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

Saprevne Court, U.S.

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FitL ep

JUL 21 2000

No. 99-1235

a A A a tt om)

In The

Supreme Court of the Anited States

GREEN TREE FINANCIAL Corp.-A LABAMA,

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 AMICUS CURIAE OF

CONSUMERS UNION OF U.S. IN

SUPPORT OF THE RESPONDENT

Sally J. Greenberg* Earl Lui

Consumers Union of U.S. Consumers Union of U.S.

1666 Connecticut Avenue 1535 Mission Street

Suite 310 San Francisco, CA 94103

Washington, DC 20009 (415) 431-6747

(202) 462-6262

July 24, 2000 *Counsel of Record

TABLE OF CONTENTS

Page

BARRE GP RUFTII vcs ssvivssinsnssnnccsencevinesesiooeksdéce.n iii

STATEMENT OF INTEREST OF AMICUS CURIAE............ 2

SUMMARY OF ARGUMENT...............:.cccccceseccescceuscecec 2

PITT sin sidiwineudonstaniueccwssankisatcinsiabixesscckhil jue 4

I. THE ELEVENTH CIRCUIT PROPERLY FOUND

THE ARBITRATION CLAUSE UNENFORCEABLE

BECAUSE OF ITS SILENCE ON

II. ARBITRATION CLAUSES ARE PROLIFERATING

IN CONSUMER CONTRACTS. ...........ceccesseeceee sees

A. Arbitration Clauses Are Often Concealed In Fine

Print So That Consumers Are Not Aware They

Have Waived Their Right To Go To Court......... 10

B. Arbitration Clauses Are Contained In Form

Contracts or Contracts of Adhesion.................. 11

C. Consumers Do Not Read Form Contracts For

Rational Reasons.................0cccocessscscooeeeeeeol 5

D. Public Policy Favoring Arbitration Does Not

Require The Court to Permit Green Tree To Impose

Unilaterally Pre-Dispute Mandatory Binding

Arbitration On All Of Its Customers..................16

E. This Case Raises Significant Issues Regarding The

Enforceability Of Mandatory Arbitration Clauses In

Contracts of Adhesion Between Parties of Greatly

Differing Sophistication, | Knowledge, And

IIS DWI sss cscs sansencecedeasacncevsci nes 17

III]. PRE-DISPUTE MANDATORY ARBITRATION

CLAUSES THREATEN TO UNDERMINE

STATUTORY RIGHTS CREATED BY

Sins vern ndiniticpenintcan tap astbeia Mtns iiiensvincs 19

A. Consumer Protection Statutes Provide Specific

Rights That Arbitration Is Unequipped To

POM viosnnisroagusibeahseesdemnbnaclcle amass kuscsonn ous 19

B. Arbitrators Are Not Required To Follow The Law,

Yet Their Decisions Are Essentially

CI iki eicadincuesistinenideiike tec chiiad 21

C. The Instant Case Can Be Distinguished From

Supreme Court Cases Allowing Arbitration Of

SUMINY THUY sca cvcpcitintessdes se ednesainkixssceuee

D. TILA Cases Are Particularly Inappropriate For

RII ss» sacenrsstidddenca manatee 24

E. Absence Of Public Decisions in Arbitration, The

Increased Use Of Unilaterally Imposed Arbitration

May Harm Consumer Interests In Securing Rights

POUR TY Diss cstntacaiacecsubns tities sicsccenee

IV. CONSUMERS UNION SUPPORTS ALTERNATIVE

DISPUTE RESOLUTION’ THAT IS MUTUALLY-

AGREED ON BY THE PARTIES IN A

APE Eis van nes nniomsntedetnpeasaian Aceon 27

A. Arbitration, Unlike Litigation, Presents The Danger

Of “Selection Bias” Against The Consumer........29

COLI on sisiaisiniinvesesdenessena area ans 30

APPENDIX 1A

TABLE OF AUTHORITIES

FEDERAL CASES Page

Bantolina v. Aloha Motors, Inc.,

Be I Be ROO vise vinnie ncncicenees diva tersvesins sande 25

Cole v. Burns Int’l Sec. Servs.,

SU atee BOE TPA, BOOT) in wncsccscscccescsavenesess 5,8

Gilmer v. Interstate/Johnson Lane Corp.,

Nd fics cnc saksacesnnsessicuminacass 5,21

Johnson v. Tele-Cash, Inc.,

82 F.Supp.2d 264 (D. Del.1999).......... 0. cece cess 25, 24

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

DAF BE EI annie eves cascasassasevenscnss 5, 22, 23, 24

Moses H. Cone Memorial Hospital v. Mercury Construction

5 en I Se We ie OPI ions cnn score viecncvansoncce 5

Paladino v. Avnet Computer Technologies,

EPPS OW, BING oo oiccccccssscscscecessaas 6, 8

Parker v. DeKalb Chrysler Plymouth,

ee die Fel ye 3) | >, FS eee 24, 25

Pitchford v. Oakwood Mobile Homes, Inc.,

1999 U.S. Dist. LEXIS 20596 (W.D. Va.)...............7, 18

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

178 F.3d 1149 (11 Cir, 1999)................0000ecs000. 4, 6,8

Rodriquez de Quijas v. Shearson/American Exp., Inc.,

NI iscsi curcnsicdénevabsaceseeccous 22, 23

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974)... .000.00000.23

Shankle v. B-G Maintenance Management of Colorado, Inc.,

WP Oe TRING CW, FGI) oc ecnsncsvnscsesccssecsserd 6, 8

Shearson/American Express Inc. v. McMahon,

Riss sddeskenecsxniinnshasicaiesdsiedne yt My

Standard Oil Co. of Calif. v. Perkins,

the ge i ee 12

Witko v. Swan, 346 U.S. 427 (1953)............ssssecosssseossees sons 23

STATE CASES

Accord, Obstetrics & Gynecologists v. Pepper,

ee BP CONN, SUEND i csicnisccksenccscsnssssebasneccerd 16

Broemmer v. Abortion Services of Phoenix,

PORT ce CUED CINE, COR sion sevececiasssnsensveverceusnensns 16

Cubic Corp. v. Marty,

185 Cal. App.3d 438, 229 Cal.Rptr. 828 (Cal. Ct. App.

PUN cherie cabnrdiasparudsnnecuxeiasannterssunenecerasiincel 12

Martens v. Smith Barney, Inc.,

Se Cs Oe CGE 5 BD carn vsevesevesesvavsnnvecnes 7

Morstad v. Atchinson Topeka and Santa Fe Ry.,

FR ie BE dininc sin etsenanecssssacconmesitos 13

Patterson v. ITT Consumer Financial Corp.,

14 Cal. App.4" 1659, 18 Cal. Rptr.2d 563 (Cal. Ct. App.

PUT ile Ga dassyeysh Gisciescnind chin nk nbaalay aieienins waueiaa wiaiehendeeers 7

University of Alaska v. Modern Constr., Inc., 522 P.2d 1132,

PIED RUFOOED a sisssinastitabensnsthiontinibdsabelineineniasangeinieiates 21

FEDERAL STATUTES

ee ek ee Or iccaidcdaacnncadeistbucans gicoeascavunnnionteiieel 4, 23

Se Ss a SAI oss nin suns hae bust vbimakeawsanaehedthecnine 20

Sor Ae inn: tb ME nceitvicn ynentda nee bes aneunenissuaaweveibveeesanaseel 25

Re ais ee Sain Gncsncatinnt-cacsonensuesaunesenisnbasiwenns 20

CF Os Be PE isiks taxeskachshedicinnciabamesseseued’ 4, 20

SF is Se is ci nts cn snccwnusialwiekeciacokass eee kians 20

STATE STATUTES

ee. Re Fic tis cacepncnnconncd cisebsarvesiensuscecnkerennel 29

BOOKS , ARTICLES, & TREATISES

Richard Abel, The Contradictions of Information Justice, |

THE POLITICS OF INFORMAL JUSTICE 296 (1982)......... 20

Alternative Dispute Resolution: A Roundtable, THE

PDCORDER, SITUS TFTA, FE UE oo vscccccmcesenvcssesvesessven 29

American Arbitration Association, COMMERCIAL

ARBITRATION RULES (1996)...........ccscsseccsceceecees 9, 26

Amicus Brief for the National Arbitration Forum, Green

Tree Financial Corp. v. Randolph, (No. 99-1235)........20

>

Credit Regulation, 30-35 (1987) ..........ccccceceeeceeceeeee 20

Edward Brunet, Arbitration and Constitutional Rights, 71

aia Mes SOE Macca isnetietcdree tack 26

Mark Budnitz, Arbitration of Disputes Between Consumers

and Financial Institutions: A Serious Threat to

Consumer Protection, 10 OHIO ST. J. ON DISP.

