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

3

a JUL 2 4 2000

No. 99-1235

‘¥

IN THE

Supreme Court of the United Staten

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 AMICUS CURIAE OF PUBLIC CITIZEN

IN SUPPORT OF RESPONDENT

ALAN B. MORRISON

(Counsel of Record)

PAUL LEVY

MICHAEL J. QUIRK

PUBLIC CITIZEN LITIGATION GROUP

1600 20th Street, N.W.

Washington, D.C. 20009

(202) 588-1000

Attorneys for Amicus Curiae Public Citizen

July 24, 2000

MBEST AVAILABLE COPY

1

TABLE OF CONTENTS

INGERbe! OF THE AMICUS . 2. occ cc cccssccusess l

INTRODUCTION AND SUMMARY OF ARGUMENT . 2

PTE 6< Cineis eet ence atiers Uk. 5

‘ Congress Never Intended the Federal

Arbitration Act to Allow a Party Effectively to

Extinguish Opposing Legal Claims by Imposing

Prohibitive Arbitration Costs on Their

TIE oc sav sv aaa dh ba hie k oda vucwhe 2

II. The Truth In Lending Act’s explicit class action

remedies, which are essential to its consumer

protection goals, cannot be enforced through

OE Weg iets e aay ices ua ie ei cs 19

A. The Truth In Lending Act’s

class action remedies are

essential to the effective

enforcement of the Act against

RRR Noo. ce Sees renew 19

B. The claims of the proposed

plaintiff class cannot be ordered

to arbitration because arbitrators

do not have authority to bind

absent class members to their

pS EN Ne ee eee 23

IT Oia 5595 ca vas Caw isasekeacun nace 28

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TABLE OF AUTHORITIES

CASES

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

Itd US. 2E5 CN) cscs canine 6

Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997) . 26

Cole v. Burns International Security Services,

10S F358 1465 GO. Gt. Fiero skeen 14, 16

Deposit Guaranty National Bank v. Roper,

V6 US SEB UTI cccneisarinicct in 21

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) ......... 21

First Options of Chicago, Inc. v. Kaplan,

384 US. S56 CIGPED sicnsscisieaeabetedainiek 27

In re General Motors Corp. Pick-Up Truck Fuel Tank,

33 F368 166 GOOCH. TOR ccc ouduaaela 26

Gilmer v. Interstate/Johnson Lane Corp.,

JOO U.S. 20 CI9F1) ccconermiaen aie oe 6, 22

Halligan v. Piper Jaffray, Inc.,

148 F.36 197 (2b Oe, Te cece 27

Hansberry v. Lee, 311 U.S. 32 (1940) wou. seescssccssseeeees 24

Johnson v. Tele-Cash, Inc., 82 F. Supp.2d 264, 270 (D. Del.

EDDD) ..srcorscneseieuasdsscsnessdiioningaaiaenane Laae one 22

ili

McDonald v. City of West Branch, 466 U.S. 284 (1984) .. 25

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

PR Rely RE SUTIOE cvsevssasessivacssmcaseussarcnsionsine 4, 6, 19, 20

Mullane v. Central Hanover Bank and Trust Co.,

I I odin asscsdaesncoasicmicicsbubuick 24

O'Neil v. Hilton Head Hospital,

eT GN, BOT oonchescicinvecksensscabsinassesuntoxsecs 16

SI PE MR I oo ccsnvenccvevassexcvossasnionsanntocnscchons 26

Ortiz v. Fibreboard Corp., 119 S. Ct. 2295 (1999) ...0....... 24

Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985) 21, 24

Securities and Exchange Commission v. Sloan,

a os ss ssdacasesmmcuoweanesuckee 7

Shearson/American Express, Inc. vy. McMahon,

I MA ED a sadiserssivepesicsdvvsasenencsvsnsxnonserneesse 19, 23

Tennessee Valley Authority v. Hill, 437 U.S. 153 (1978) .... 7

United Leather Workers International Union v. Herkert &

Meisel Trunk Co., 265 U.S. 455 (1924) vovcecececccsceeeees 17

Watkins v. Simmons & Clark, Inc.,

Bre we Pe OO OE, TDD: onic sconssnvsssccsncneesscsceses 20, 22

STATUTES

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BF Ries IPE Siseiecivuchaieiiarsdcesnlackeewnpidsesmaaaamuiadouin 20

