found was statutorily required. In Cole, the D.C.

Circuit held that employees cannot be required, as a

condition of employment, to pay arbitrator fees incurred

during the resolution of Title VII employment discrimination

claims. The arbitration agreement in Cole was silent on the

question of who would pay the arbitrator’s fees. Jd. at 1485.

However, the D.C. Circuit did not therefore find (as the

Eleventh Circuit did below) that the arbitration agreement

was unenforceable because it “fail[ed] to provide the

minimum guarantees required to ensure [plaintiff's] ability to

vindicate her statutory rights,” Pet. App. at 18a. Instead, the

D.C. Circuit carefully considered the FAA’s pro-arbitration

policy, as well as District of Columbia contract law, and then

interpreted the agreement’s silence in a manner that

preserved the agreement to arbitrate -- by construing the

agreement to require the employer to pay all of the

arbitrator’s fees. Interpreted in that manner, the arbitration

agreement was consistent with Title VII and “valid and

enforceable.” Cole, 105 F.3d at 1485-86.

29

The Cole approach should be applied whenever an

arbitration agreement is silent or ambiguous. In this case, the

Eleventh Circuit was presented with an arbitration agreement

that did not state what the arbitration fees would be. Instead

of conjuring up a parade of horribles and assuming the worst,

the Court of Appeals should have interpreted the contract to

provide for a reasonable fee arrangement consistent with the

TILA and ECOA. Given such a plain choice between a

construction that upholds an arbitration agreement and a

construction that negates it, the Eleventh Circuit erred by

choosing to invalidate the agreement.

CONCLUSION

For the foregoing reasons, the decision of the Court of

Appeals should be reversed.

Respectfully submitted,

CHRISTOPHER R. LIPSETT

Counsel of Record

ERIC J. MOGILNICKI

TODD ZUBLER

MICHAEL D. LEFFEL

WILMER, CUTLER &

PICKERING

2445 M Street, N.W.

Washington, DC 20037

(202) 663-6000

Counsel for Amici Curiae

June 8, 2000