RESOL. 267 (1995)........0ccs0cees 8, 9, 18, 19, 24, 26, 27, 29

Give up Your Right to Sue?, CONSUMER REPORTS, May

SPE i vtcatrvieiwiddnsees emis EE ne Pn CR Er ee 30

The Arbitration Trap, CONSUMER REPORTS, Aug. 1999, at

Thi scctshuvavernmanesvthmneeidpokubvenitedieateedbiemet 7,8

When You Need a Lawyer, CONSUMER REPORTS, Feb. 1996,

WE Bc kennansh wenden sphcapendscsmsiss Meelgeambuascimekienicaaal 28

Owen Fiss, Forward: The Forms of Justice, 93 HARV. L.

snmp cock (et MIO cna ee 19, 27

Michael Z. Green, Preempting Justice Through Binding

Arbitration of Future Disputes: Mere Adhesion

Contracts or a Trap for the Unwary Consumer, 5

Loy. CONSUMER L. REP. 112 (1993)...........cccececeeeee 28

Kirk Johnson, Public Judges as Private Contractors: A

Legal Frontier, N.Y. TIMES, Dec. 10, 1993, at

Pe sins ss mia insiniedaapeaeidenuiadi cee tae 21

Joint Appendix at 20-21, Green Tree Financial Corp.-Ala. v.

crcstiniy, sats sieae Pca. RS MD oh 17

Arthur A. Leff, Contract as a Thing, 19 AM. U. L. REV. 131

GRP UN sb panier scnnsrnbinssresksdiesienighide en aaeeee oe 12, 15

K.N. Llewellyn, Book Review, 52 HARV. L. REV. 700, 704

CRP ia scssesnstdssmuinebnsipacemaiibatne sett nee 14

Joan Lowy, Consumers are Losing the Right to Sue Without

Knowing it, THE PLAIN DEALER, May 14, 2000, at

Tarkvnsb sacinsuucasbenienbacusnatubeii tease element 9, 10

Caroline E. Mayer, Hidden in Fine Print: ‘You Can’t Sue

Us’, WASHINGTON PosT, May 22, 2000, at

PRR ii ine exsstimahccestanibienineiadaanal 8, 10, 11

Merriam-Webster Law Dictionary. ..............200.cesccceeecceeeeee. 1]

Michael I. Meyerson, The Reunification of Contract Law:

The Objective Theory of Consumer Form Contracts,

47 U. MIAMIL. REV. 1263 (1993)...........cs:eceeeeee 13, 15

Erik Moller, et.al, RAND, Private Dispute Resolution in the

Banking Industry, 32 (1993)...........ccccsececesssseeees 10, 11

RESTATEMENT (SECOND) OF CONTRACTS (1979) § 211...... 14, 15

Yvonne W. Rosmarin & Jonathan Sheldon, Sales of Good

and Services, at 569-70 (1989)...........cccccecesessseeess 17

Jonathan Sheldon, Unfair and Deceptive Practices, at 20 (3d

OG SOD cncsincinpisrinseetiqaeeniaisabeaa eae 21

W. David Slawson, Binding Promises: The Late 20th-

Century Reformation of Contract Law, at 68-70

(PRPs i snttarunicceadnasaseninadvabapanapeetin caine 14

W. David Slawson, The New Meaning of Contract: The

Transformation of Contracts Law by Standard

Forms, 46 U. PITT. L. REV. 21 (1984).........0cccccecsceee 13

W. David Slawson, Mass Contracts: Lawful Fraud in

California, 48 S. CAL. L. REV. 1 (1974)...........2..202..12

Stewart S. Sterk, Enforceability of Agreements to Arbitrate:

An Examination of the Public Policy Defense, 2

CARBO 5. TRBY. FRE CITI oss sicsissivcencemastcvans, 27, 29

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

Certiorari to the United

States Court of Appeals for

the Eleventh Circuit

BRIEF AMICUS CURIAE OF

CONSUMERS UNION OF U.S. IN

SUPPORT OF THE RESPONDENT

This amicus curiae brief is submitted in support of

respondent. 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, Consumers Union (CU) states

that this brief was prepared in its entirety by CU. No monetary

contribution toward the preparation or submission of this brief was made

by any person other than CU.

STATEMENT OF INTEREST OF AMICUS CURIAE

Consumers Union, publisher of Consumer Reports

magazine, is a nonprofit, independent testing and consumer

protection organization serving only consumers. Since 1936, CU

has been a comprehensive source for unbiased reporting about

goods, services, health, personal finance and other consumer

concerns. CU engages regularly in consumer advocacy before the

executive, judicial, and legislative branches of government. CU is

deeply concerned about the proliferation of pre-dispute mandatory

binding arbitration clauses in consumer contracts, and the potential

of these clauses to deprive consumers of common law and

statutory rights and protections.

SUMMARY OF ARGUMENT

The matter before this Court is whether the Eleventh

Circuit properly held Green Tree’s arbitration agreement to be

unenforceable because its terms undermined Ms. Randolph’s

ability to protect her substantive rights provided by statute. This

Court has reaffirmed time and again the strong federal policy

favoring arbitration of disputes under the Federal Arbitration Act.

In cases involving arbitration of statutory rights, this Court has

affirmed an equally strong policy that parties do not forego their

substantive rights under the Federal Arbitration Act. The Eleventh

Circuit’s holding in the present case is entirely consistent with this

Court’s decisions favoring arbitration, but mandating at the same

time that the arbitration process not act as a barrier to the

vindication of statutory rights.

Pre-dispute mandatory binding arbitration clauses are

increasingly found in preprinted consumer contracts. This brief

‘discusses the distinctions between adjudication and arbitration,

highlighting the importance for consumers of making a knowing

and informed choice to arbitrate. The public policy favoring

arbitration does not require this Court to permit the imposition of

unilateral pre-dispute mandatory binding arbitration on all

customers, the trend in many consumer contracts. Consumers

Union favors dispute resolution as an alternative to litigation when

e

it is mutually agreed on by the parties. We do not believe it is

possible, however, for a consumer to make a knowing, intelligent,

pre-dispute waiver.

The mandatory pre-dispute binding arbitration clauses that

are proliferating in consumer contracts are buried all too

frequently in fine print and written in impenetrable legalese. As a

result, consumers may be unaware that they have waived the right

to go to court. When presented with arbitration as an alternative to

litigation, consumers will frequently find that the steep costs of

arbitration or the inconvenience of traveling to an arbitration

effectively bars them from seeking a remedy.

In the absence of a truly voluntary waiver of the right to

go to court, consumers should be able to choose litigation for

violations of consumer protection statutes. Consumers should have

access to remedies expressly provided by statute, including

punitive damages, and where appropriate, an injunction, or be able

to join a class action. Consumer protection statutes contemplate

those remedies, and in fostering the “private attorney general

concept,” they recognize the importance of effective private

enforcement, all of which is undermined by mandatory arbitration.

The burden of mandatory arbitration clauses is likely to

fall most heavily on consumers who are the least sophisticated, the

poorest, and the least educated. This group has benefited, perhaps

more than others, from judicial decisions enforcing statutory

rights. Those decisions have also served to guide the public about

permissible and impermissible practices. Because arbitration

decisions are private, they cannot serve this important function.

Pre-dispute mandatory binding arbitration clauses also

create the potential of arbitrator bias based on repeat business.

When a financial or other institution routinely uses preprinted

forms containing arbitration clauses and regularly employs

arbitrators to decide disputes with consumers, an individual

consumer may be disadvantaged because she or he is not

repeatedly in this situation. We are concerned that the presence of

. 3

arbitrator bias in some instances may be harming consumer

interests and urge judicial scrutiny of this issue.