15 U.S.C. § 1640(c) ......... itiecidacsasndtaasaioasin a a a

EE Cae Cs: RNS aa aE HOSA MINED Na i 25

ead 18

BF i IEE scivininincnncecnniaineidicniaaniadameniliniite 22

H.R. Rep. No. 96, 68th Cong., Ist Sess., 2 (1924) wc... 17

Ba ey ee RE, GE ID sdicssinsssnnitesnsnctiaeepaniterndnavmenes 15

S. Rep. No. 536, 68th Cong., Ist Sess., 3 (1924) ......... 13,17

’ LEGISLATIVE HISTORY

Ny = | eee CCPL eC 8

67th Cong., 4th Sess. (Senate Subcommittee Hearing) 14

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re SA, BOE TRO: BO ED svn vas iccsansecnsansovactdansnonsonmnans 7

ee Ee i, Sy | Seenneenemrnc aN mene ne 20, 21, 22

MISCELLANEOUS |

J.H. Cohen and K. Dayton, The New Federal Arbitration

Lat, 12 Ve. ©. Ov. BBD, ZOE CERES sevissesnscncstessacensesens 9

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Vv

Julius Henry Cohen, The Law of Commercial Arbitration

and the New York Statute, 31 Yale L.J. 147, 152

(1921) ,

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INTEREST OF THE AMICUS'

Public Citizen is a national consumer organization with

approximately 150,000 members. While Public Citizen

recognizes the appropriate role that consensual arbitration

plays, it has a longstanding interest in preventing large

institutions from compelling consumers and workers to forgo

their rights to proceed in court, especially where, as here,

arbitration does not merely involve a change in forum, but also

affects a significant reduction in remedies and other rights,

either as a matter of law or, as here, as a matter of practical

necessity. In addition, the rights of the thousands of absent

members of the class that respondent sought to maintain in this

action will be effectively determined by whether the decision

of the Eleventh Circuit is upheld. Because Public Citizen

regularly participates in class actions to protect the interests of

absent class members, its brief here will focus on their interests

in having the decision below affirmed.

Amicus agrees with the arguments made in respondent’s

brief, and they will not be repeated here. Instead, amicus will

provide a detailed history of the Federal Arbitration Act of

1925 to establish that the Act was not intended to be an

unqualified endorsement of arbitration under all circumstances,

but a more limited approval of consensual agreements between

businesses to arbitrate their differences, without altering the

substantive rights of either party. In this case, compelled

arbitration of the Truth in Lending Act claims of respondent

1

Letters of consent to the filing of this amicus brief

have been lodged with the Clerk. Pursuant to this Court’s Rule

37.6, amicus states that no party had any role in writing this

brief and that no one other than amicus or its counsel made a

monetary contribution to its preparation or submission.

2

and the class that she seeks to represent would effectively

foreclose the exercise of their rights because of the costs that

claimants would have to incur in pursuing arbitration and

because of the absence of class action remedies that are

essential to TILA enforcement. Thus, compelling arbitration

here would not further the purposes of the FAA and would

undermine the purposes of TILA, as the Eleventh Circuit

correctly held.

Finally, although we agree with respondent that the

decision below should be affirmed, we do not support her

suggestion that, if the agreement at issue here had somehow

specifically authorized class arbitration, that would have cured

this defect. In our view, only an instrumentality of government,

and not a private arbitrator, can issue orders that can bind

absent class members. In taking this position, amicus provides

a perspective entirely different from those of the parties.

INTRODUCTION AND SUMMARY OF ARGUMENT

This case involves a claim brought by a mobile-home

purchaser against her mortgage company on behalf of herself

and a proposed class of borrowers under the Truth In Lending

Act’s express class action provisions. Respondent’s complaint

sought class certification and appropriate class-wide relief for

petitioner’s failure to inform consumers that its financing

documents required them to purchase a $15 vendors’ single-

interest insurance policy. In its contracts with each class

member, petitioner included an.sextremely broad and identical

arbitration provision that requires borrowers to arbitrate all

contractual and statutory claims for both damages and

injunctions. The contract does nothing to change the general

rule that the parties to an arbitration must share forum costs,

such as the fees of the decision-maker, unlike in court

proceedings where judges are paid by the government.