ARGUMENT

This Court must determine the appropriate boundaries on

Petitioner Green Tree Financial Corporation’s (“Green Tree’’)

power to require pre-dispute mandatory binding arbitration in its

consumer contracts. The clause in the instant case eliminated

respondent’s right to a trial for violations of the Truth In Lending

Act (“TILA”), 15 U.S.C. §160let seqg., and the Equal Credit

Opportunity Act (““ECOA”), 15 U.S.C. §§ 1691-169/f.

Consumers Union’ files this amicus brief in support of

Respondent.

I. The Eleventh Circuit Properly Found The Arbitration

Clause Unenforceable Because Of Its Silence On

Costs.

The Eleventh Circuit Court of Appeals* properly found

the mandatory arbitration’ clause in Ms. Randolph’s contract

? Consumers Union is a nonprofit membership organization chartered in

1936 under the laws of the State of New York to provide consumers with

information, education, and counsel about goods, services, health and

personal finance; and to initiate and cooperate with individual and group

efforts to maintain and enhance the quality of life for consumers.

Consumers Union’s income is solely derived from the sale of Consumer

Reports, its other publications and services, and from noncommercial

contributions, grants, and fees. In addition to reports on Consumers

Union’s own product testing, Consumer Reports with approximately 4.5

million paid circulation, regularly carries articles on health, product

safety, marketplace economics, and legislative, judicial, and regulatory |

actions which affect consumer welfare. Consumers Union’s publications

and services carry no outside advertising and receive no commercial

support.

> Randolph v. Green Tree Financial Corp, 178 F.3d 1149 (11"" Cir.

1999).

unenforceable. This Court has articulated a strong federal policy

favoring arbitration. “Section 2 is a congressional declaration of a

liberal federal policy favoring arbitration agreements...as a matter

of federal law, any doubts concerning the scope of arbitrable

issues should be resolved in favor of arbitration...”” Moses H. Cone

Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24,

25 (1983). “So long as the prospective litigant effectively may

vindicate [his or her] statutory cause of action in the arbitral

forum, the statute will continue to serve both its remedial and

deterrent functions. Gilmer v. Interstate/Johnson Lane Corp., 500

U.S. 20 (1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler

Plymouth, Inc., 473 U.S. 614 (1985)).

This Court has reinforced the notion that arbitration

clauses are to be enforced, but that “by agreeing to arbitrate a

statutory claim, a party does not forego the substantive rights

afforded by the statute. It only submits their resolution in an

arbitral, rather than a judicial, forum.” Mitsubishi, 473 U.S. at 637.

In reversing the district court’s decision in the instant case,

the Eleventh Circuit noted that “[W]hile the arbitral forum usually

serves just such an alternative, some barriers of access to that

forum may render an arbitration clause unenforceable.” In

reaching its decision, the Eleventh Circuit noted that three federal

Courts of Appeal have concluded that substantial, undisclosed fees

arising out of arbitration contracts are unconscionable.

Considering the practical effects of such fees, they determined that

if fees discourage or prevent a party from vindicating statutory

rights, the agreement should not be enforced.

In Cole v. Burns International Security Servs., 105 F.3d

1465, 1484 (D.C. Cir. 1997), the D.C. Circuit held that an

employee could not be required to pay an arbitrator's fee—which

the court estimated to range from $500 to $1000 or more, daily—to

* Unless otherwise specified, the term “mandatory arbitration” in this

brief means pre-dispute mandatory binding arbitration.

> Id. at 1159.

pursue his discrimination claims because the fees would

discourage such an action and prevent him from vindicating his

statutory rights.

The Eleventh Circuit in Paladino -v. Avnet Computer

Technologies, 134 F.3d 1054 (1998), refused to enforce an

arbitration clause because of a “troubling infirmity’—the

arbitration clause was silent on the issue of costs. The Court found

the clause unenforceable because it imposed a $2000.00 filing fee

and potential responsibility for a portion of the arbitrator's fees,

holding, “Because Avnet makes no promises to pay for an

arbitrator, employees may be liable for at least half the hefty cost

of an arbitration and must, according to the American Arbitration

rules the clause explicitly cites, pay steep filing fees (in this case

$2000). We consider costs of this magnitude a legitimate basis for

a conclusion that the clause does not comport with statutory

policy.” Paladino 134 F.3d at 1059, 1062 (1998).

The 10" Circuit similarly refused to enforce an arbitration

agreement in which a fee-splitting provision substantially limited

an employee’s use of the arbitral forum. Shankle v. B-G

Maintenance Management of Colorado, Inc., 163 F.3 1230 10"

Cir. 1999).

This Court has reaffirmed time and again the strong

federal policy favering arbitration of disputes under the Federal

Arbitration Act. In cases involving arbitration of statutory rights,

this Court has affirmed an equally strong policy that parties do not

forego their substantive rights under the statute. The decisions in

the three Courts of Appeal cases discussed above are entirely

consistent with this Court’s policy. All concluded that non-

disclosure of a crucial term, specifically allocation of costs and

fees in arbitration, rendered the arbitration clause unenforceable

because excessive costs would prevent vindication of statutory

rights.

Other courts have similarly found that substantial fees

create a significant, if not impossible, roadblock that prevents

consumers and workers from pursuing valid claims, and therefore

i‘.

Prmpmcamemcretr ne et

are unconscionable. Pitchford v. Oakwood Mobile Homes, Inc.,

Case No. 5:99CV00053, 1999 U.S. Dist. LEXIS 20596. (Stating,

“..the risk of incurring substantial expense in arbitration is a

functional deterrent to any consumer like plaintiff, who has

diminished financial capabilities from the outset.”); Martens vy.

Smith Barney, Inc., 181 F.R.D. 243, 255-56 (S.D.N.Y. 1998)

(stating "arbitration agreement cannot impose financial burdens on

plaintiff access to the arbitral forum, ‘including steep filing fees

and arbitrators’ fees); Patterson v. ITT Consumer Financial Corp.,

14 Cal. App.4" 1659, 18 Cal. Rptr. 2d 563, 566-67 (Cal. Ct. App.

1993) (refusing to compel arbitration of consumer claims where

Claimants were required to pay fees on grounds of

unconscionability), review denied, 1993 Cal. LEXIS 4322 (Aug.

12, 1993), cert. denied, 510 U.S. 1176 (1994).

As the number of mandatory arbitration clauses increases,

more consumers may face the problem of high arbitration costs.

Ray Crawford, featured in a recent Consumer Reports’ article,

found himself victim to an arbitration clause he never knew he had

signed. When the two halves of his new manufactured home didn’t

match up, and he was unable to resolve the problem with the

manufacturer, he sought legal action. Crawford was dismayed to

learn that a mandatory arbitration clause was buried in the fine

print of the purchase agreement he had signed. Instead of paying a

simple $65 fee to file a claim at his local courthouse, he would

have to pay $2,000 to initiate an arbitration process and make a

six-hour round trip to the arbitrator’s office. “Before I brought this

home,” Crawford said, “I never heard the word ‘arbitration’—didn’t

have a clue what it meant.” ”

The same article advises consumers that “binding

arbitration is touted as a low-cost way to get justice but it can end

up costlier than taking a case to court. Consumers may have to pay

for the arbitrator’s time, which can run $300 or more per hour—

. The Arbitration Trap, CONSUMER REPORTS, Aug. 1999, at 64.

” Id

effectively ruling out arbitration’s usefulness in cases involving

small claims. Even when the arbitrator decides in favor of the

consumer, awards are often limited to simple restitution for the

amount of the loss.”*

II. Arbitration Clauses Are Proliferating In Consumer

Contracts

The very barriers to vindication of statutory rights cited in

Cole, Shankle, and Paladino created by the costs of arbitration are

the same barriers respondent in this case might have faced. Indeed,

the Eleventh Circuit here based its decision on Petitioner Green

Tree’s fatally flawed arbitration clause that failed to mention how

costs and fees would be allocated.’ In fact, many arbitration

contracts used by financial institutions are silent as to who pays

which costs.'°

As mandatory arbitration clauses proliferate,'’ the mere

act of obtaining a loan, a good or service will bind consumers to

8 Id. at 64, 65.

° “This clause says nothing about the payment of filing fees or the

apportionment of the costs of arbitration.” Randolph, 178 F.3d at 1158.

'0 Mark Budnitz, Arbitration of Disputes Between Consumers and

Financial Institutions: A Serious Threat to Consumer Protection, 10

OHIO ST. J. ON DISP. RESOL. 267, 279-280 (1995)

'! Caroline E. Mayer, Hidden in Fine Print: ‘You Can’t Sue Us’,

WASHINGTON POST , May 22, 1999, at Al. (First USA Bank, the largest

issuer of Visa cards, with 58 million customers, added mandatory

arbitration clauses in its customer contracts in 1997). See also Joan

Lowy, Consumers are Losing the Right to Sue Without Knowing it, THE

PLAIN DEALER, May 14, 2000, at SL. (MBNA America, a credit card

issuer with 40 million accounts, inserted a pre-dispute arbitration clause

into all of its consumer agreements this year. American Express,

Discover, Sears, Saks Fifth Avenue, Hooters restaurant chain, Best Buy,

Gateway computers, and H&R Block have done so, as well. Mandatory

arbitration clauses are turning up in residential leases, HMO contracts,

-8-

arbitrate all future disputes with the party drafting the agreement.

Such a result stands on its head the notion of arbitration as a

voluntary act.'? Mandatory arbitration could soon become an

involuntary and exclusive method of dispute resolution for

potentially all consumer contract disputes.'? With businesses that

are subject to far less regulation than the banking or securities

industries including mandatory arbitration clauses in their

contracts, car dealers or mobile home dealers, for example, greater

numbers of consumers will find themselves confronting arbitration

as their only option in a dispute.'* The widespread use of these

clauses in consumer contracts represents a major change in market

activity that, without adequate disclosure or an opportunity to take

advantage of market alternatives, can deny consumers substantive

legal rights. This shift toward arbitration should involve public

debate and discussion, rather than be imposed on consumers

through the unilateral actions of large and potentially monopolistic

entities.

home sales, computer warranties, and services from pest control to

security brokerages).

'? Arbitration has been defined as: “the voluntary submission of a dispute

to an impartial person or persons for final and binding determination.”

American Arbitration Association, COMMERCIAL ARBITRATION RULES

(1996) (emphasis added).

_ Placing mandatory arbitration clauses in consumer contracts is a trend

that is likely to continue, leaving consumers with little choice but to

accept arbitration or stop doing business with financial institutions

altogether. The trend is especially problematic in rural or low income

areas where choices between financial institutions are often more limited.

See Budnitz, at 267, 330.

'4 Id at 320.

A. Arbitration Clauses are Often Concealed in Fine Print

So That Consumers Are Not Aware They Have

Waived Their Right to Go to Court.

Consumers like Ray Crawford often learn about the costs

of arbitration only after discovering they have signed an

arbitration clause buried in fine print in a legal document, and that

in so doing, they have surrendered their right to go to court. A

recent article in the Washington Post noted the stealth quality of

pre-dispute arbitration clauses. “Last month’s notice from

American Express seemed routine, even innocuous-the typical

fine print that’s usually stuffed in the same envelope with the

monthly bill and often thrown away. But card holders who read

the ‘F.Y.I.’ update closely would have discovered that simply by

using their card after June 1, they give up their right to sue the

company.” Another newspaper reported recently, “...MBNA

Corp. sent a dense notice in small type to its 40 million credit card

customers informing them that they were giving up their right to

go to court in favor of arbitration unless customers responded in

writing within the next three weeks.”"°

These concerns are further reinforced by the reality that

banks and other commercial entities resort to arbitration in order to

reduce their liability exposure, as well as litigation costs.'’ A

RAND study found that binding arbitration limited banks’

exposure to punitive damages and unpredictable juries.'*

“Punitive damages and large verdicts serve both to

punish . . . egregious behavior and to deter others

from behaving in a similar fashion. To the degree

© See Mayer, supra at Al quoting Mark Budnitz.

"© See Lowy, supra at SL.

7 Erik Moller, et.al, RAND, Private Dispute Resolution in the Banking

Industry, 32 (1993) (“RAND study”).

" ww

-10-

ADR eliminates these sanctions, justice and

deterrence may not be well served... .Courts not only

resolve disputes but also establish, reinforce and

revise standards of conduct through their written

opinions.’ No private ADR mechanism can serve

this function. And if whole categories of cases are

removed from public scrutiny, how appropriate

changes in the common law and statutory

interpretation might be accomplished becomes a

serious question.’

As one commentator noted, “There’s no question that

arbitration is an excellent, wonder dispute-resolution device.” But

if it’s so good for consumers, then why don’t companies make

such provisions “very clear and explain everything to consumers,

and not try to hide the terms in bill stuffers or a pile of

documents.” ”!

B. Arbitration Clauses are Contained in Form Contracts

—Sets_ are Sontained_in_ Form Contracts

or Contracts of Adhesion.

The problem with reconciling fundamental contract

principles with the reality of standard form contracts or contracts

of adhesion*’ has been well-stated by Professor David Slawson,

'? See discussion, infra, pp. 26-27 on impact of non-public decisions in

arbitration of statutory claims.

20 ‘See Moller at 32.

2! See Mayer, supra at Al.

?2 Contracts of adhesion have been defined as “a standardized contract

form offered to consumers of goods and services on essentially a “take it

or leave it" basis without affording the consumer a realistic opportunity

to bargain and under such conditions that consumer cannot obtain desired

product or services except by acquiescing in form contract.” BLACK’S

LAW. DICTIONARY 318 (7" ed. 1999). See also MERRIAM-WEBSTER

DICTIONARY OF LAW (“a contract that is not negotiated by the parties and

that is usually embodied in a standardized form prepared by the dominant

at

the Torrey H. Webb Professor of Law at the University of

Southern California and a long-time authority on form contracts:

“Every prominent authority on contract law, from

the treatises of Williston and Corbin to the leading

cases of [California], sets forth principles from

which the conclusion follows that a written

instrument is a contract only if it is the parties’

mutual manifestation of agreement and only if it

means what the parties should reasonably have

expected it to mean. The standard form in the

typical consumer transaction today meets neither of

these requirements. It cannot possibly be the

consumer’s manifestation of agreement unless the

consumer is given a reasonable opportunity to read it

understandingly before he chooses to buy. In fact,

this opportunity is rarely given, and under the

circumstances in which mass contracting occurs, it

rarely could be, because normally neither the mass

contractor nor the consumer is willing to spend the

time.”””

Professor Slawson criticized “[a]ll of us—judges, lawyers

and professors alike” for being “mesmerized by printed forms”

and treating them as the equivalent of freely-bargained for

contracts, when in fact they are not’* Slawson has long urged that

party.”) See also Cubic Corp. v. Marty, 185 C.A.3d 438, 229 Cal.Rptr.

828, 833 (Cal. Ct. App. 1986); Standard Oil Co. of Calif. v. Perkins, 347

F.2d 379, 383 (9" Cir. 1965) (a distinctive feature of an adhesion

contract is that weaker party has no realistic choice as to its terms).

23 W. David Slawson, Mass Contracts: Lawful Fraud in California, 48

S. CAL. L. REV. 1, 11-12 (1974).

24 Id. at 4; See also Arthur A. Leff, Contract as a Thing, 19 AM. U. L.

REV. 131, 142 (1970).

oa.

the writing does not control, but instead “the reasonable

expectations [of the parties] are the contract.”

Classical legal theory viewed form contracts no differently

than individually negotiated contracts, and enforced them

according to their terms, no matter how harsh or unjust. See, e.g.,

Morstad v. Atchinson Topeka and Santa Fe Ry. (N. M. 1918) 170

P.2d 886, 889 (enforcing waiver of employer’s liability signed by

injured worker “in awful pain” on way to hospital while not

wearing needed glasses). Under the classical theory, courts

created a conclusive presumption that the signing party understood

the terms.” This result was based on the “duty to read” doctrine,

which also developed out of the paradigm of individually

negotiated contracts.’’ Professor Meyerson noted, however, that

the classical theory does not work when applied to standard form

contracts:

“This classical theory has no basis in either reality

or justice. Courts had to create a “conclusive”

presumption because such a presumption was so

counterfactual. The drafters of such contracts knew

the signing party had not read the terms. . . .”