3

Moreover, despite the breadth of the arbitration clause, it makes

no mention of class actions and plainly does not contemplate

that a private arbitrator would have the power, let alone the

tools, to adjudicate these claims on a class-wide basis.

Although the District Court recognized that requiring

arbitration here would almost certainly end this proceeding, it

concluded that it had no choice but to order arbitration and to

dismiss the case with prejudice, a ruling to which it adhered on

respondent’s motion for reconsideration. The Court of Appeals

reversed, concluding that it had jurisdiction over a final

decision of dismissal and finding that the failure to shift the

burden of the expenses of arbitration to petitioner

fundamentally interfered with respondent’s enforcement of

TILA in these circumstances.

Amicus agrees with respondent that the Court of

Appeals had jurisdiction over her appeal. Section 1291 of Title

28 provides for jurisdiction over “final decisions”of district

courts, and Section 16(a)(3) of the FAA confirms that authority

using identical terminology, with no qualifications whatsoever.

Petitioner never explains what else remains to be done to make

the decision final, nor when else a person who declines to

arbitrate, as respondent did here, could take an “appeal” from

this order of dismissal, let alone how a person who prevails in

arbitration can “appeal” a victory in that forum, when the real

objection is to the defeat in the judicial forum that occurred

well in the past. Finally, of particular interest to amicus, what

would happen to the claims of absent class members while the

cas€ was wending its way through arbitration, and, in

particular, would their statutes of limitations be tolled until

somehow the class representative was able to appeal the final

decision of dismissal? All of those problems can be avoided by

reading “final decision” in Section 16(a)(3) to mean what it has

always meant: A losing party may take an appeal whenever, as

4

here, there is nothing left to be done in the District Court.

Contrary to the assertions by petitioner and its amici,

the FAA was never intended to be a paean to arbitration to the

exclusion of all other interests. The history of the FAA makes

clear that it was enacted in response to the refusal of courts to

enforce arbitration agreements and even arbitration awards

between businesses. Congress recognized other values in the

Act and never contemplated that statutory claims, which

depend on the courts for meaningful enforcement, would be

undermined by the kind of pre-dispute arbitration clauses

inserted by petitioner here in all of its contracts. It is not our

position that statutory claims are never a proper subject of

arbitration, but that the i:istory of the Act confirms this Court’s

recognition in Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 637 (1985), that arbitration

clauses cannot undermine the effective enforcement of

substantive rights, particularly those under laws like TILA that

are intended to override ordinary principles of contract law.

That approach is of particular significance here, where

the class action device has been recognized by Congress as

vital to TILA enforcement. As respondent demonstrates, the

absence of a class action mechanism, as well as the lack of a

requirement that petitioner bear the cost of arbitration, makes

these TILA claims effectively unenforceable if she must

proceed in arbitration. But even if petitioner agreed to pay for

arbitration costs and purported to create a class action

arbitration forum, that would be of no avail. Consistent with

due process, a non-party can lose his or her claim only by

governmental action, not by a private arbitration. Thus, absent

class members have the right to the protection of a court before

their claims are adjudicated, and only a unit of government, not

a private party like petitioner, can create such a forum. This

Court need not pass on the legality of such a hypothetical

5

private class action mechanism, but the obvious and serious

problems with the concept provide a further reason to conclude

that a court, not an arbitrator, must pass om the merits of these

statutory claims.

ARGUMENT

The decision of the Court of Appeals below should be

affirmed.

I. Congress Never Intended the Federal

Arbitration Act to Allow a Party Effectively

to Extinguish Opposing Legal Claims by

Imposing Prohibitive Arbitration Costs on

Their Enforcement.

Petitioner attempts to answer the questions presented in

this case primarily by reference to an “emphatic” federal policy

favoring arbitration. In arguing that the Federal Arbitration

Act’s express provision for the appeal of a “final decision with

respect to an arbitration that is subject to this title,” 9 U.S.C. §

16(a)(3), does not apply to the district court’s decision

dismissing all of respondent’s claims with prejudice, petitioner

relies foremost on the FAA’s “object and policy” favoring

arbitration. Br. at 21. Asserting that its arbitration clause

should be enforced despite its threat to impose hundreds of

dollars in additional forum costs on consumers seeking to

enforce their $200 Truth In Lending Act claims, petitioner

recites the enforcement language of Section 2 of the FAA, Br.

at 31, on the assumption that it applies to all arbitration

agreements, no matter what the subject or how the agreement

affects substantive rights.