“The other problem with the classical theory was

that it permitted drafters of form contracts to abuse

their power.’”®

” W. David Slawson, The New Meaning of Contract: The

Transformation of Contracts Law by Standard F. orms, 46 U. PITT.L.

REV. 21, 23 (1984).

Michael I. Meyerson, The Reunification of Contract Law: The

Objective Theory of Consumer Form C ontracts, 47 U. MIAMI L. REV.

1263, 1273 (1993).

27 Id. at 1267.

28 Id. at 1273.

~§3.

Gradually, legal scholars and courts recognized the

fundamental differences between form contracts and the classical

model of individually negotiated contracts. Professor Karl

Llewellyn noted the importance of protecting the weaker party’s

reasonable expectations when interpreting form contracts:

“{F]ree contract presupposes free bargain; and...

free bargain presupposes free bargaining; and that

where bargaining is absent in fact, the conditions

and clauses to be read into a bargain are not those

which happen to be printed on the unread paper, but

are those which a sane man might reasonably expect

to find on that paper.’””’

Based on these and other arguments raised by legal

commentators, the Restatement (Second) of Contracts included a

reasonable expectations test for analyzing the enforceability of

terms in contracts of adhesion. The Restatement observed that “[a]

party who makes regular use of a standardized form of agreement

does not ordinarily expect his customers to understand or even

read the standard terms.” RESTATEMENT (SECOND) OF

CONTRACTS (1979) § 211 cmt. b. Because the drafting party has

no objective expectation that there has been true assent to the

terms of the contract, it cannot claim reliance upon such unread

terms. Therefore, the Restatement explains the reasonable

expectations test as follows: “customers are not bound to

unknown terms which are beyond the range of reasonable

expectation.” Jd. § 211 cmt. f °°

29 KN. Llewellyn, Book Review, 52 Harv. L. Rev. 700, 704 (1939).

°° Some may argue that strict application of the reasonable expectations

rule would destroy the use of form contracts since they would become

useless if consumers would not be held to their terms. Professor Slawson

replies, however, that business entities have continued to use form

contracts. See W. David Slawson, Binding Promises: The Late 20th-

Century Reformation of Contract Law, at 68-70 (1996). He notes that the

reasonable expectations test has been applied to insurance contracts for

over twenty years, yet insurers continue to use form contracts. He notes

that businesses will still reap substantial benefits from continued use of

form contracts.

othe

C. Consumers Do Not Read Form Contracts for

Rational Reasons.

Application of the reasonable expectations test to form

contracts is further supported by a significant fact: consumers do

not read form contracts for sound, rational reasons. First,

consumers realize they cannot negotiate to obtain better terms,

leaving little point to reading the terms.’

Second, businesses offer form contracts for the very

purpose of eliminating individual bargaining, as the Restatement

recognizes: “[businesses’ purposes for using standardized

contracts] would not be served if a substantial number of

Customers retained counsel and reviewed the standard terms.”

RESTATEMENT (SECOND) OF CONTRACTS § 211 cmt. b. In fact,

greater economic inefficiencies from the far greater time needed

for completing transactions would result if consumers were

required to read and understand form contract terms prior to

signing.

Third, consumers do not read form terms because they are

often written in fine print, or in dense legalese. The instant case is

more egregious. Ms. Randolph was actually discouraged by Green

Tree’s agent from reading the paperwork.

Finally, consumers do not pay attention to form terms

because of the low probability of a dispute arising out of the

contract.” Instead, consumers focus on the transaction as one for

the goods or services provided, rather than viewing themselves as

entering into a contractual relationship in which they have agreed

to every detail in the “fine print.”**

" See Meyerson, supra at 1270-71.

%2 See Leff, supra at 148-49.

33 Id. at 148-49.

«$4.

The Arizona Supreme Court rejected an arbitration clause

in Broemmer v. Abortion Services of Phoenix (Ariz. 1992) 840

P.2d 1013. Plaintiff was given forms to sign the night before her

abortion procedure, one of which was labeled, “Agreement to

Arbitrate.” Because plaintiff could not recall signing the

arbitration agreement, nor was it explained or called to her

attention by the clinic, the court held that the agreement fell

outside plaintiffs reasonable expectations and therefore was

unenforceable. Jd. at 1017. Accord, Obstetrics & Gynecologists

v. Pepper (Nev. 1985) 693 P.2d 1259 (under facts similar to

Broemmer, Nevada Supreme Court held arbitration agreement

unenforceable).

Of course, arbitration may provide benefits to disputants

under some circumstances—circumstances absent in this case. The

premises underlying the policy favoring arbitration, a voluntary

decision by both parties to accept a greater risk of an erroneous

decision in return for arbitration’s speed, lower costs and finality,

simply do not apply to contracts of adhesion such as the one Ms.

Randolph was presented with. By filing this brief, Consumers

Union does not suggest that litigation is always better for

consumers than arbitration. Entry into arbitration, however,

should be a fully informed decision, rather than a clause b’ ried in

a contract by a party with vastly superior bargaining power, and

before a dispute has even arisert.* Arbitration may be faster and

cheaper than litigation in some cases, but it is no bargain for

consumers when it forced upon them on a take-it-or-leave-it basis.

D. Public Policy Favoring Arbitration Does Not Require

the Court to Allow Green Tree to Impose Unilaterally

Pre-Dispute Mandatory Binding Arbitration on All of

Its Customers

Parties may always voluntarily agree to arbitration after a

dispute arises. But it is impossible for a consumer to make a

voluntary, knowing, intelligent, voluntary pre-dispute waiver.

Consumers Union urges this Court to examine closely the full

4 See supra note 14.

-16-

implications of preprinted mandatory binding arbitration clauses in

form contracts, an increasingly common method of imposing

involuntary arbitration on unwitting consumers.

E. This Case Raises Significant Issues Regarding The

Enforceability Of Mandatory Arbitration Clauses In

Contracts Of Adhesion Between Parties Of Greatly

Differing Sophistication, Knowledge, And Bargaining

Power

Respondent Larketta Randolph lives in rural Alabama.

She arranged for a loan to buy a mobile home for $38,000, and

was presented with papers by an agent who pressed her to sign

quickly so he could turn in the paperwork that day to “prevent the

interest rate from going up.”*’ Ms. Randolph was not given an

Opportunity to read the document and did not know about the

arbitration clause. Even if she had read it, the clause appears on

the back of the document—located midway between 22 other

paragraphs—and is in the proverbial fine print. In her affidavit, Ms.

Randolph’s says that she was not shown the reverse side of the

document where the arbitration clause appeared. She said, in fact,

she didn’t know there was a reverse side. *°

Green Tree Financial Corp is a miultimillion-dollar -

corporation with abundant legal and other resources. Larketta

Randolph is a consumer of modest means who signed a document

on whose back side in tiny print is an arbitration clause that

removes her right to go to court.’ The imbalance of power

between the parties in consumer mandatory arbitration contracts of

this kind calls for judicial scrutiny.

°° Joint Appendix at 20-21, Green Tree Financial Corp.-Ala. V.

Randolph, (No. 99-1235).

% Id. at 21.

37 See Yvonne W. Rosmarin & Jonathan Sheldon, SALES OF GOODS AND

SERVICES 569-70 (1989).

me

BRP ora eR TT co eee a ee

|

A recent district court decision demonstrated again how

arbitration clauses can victimize unsophisticated, low income

consumers. This case involved single mother with an 11" grade

education, four young children, and an income of $1200 a month.

A pre-dispute mandatory binding arbitration contract was part of

the loan papers she signed for the purchase of a mobile home. She

testified that when she signed the preprinted forms, there was no

discussion of an arbitration clause, she had never heard the word

“arbitration,” and the agreement was “stuck” in front of her to

sign. In striking the arbitration clause because its fee structure was

“so unfair that it is rendered unconscionable,” the district court

also noted, “Fees and costs incident to binding arbitration in

consumer transactions raise concerns for this court because these

transactions most often involve parties of disparate bargaining

power. This concern is enhanced in the context of a consumer

transaction by the fact that the FAA expressly permits the court to

assess the enforceability of arbitration agreements on the basis of

fairness and conscionability.” Pitchford v. Oakwood Mobile

Homes, Inc., Case No. 5:99CV00053, 1999 U.S. Dist. LEXIS

20596.

Law professor Mark Budnitz has described concerns about

the imbalance of power in arbitration clauses in consumer

contracts:

“While laissez faire proponents deal with

consumers in the aggregate as an economic unit,

the consumer advocates focus on individuals who

will be deprived of remedies to which they are

legally entitled and the resulting hardship to these

persons. They are concerned with those most

likely not to realize the impact arbitration may

have on them: the poor, the uneducated, and the

unsophisticated. The consumer advocates feel their

concerns are justified by the strategy thus far

adopted by financial institutions who have made

no effort to explain to customers the benefits and

drawbacks of arbitration. The arbitration

“agreements” seem designed to ensnare consumers

-18-

who will not realize they are agreeing to anything

at all. This is done by including the arbitration

contracts as stuffers with the monthly statements

rather than requiring the customer’s signature on a

separate document properly introduced and

explained. The inclusion of dragnet clauses

illustrates that the bank’s strategy seems to be to

win consumer acquiescence absent consumers’

understanding what they are agreeing to.”**

Mandatory arbitration clauses deprive the plaintiff of

fundamental rights, including the right to trial with fact finding by

a jury of one’s peers, access to discovery, a resolution of the issues

in dispute based on the relevant law, injunctive relief, the right to

join with others in a class action, and the right of appeal except on

very narrow grounds.

Virtually all transactions between consumers and

commercial entities are governed by contracts of adhesion and

mandatory arbitration clauses increasingly are inserted into such

preprinted contracts.” Undoubtedly this practice will increase in

the future, especially if this Court upholds the enforceability of the

arbitration contract in this case.

Ill. Pre-Dispute Mandatory Arbitration Clauses Threaten

To Undermine Statutory Rights Created By Congress

A. Consumer Protection Statutes Provide Specific Rights

That Arbitration is Unequipped to Protect

Mandatory arbitration contracts threaten to undermine

Statutory rights created by Congress to enforce “society-wide

norms.” These statutes include the two in the instant case, the

8 See Budnitz, supra at 321.

3° See Fn. 6, supra.

4° Owen Fiss, Forward: The Forms of Justice, 93 HARV. L. REV. 1, 30

(1979).

-19-

Truth in Lending Act (TILA);’ the Equal Credit Opportunity Act,

(ECOA).” as well as the Fair Credit Billing Act, “* Electronic

Funds Transfer Act, “* state Small Loans Act,’* and state Uniform

and Deceptive Acts and Practices Acts. It is inappropriate for these

claims to be resolved under the current system of arbitration.

Under ECOA, one of two statutes plaintiff claims was

violated in this case, Congress provided a private right of action

that consumers may pursue in state or federal court, as an

individual or class action.“° Disputes arising out of violations of

consumer protection statutes tend to involve documents such as

the contract, disclosure forms or a security agreement. Some or all

of these documents may be in the possession of the financial

institution. *’

Mandatory arbitration, however, generally limits parties to

subpoenas duces tecum, which merely requires the opposing party

to bring certain documents to the arbitration. The consumer may

be disadvantaged going into the arbitration because he or she lacks

the ability to study and review in advance important documents. If

the consumer requests addi‘ional documents, the arbitrator may be

41 15 U.S.C. §§ 1601 -1665b.

42 Id. §§ 1691-1691f.

43 Id. §§ 1666-1666).

44 Id. §§ 1693-1693r.

45 Kevin W. Brown & Kathleen E. Keest, USURY AND CONSUMER

CREDIT REGULATION, at 30-35 (1987).

46 15 U.S.C. § 1691e.

47 Richard L. Abel, The Contradictions of Information Justice, | THE

POLITICS OF INFORMAL JUSTICE , 296 (Richard L. Abel ed., 1982). Abel

has noted that many consumers do not maintain complete records of their

official documents.

-20-

resistant to granting the request because it may require

rescheduling of the hearing, in conflict with one of the goals of

arbitration: limitations on discovery and delays in adjudication.

B. Arbitrators are Not Required to Follow the Law Yet

Their Decisions are Essentially Unappealable..

This Court has held that in arbitration of Statutory claims,

parties are entitled to enforcement of their substantive statutory

rights."* Requiring that arbitrators follow the law is not the norm,

however,” and as a result, arbitrators may instead apply

unconscionability or good faith concepts to disputes involving

consumer protection statutes. Even if the arbitrator finds in favor

of a consumer, she or he may disregard provisions allowing for

treble damages or attorneys fees,° provisions that are critical to

the efficacy of consumer protection statutes. These cases instead

may allow arbitrators to follow their own notions of fairness and

justice.*' There is no way to know whether arbitrators, even if they

have expertise to do so, will follow the law or reach results far

astray from what Congress or state legislatures intended in

enacting consumer protection statutes.

** Gilmer, 500 U.S. at 28 (1991).

*? Amicus Brief for the National Arbitration Forum at 6, Green Tree

_ Financial Corp.-Ala. V. Randolph, (No. 99-1235). “What sets the Forum

apart from many providers of arbitration services is that its arbitrators

must apply the relevant substantive law.” “The Forum’s requirement that

cases be decided under the applicable substantive law is a significant

addition to the rules common to arbitration organizations.”

°° Jonathan Sheldon, Unfair and Deceptive Practices, at 20 (3d ed.

1991).

‘I Kirk Johnson, Public Judges as Private Contractors: A Legal Frontier,

N.Y. TIMES, Dec. 10, 1993, at D20. i i

Constr... Inc., 522 P.2d 1132, 1140 (Alaska 1974).

9).

C. The Instant Case Can Be Distinguished From

Supreme Court Cases _ Allowing Arbitration of

Statutory Rights

This Court has supported arbitration of disputes involving

statutory claims.°* Two of the cases discussed below involve

application of arbitration clauses where investors allege statutory

violations of securities laws. Another involves a dispute between

international corporations, also raising issues of statutory

violations. Each of these cases, however, can be distinguished

from the instant case.

While Consumers Union opposes pre-dispute mandatory

binding arbitration clauses generally, which would likely include

the type of clause at issue in McMahon, it would be wrong not to

grasp the difference between the plaintiffs in McMahon and Ms.

Randolph, plaintiff in the instant case. Unlike Ms. Randolph, an

unsophisticated consumer faced with a contract of adhesion

prepared for Green Tree Financial Corp by savvy legal staff, in

McMahon the plaintiffs were trustees for pension and _profit-

sharing plans who were presumably well-equipped to understand

the terms of the documents they signed. Indeed, this Court

tempered the holding in McMahon by noting it would uphold such

agreements “absent a well-founded claim that an arbitration

agreement resulted from the sort of fraud or excessive economic

power that would provide grounds for revocation of any contract.”

McMahon 482 U.S. at 226 (emphasis added). This Court was

further persuaded to support the arbitration process in McMahon

because the Securities and Exchange Commission had specifically

approved the arbitration procedures of the New York Stock

Exchange, the American Stock Exchange, and the National

Association of Securities Dealers, the organizations mentioned in

the arbitration agreement. McMahon, 482 U.S. at 235.

ss Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987),

Mitsubishi, 473 U.S. at 625, Rodriguez de Quijas v. Shearson/American

Exp.Inc., 490 U.S. 477 (1989).

a.

Again in Mitsubishi, this Court looked favorably upon a

clause calling for arbitration of disputes covered by the Sherman

Act,” involving the distribution and sale of automobiles. “...[w]e

find no warrant in the Arbitration Act for implying in every

contract within its ken a presumption against arbitration of

statutory claims.” Mitsubishi, 473 U.S. at 625. But Mitsubishi can

once again be distinguished. The case involved an agreement

between two corporations with equal bargaining power and

sophisticated legal resources. Further, the parties in Mitsubishi

were corporations residing in different countries, and this Court

has given deference to arbitration agreements in international

transactions that designate the forum in which a future dispute will

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

In overruling Wilko v. Swan, 346 U.S. 427 (1958), this

Court once again supported an arbitration clause in a contract with

securities investors involving statutory rights. Wilko was

“[iJncorrectly decided and inconsistent with the prevailing uniform

construction of other federal statutes governing arbitration

agreements in the setting of business transactions,” Rodriguez de

Quijas v. Shearson/American Exp.Inc., 490 U.S. 477 (1989).