The history of the FAA, however, provides no support

for petitioner’s invocation of a boundless federal policy

6

favoring arbitration of all disputes between contracting parties.

The events leading to the FAA’s passage demonstrate a

prevailing consensus that arbitration was an expeditious and

cost-effective mechanism for resolving business contract

disputes. Although this Court has subsequently recognized

broader applications of the Act to statutory claims, Mitsubishi,

473 U.S. at 626-27; Gilmer v. Interstate/Johnson Lane Corp.,

500 U.S. 20, 26 (1991), and to disputes arising from consumer

transactions, Allied-Bruce Terminix Companies, Inc. v. Dobson,

513 U.S. 265 (1995), the Court has also been careful to ensure

that arbitration continues to serve the Act’s dual goals of

allowing for faster and cheaper resolution procedures, while

preserving all of a party’s legal remedies. See, e.g., Mitsubishi,

473 U.S. at 628:

By agreeing to arbitrate a statutory claim, a

party does not forgo the substantive nights

afforded by the statute; it only submits their

resolution in an arbitral, rather than a judicial,

forum. It trades the procedures and opportunity

for review of the courtroom for the simplicity,

informality, and expedition of arbitration.

Petitioner’s use of arbitration in this case threatens plaintiffs

with arbitration-specific costs that would prevent them from

vindicating their rights under the Truth In Lending Act. This

use of mandatory arbitration would exceed the bounds set by

the FAA’s underlying policy goals and thus requires the Court

to reassert the limitations set by Congress on the FAA’s

enforcement.

The history of the Federal Arbitration Act defines the

contours of federal policy regarding arbitration. While Section

2 speaks generally to enforcement of a “contract evidencing a

transaction in interstate commerce,” for the settlement of a

7

“controversy thereafter arising out of such contract,” 9 U.S.C.

§ 2, the process culminating in the FAA’s passage in 1925

makes clear the circumstances in which the Act provides for the

enforcement of arbitration. This history reveals more than

isolated statements as to the Act’s likely application; it

demonstrates an overwhelming consensus among legislators,

drafters and supporters, as confirmed by the then-prevailing

state law, that arbitration was to be used to provide a faster and

cheaper method for resolving contractual disputes between

businesses. On proper uses of legislative history, compare

Tennessee Valley Authority v. Hill, 437 U.S. 153, 177 (1978)

(“The legislative proceedings in 1973 are, in fact, replete with

expressions of concern over the risk that might lie in the loss of

any endangered species”), with Securities and Exchange

Comm’n y. Sloan, 436 U.S. 103, 121 (1978) (“We are

extremely hesitant to presume general congressional

awareness...based only upon a few isolated statements in the

thousands of pages of legislative documents”). As we now

show, petitioner’s attempt to use arbitration to create barriers

to plaintiffs’ assertion of statutory claims is wholly unjustified

by reference to the FAA’s history and purposes.

Congress enacted the Federal Arbitration Act in 1925 to

allow businesses to resolve their contractual disputes before

experienced decision-makers in expedited, cost-effective

proceedings. The FAA was the legislative culmination of a

process that the American Bar Association set into motion to

obtain congressional authorization for federal courts to enforce

arbitration agreements in maritime and interstate commercial

contracts. See Joint Hearings on S. 1005 and R. 646 before the

Subcommittees of the Judiciary Committees (Joint Hearings),

68th Cong., Ist Sess. 34 (1924). The ABA’s Committee on

Commerce, Trade, and Commercial Law described its

legislative proposal thus:

8

[T]he adoption of ...the Federal statute and the

uniform State statute will put the United States

in the forefront in this procedural reform. It

will raise the standards of commercial ethics. It

will reduce litigation. It will enable business

men to settle their disputes expeditiously and

economically, and will reduce the congestion in

the Federal and State courts.

Hearing on S. 4213 and S. 4214 before the Subcommittee of the

Senate Committee on the Judiciary, 67th Cong., 4th Sess.