Rodriguez must again be distinguished, for the plaintiffs

were investors of presumably greater sophistication than the

average consumer.

With businesses such as mobile home dealers and used car

dealers joining the trend toward including mandatory arbitration

clauses in their consumer contracts, industries that are subject to

far less regulation than is even the financial industry, it is clear

that greater numbers of consumers of modest means will find

themselves confronting arbitration as their only option if a dispute

arises.

*? 15 U.S.C. § 1 et seq,

*4 Id. at 320.

Ss.

D. TILA Cases Are Particularly Inappropriate for

Arbitration

Because of the absence of any federal agency approving

arbitration procedures under TILA, the complex regulatory

scheme of the statute, and its concomitant provision of specific

consumer rights, TILA is particularly inappropriate for arbitration.

TILA requires specific disclosures and represents “a carefully

tailored regulatory scheme which tries to balance the consumer’s

need for disclosure of certain information against the creditor’s

need for clear rules and protection from unwarranted liability.””°

The Eleventh Circuit’s decision in Parker v. DeKalb

Chrysler Plymouth, 673 F.2d 1178 (1 1" Cir. 1982), reinforced this

notion. The court in Parker held that a car dealership’s payment to

plaintiff in exchange for her waiver of rights under TILA was

‘inconsistent with the public interest in enforcing TILA

requirements...Congress passed TILA in part to encourage

consistent and fair treatment of borrowers.” Jd. at 1180. The court

went on to note, “...the public must rely largely on the efforts of

individual consumers acting as “private attorneys general” to

achieve the disclosure system envisioned by the Act.” Jd. The

court observed, “...[t]hey [the consumer] may be unfairly

deceived if we allow such broad language to bar their claims under

an Act of which they may be unaware and which was passed for

the protection of all borrowers, both gullible and sophisticated.”

Id.

Once again noting TILA’s unique purpose, the federal

district court in Delaware declined to enforce an arbitration

contract in a recent case, stating that “a ruling which compels

arbitration seems contrary to the underlying purpose of TILA.”

Johnson v. Tele-Cash, Inc., 82 F. Supp. 2d 264 (D.Del. 1999). The

court determined that based on the legislative history of TILA, it

seemed clear that “Congress was trying to encourage the use of

55 See Budnitz at 317 [citing JOHN SPANOGLE et al., CONSUMER LAW,

CASES AND MATERIALS 106-07 (2d ed. 1991).

-24-

class actions as a means for enforcing TILA. As a result, the court

believes that a strong argument can be made that TILA claims

should not be arbitrated since this forum cannot provide the class-

wide relief available in the courts.” Jd. at 269. The court found

unpersuasive the defendant’s argument that Congress had

amended TILA in 1980 to curb lawsuits. “In fact, Congress

observed when it amended TILA,

The typical disclosure statement...is not an

effective communication device. Most disclosure

Statements are lengthy, written in legalistic fine

print, and have essential truth in lending

disclosures scattered among various contractual

terms. The result is a piece of paper which appears

to be just another legal document instead of the

simple, concise disclosure form Congress

intended.” Jd. at 274.°°

As Parker stated so emphatically, Congress enacted TILA

to address the disparities in state credit disclosure laws and create

uniform disclosure rules for the benefit of both creditors and

consumers. Parker, 673 U.S. at 1180. If an arbitrator were to

ignore federal policy and substitute his or her belief as to what is

fair to the parties, this would undermine Congressional intent. No

matter how fair an arbitrator might be, he or she should not

supplant the collective wisdom of Congress ~z the Federal Reserve

Board, each of which have years of e€ ~<rience determining

national policy on credit disclosure.

* Quoting from The Truth in Lending Simplification and Reform Act.,

Pub. L. No. 96-221, § 122(a), 94 Stat.168 (175)(1980)(codified as

amended at 15 U.S.C. § 1631(a)(1994). See also, Bantolina v. Aloha

Motors, Inc., 419 F. Supp. 1116 (1976), in which the District Court for

Hawaii certified a class action under TILA, noting “...congressional

intent to go beyond actual damages and foster the use of the class-action

device as an incentive for voluntary national compliance with the Act...”

at 1122, n24.

i‘.

Finally, because arbitration limits discovery, has no

procedure for dealing with class actions, does not require written

opinions containing findings of fact and rulings of law, and

contains no mechanism for transmitting data to regulatory and

enforcement agencies, consumers are inevitably denied the

protections enumerated above and guaranteed by Congress in

these aptly-named consumer protection laws.

E. Absence _of Public Decisions in Arbitration, the

Increased Use_of Unilaterally Imposed Arbitration

May Harm Consumer Interests in Securing Rights

Provided By Statute

Most arbitrations are private. The results of arbitration are

also private. Most commercial arbitrations conclude only with an

award, without disclosing findings or the rationale for the result.*’

The Commercial Arbitration Rules of the American Arbitration

Association require secrecy.** The secrecy of arbitration means

that the deterrence and public education values served by open

court proceedings are absent. As one commentator has noted,

“arbitration makes it more difficult for a consumer to obtain

information about the experiences of others. This not only

increases the transaction costs for a consumer who seeks

information about a financial institution, it also isolates the

consumer.” *’ Moreover, when disputes about a practice can be

kept secret, the incentive to reevaluate them is reduced.

Commentators have made observations about other areas

of law that are apt in this discussion. Our laws address both public

and private disputes. In a private dispute, “only the interests and

°” Edward Brunet, Arbitration and Constitutional Rights, 71 N.C. L.

REV. 81, 85 (1992).

7 American Arbitration Ass’n., COMMERCIAL ARBITRATION RULES 25

(1996).

*? See Budnitz, supra at 327-28.

a.

behavior of the immediate parties to the dispute are at issue.’*°

Because of the localized nature of the dispute, the privacy of

arbitration proceedings does not conflict with the interests of

society in public decision making forums.*' In contrast, a public

dispute is one involving enforcement of “society-wide norms”

involving laws that protect the “public at large.®’ Consumer -

protection statutes were developed precisely out of this need to

protect the public and enforce society-wide norms. Congress and

state legislatures have enacted these statutes to protect a defined

segment of the public from the documented abuses of a specific

industry. Moreover, many of these statutes designate an agency of

the government to promulgate regulations, and the agency has

regulatory power over that industry. As a result, consumer

protection statutes are often an integral part of a comprehensive

regulatory scheme. Indeed, the regulatory agency often has the

power to investigate the industry to assure compliance with the

statute. Allowing an arbitrator, who is generally under no

obligation to apply the law, to decide a case, the results of that

decision remaining confidential, “tears at the fabric of this

regulatory scheme.”

IV. Consumers Union Supports Alternative Dispute

Resolution That Is Mutually-Agreed On By Parties In

A Dispute

In its flagship publication, Consumer Reports, Consumers

Union has advised consumers to consider mediation and

® See Fiss supra at 30.

°! Id. at 30-32.

® Id. at 31. -

®3 Stewart S. Sterk, Enforceability of Agreements to Arbitrate: An

Examination of the Public Policy Defense, 2 CARDOZO L. REV.481

(1981).

64 See Budnitz, supra at 323.

2M

arbitration, describing both as “often cheaper and faster than

litigation.’ The magazine also stated that: “We think consumers

should not have to sign contracts with businesses or professionals

that mandate arbitration...because such contracts deprive you of

access to the courts...”°° Consumers Union’s policy statement on

mandatory arbitration in consumer form contracts is attached in

the appendix to this brief.

The Consumers Union policy recognizes that arbitration

can be a desirable way to resolve disputes arising out of consumer

form contracts, but only if consumers have bona fide opportunity

to make an informed choice. This may occur under two scenarios.