(Senate Subcommittee Hearing) 14 (1923). The ABA’s

legislative proposal was intended to provide merchants with

faster and cheaper procedures for resolving commercial

contract disputes. and was not intended to establish a general

federal policy favoring arbitration of all controversies between

contracting parties. See Report of Standing Committee on

Commerce, Trade and Commercial Law, 50 ABA Rep. 356,

361 (1925) (arbitration’s “appropriate field in respect to future

disputes is somewhat qualified and limited. It is, in our

opinion, desirable that this Association should lend its

influence and aid to arbitration within its proper field.”)

(quoting committee study of Association of the Bar of the City

of New York).

The ABA drafted the proposed federal arbitration law

in response to problems experienced primarily by commercial

actors. In addition to the costs of litigation, the ABA drafters

were concerned with delays that the litigation process entailed,

“especially in recent years in centers of commercial activity,

where there has arisen great congestion of the court calendars,”

and with the

failure, through litigation, to reach a decision

regarded as just when measured by the

9

standards of the business world. This failure

may result either because the courts necessarily

apply general rules which do not always fit a

specific case, and [sic] because, in the ordinary

jury trial, the parties do not have the benefit of

the judgment of persons familiar with the

peculiarities of the given controversy.

Joint Hearings 34-35 (ABA Brief on proposed Federal

arbitration statute). These limited purposes should signal

caution whenever the Act is invoked outside the context of

business contract disputes. Statutory claims compel decision-

makers to apply special rules designed to vindicate

legislatively-declared public values, which exist wholly apart

from, and often in conflict with, commercial norms. The Truth

In Lending Act, for example, supersedes general principles of

contract law, requiring decision-makers to enforce the Act’s

remedies to vindicate consumer protection goals. This is an

entirely different function from that which the FAA’s architects

expected arbitrators to perform.

During congressional hearings on the bills that were

later enacted as the FAA, the ABA drafters supported their

legislative proposal by reference to its impact on merchants.

W.H.H. Platt, chair of the ABA’s commerce committee,

explained to the Senate Judiciary subcommittee that the

legislation responded to “quite a demand in commercial centers

on the part of a good many commercial organizations to

have...a vehicle constructed to effectuate an agreement to

arbitrate.” Senate Subcommittee Hearing 8. Julius H. Cohen,

also of the ABA commerce committee, explained that federal

courts “could get rid of the litigation that these business

concerns can prevent by their arbitration committees” because

the Act “would take out all these matters of business and leave

the courts free to handle the business that ought to be handled

10

with dispatch.” Joint Hearings 18; see also J.H. Cohen and K.

Dayton, The New Federal Arbitration Law, 12 Va. L. Rev. 265,

281 (1926):

Not all questions arising out of contracts ought

to be arbitrated. It is a remedy peculiarly suited

to the disposition of the ordinary disputes

between merchants as to questions of

fact—quantity, quality, time of delivery,

compliance with terms of payment, excuses for

non-performance, and the like. It has a place

also in the determination of the simpler

questions of law—the questions of law which

arise out of these daily relations between

merchants as to the passage of title, the

existence of warranties, or the questions of law

which are complementary to the questions of

fact which we have just mentioned. It is not the

proper method for deciding points of law of

major importance involving constitutional

questions or policy in the application of statutes.

The FAA was enacted with the intention that the Act would not

subvert legal remedies because arbitration would be enforced

only where it could provide a full and fair resolution to a

dispute involving private interests.

Commercial sector supporters likewise viewed the FAA

in terms of its application to contractual disputes between

businesses. Charles Bernheimer of the New York Chamber of

Commerce was unambiguous in expressing his understanding

of this limited application of arbitration legislation:

There are four known methods based on long

experience | have had by which to meet trade

——— ge ee

ee) Se

11

disputes, the ordinary everyday trade disputes,

and it is for them that this legislation is

proposed...

Speaking for those who have had experience

and who are engaged in business, I may say

this, that arbitration saves time, saves trouble,

Saves money. There is no question about that.

We know it. /t preserves business friendships.

...Friendliness is preserved in business. It

raises business standards.