First, if arbitration is to be binding on the parties, then consumers

must be offered the choice to accept binding arbitration, or decline

to enter into it, after a dispute arises. We believe that consumers

cannot make fully informed decisions on the pros and cons of

binding arbitration until after a dispute arises. This is particularly

true with respect to dragnet clauses that include any and all

disputes arising out of a consumer contract, including torts, the

contract the consumer executed, statutory and constitutional

issues. Consumers cannot possibly know what the nature of the

dispute will be, and therefore they cannot know whether they will

want a jury trial, will need extensive discovery, or whether they

might need injunctive relief.°”

The Consumers Union policy recommends a different

approach for businesses that wish to insert a pre-dispute

arbitration clause in their form contracts. It suggests that such pre-

dispute clauses be limited to agreements for non-binding forms of

6° When You Need a Lawyer, CONSUMER REP., Feb. 1996, at 35, 38.

86 Id. at 39.

®7 See also Michael Z. Green, Preempting Justice Through Binding

Arbitration of Future Disputes: Mere Adhesion Contracts or a Trap for

the Unwary Consumer, 5 LOY. CONSUMER L. REP. 112, 119 (1993).

-28-

ADR.” Given the reality that the consumer will not read the form

contract, this alternative preserves the consumer’s reasonable

expectations of having access to the courthouse.

A. Arbitration, Unlike Litigation, Presents the Danger of

“Selection Bias” Against the Consumer.

Organizations that provide private arbitration services are

businesses. Just like any other business, an arbitration provider

needs customers in order to survive. The serious risk of

unintended, and quite possibly inherent, “selection bias,” is rooted

in the fact that private arbitration services depend on the repeat

business of commercial entities. In a published discussion on

arbitration, Daniel Weinstein, then the vice chairman and senior

judicial officer, Judicial Arbitration & Mediation Services Inc.

(JAMS), and former superior court judge, conceded the likelihood

of “unconscious as well as the conscious bias toward [the] repeat

user.*” He described the issue of selection bias as “the most

profound criticism” of the “whole concept of private arbitrators

providing of dispute resolution services.”””

Consumer Reports, stating that “arbitration should be

impartial,” reported on the problem of bias when arbitration

companies receive significant fees from companies seeking

arbitrators. “‘...the National Arbitration Forum, a private, for-profit

68 There is precedent for non-binding ADR of consumer disputes in

many states. The state of California’s “lemon law” arbitration system

for new motor vehicle warranty disputes, for example, provides for non-

binding arbitration. See Civ. Code § 1793.22(c) (“if the buyer is

dissatisfied with [the] third-party [dispute resolution system] decision . . .

the buyer may assert the [lemon law] presumption . . . in an action to

enforce the buyer’s rights under subdivision (d) of Section 1793.2”)

(emphasis added).

®° Alternative Dispute Resolution: A Roundtable, THE RECORDER, Spring

1993, at 11.

7

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corporation, provides arbitrators for and has received revenue

from MBNA, H & R Block, First USA, and others. First USA has

paid NAF at least $5 million in fees since 1998, according to

recent court documents. Edward Anderson, the NAF’s managing

director, says consumers do better in arbitration than in court. But

First USA disclosed in court filings that of some 19,000 disputes

arbitrated and resolved over three years through NAF, cardholders

prevailed just 87 times.” ”’

To the extent that an organization of arbitrators

demonstrates a pattern of favoritism toward industry and against

consumers, this should call into question its ability to continue

hearing cases. Bias in the arbitration system is of critical concern

to consumers as mandatory arbitration clauses proliferate, and

merits serious judicial scrutiny from this Court.

CONCLUSION

Consumers Union is concerned about the proliferation of

pre-dispute mandatory binding arbitration clauses in consumer

contracts and the limitations they place on rights created at

common law and by the states and Congress in consumer

protection statutes. These concerns are compounded by the

absence of equal bargaining power between an_ individual

consumer and companies that draft and employ these clauses. For

these reasons, we believe that consumer contracts mandatory

arbitration clauses merit close scrutiny. We urge the Court to

affirm the decision below.

Respectfully submitted,

Sally J. Greenberg*

Consumers Union of U.S.

1666 Connecticut Avenue

Suite 310

Washington, DC 20009

(202) 462-6262

*Counsel of Record

"| Give up Your Right to Sue?, CONSUMER REPORTS, May 2000 at 8.

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APPENDIX

APPENDIX 1A

Consumers Union Policy on Arbitration and Other ADR

Clauses in Standard Form Consumer Contracts

Standard form contracts offered to consumers by

commercial parties are increasingly likely to contain

clauses requiring the consumer to participate in

arbitration or another form of alternative dispute

resolution (ADR). These clauses have the potential to

prevent consumers from having their claims heard in

court. Consumers Union's policy on mandatory

arbitration and ADR clauses is designed to promote

standards for when these clauses should be permitted to

be placed in consumer form contracts, or enforced if

found in such contracts, and to promote fair procedures

in the implementation of ADR clauses.

A. ADR, including arbitration, should not be required in

consumer form contracts unless the consumer has the

option either to decline to engage in the ADR process

after the dispute arises or to reject the results of the ADR

process. In other words, ADR clauses should be

permitted and enforceable in consumer contracts only if

the ADR process is: 1) contractually mandated with non-

binding results, 2) optional with binding results, or 3)

optional with non-binding results.

B. The ADR process must be fair. The overall fairness of a

contractually imposed ADR process should be judged by

compliance with the following criteria.

A. ADR clauses imposed in a consumer form contract

must not select an ADR provider if the location of that

provider would impose unreasonable travel costs upon

the consumer in order to fully participate in the hearing

of the claim.

B. Any consumer contract requiring the consumer to

submit to ADR should contain a clear, conspicuous, and

understandable disclosure describing the degree to

which the consumer gives up any rights he or she

otherwise possesses to go to court. Whenever the parties

or their agents engage in face-to-face discussions

leading to formation of the contract, there should also be

a clear oral disclosure.

C. ADR clauses should not apply to cases where a

consumer is seeking injunctive relief, unless, after the

dispute arises, the consumer agrees to the ADR process

and the ADR decision maker has the power to order

injunctive relief.

D. In order for any ADR provider to be preselected in a

consumer form contract, that provider must maintain an

index of actions which is open to the public. The index

must identify the parties to the disputes it has pending

and has resolved in the past five years. The results of its

ADR procedures involving individual consumers should

also be available, unless the ADR decision maker has

found that there is a special need to seal the results of

the ADR proceeding.

E. Whenever the result of ADR will be binding or

subject only to limited review, all parties should have

access to civil discovery to the degree necessary to the

claims and defenses presented. In particular, consumers

should always have access to the complete file, if any

exists, about their claim or dispute, and to evidence

indicating that any problem they allege is part of a larger

pattern or practice of the business.

F. Standard form consumer contract ADR clauses

should be invalid if the preselected ADR provider does

not require that the officer who presides at the ADR

proceeding must swear all the witnesses to tell the truth.

G. Standard form contract ADR clauses in consumer

contracts should be disallowed unless they provide that

the consumer may appeal for review of alleged errors.

H. ADR providers selected in consumer form contracts

must provide for waiver of fees and costs for indigent

individuals.

I. ADR clauses in consumer form contracts should be

invalid if they select an ADR provider which does not

have an effective method of internal review to reduce

the risk of selection bias. This is of critical importance.

State licensing of ADR providers may also be

necessary.

J. ADR providers selected in consumer form contracts

must provide a written statement of the basis for any

decision which is binding when issued.

K. Conflict of interest disclosures should be made by all

proposed single ADR decision makers and all who are

Proposed to serve as a so-called "neutral third." At least

the following should be disclosed:

¢ Names of prior or pending cases involving any

party to the ADR agreement or any attorney for

any of the parties in which that person is serving

or has served as an arbitrator, party or attorney.

e The results of each concluded case involving any

of the parties or attorneys for the current case,

including the identity of the prevailing party and

the date and amount of any award.

After disclosure, the consumer should have the right

to reject the proposed decision maker.

L. ADR should never be used to eliminate or delay a

consumer's access to a small claims court action,

licensing or other administrative proceeding, or a

consumer class action.