Joint Hearings 7 (emphasis added). Other supporters echoed

this understanding. /d. at 11-12 (Gray Silver of the American

Farm Bureau Federation: “we are very much in favor of the

objectives of an arbitration in commercial matters, believing it

will be helpful in speeding business generally”); /d. at 22 (M.L.

Toulme of the National Wholesale Grocers’ Association: “This

association for many years has urged commercial arbitration”):

Id. at 23 (Thomas Paton of American Bankers’ Association:

endorsing legislation “legalizing the settlement of commercial

disputes”); /d. at 23-24 (Samuel Forbes of the Converters’

Association: “we most strongly feel that the adoption of a

Federal arbitration act such as is now proposed will be one of

the most forward steps in commercial life. Our members have

found arbitration to be expeditious, economical, and equitable,

conserving business friendships and energy”).

The views of the American Bankers’ Association, a

vocal supporter of federal arbitration legislation in the early

1920's, are also instructive regarding the disconnect between

the FAA’s statement of federal arbitration policy and the home

mortgage borrowers’ statutory claims that form the basis of the

dispute here. The bankers passed the following resolution in

1923 supporting the federal bill:

12

Whereas all merchants doing interstate and

foreign business seek a method whereby

disputes arising in their daily business

transactions can be speedily, economically, and

equitably disposed of; and

Whereas arbitration offers the best means yet

devised for an efficient, expeditious, and

inexpensive adjustment of such disputes;

Whereas the arbitration laws of the various

States of the Union are not in uniformity and

often in conflict; and

Whereas the laws of any given State are not

applicable in other States: Now therefore be it

Resolved. That the commerce and marine

commission of the American Bankers’

Association is thoroughly in accord with the

efforts being made to create Federal legislation

legalizing the settlement of commercial

disputes...

Id. at 31. The bankers’ representative during the 1924 Joint

Committee Hearings responded to the question of how banks

stood to benefit from the Act solely by reference to business

disputes:

I think [the federal legislation] would be of

indirect benefit, because [the bankers’ ] interests

are linked up with the merchants and business

men of the country; and later on it will probably

be of direct benefit to the banks because it will

put in their minds the idea of taking up their

disputes through arbitration. Of course, the

banks of the country have a great deal of

business, and a great many business dealings

with one another throughout the country in

13

regard to bank collections, and there is a great

deal of conflict in regard to those bank

collections. I think this would be the best

method of handling that litigation.

Id. The banking representatives were silent about any benefits

of the Act’s application to compel arbitration of statutory

claims asserted by non-commercial account holders or

borrowers because they, like other supporters, expected the

FAA to have a narrow application to business relationships.

Prevailing arbitration law at the time of the FAA’s

enactment further illustrates the limited range of federal

arbitration policy. The FAA’s supporters repeatedly compared

the federal arbitration legislation to existing state laws,

particularly the New York Arbitration Law, which permitted

courts to enforce agreements to arbitrate commercial disputes.

The federal act was meant to parallel New York’s, but would

apply to maritime and interstate and foreign commercial

transactions that were then deemed beyond the reach of state

law. S. Rep. No. 536, 68th Cong., Ist Sess., 3 (1924); Senate

Subcommittee Hearing at 2; Joint Hearings at 8, 16, 19, 24, 30,

34. The New York Arbitration Law enforced agreements to

arbitrate disputes arising out of commercial contracts. Julius

Cohen of the ABA’s commerce committee described the public

policy behind the New York statute as one of providing a

“strong inducement toward adjusting trade difficulties out of

court and thus preserving the good relations between the

parties, while securing a fair and reasonable adjustment of the

controversy at hand.” Julius Henry Cohen, The Law of

Commercial Arbitration and the New York Statute, 31 Yale L.

J. 147, 152 (1921). Congress’s understanding of the FAA at

the time of its enactment was that it would apply to enforce

agreements negotiated between businesses to resolve their

contractual disputes.

14

When courts unleash the FAA from its originally

intended context of contractual disputes between businesses

and apply it to compel arbitration of consumer’s statutory

claims, they must ensure that arbitration preserves all of the

consumer’s legal rights. This capacity of arbitration cannot

simply be presumed because consumers, unlike businesses,

typically do not negotiate contractual terms, but rather accept

contracts, including those with arbitration clauses, on a take-it-

or-leave-it basis, have less experience and knowledge of

arbitration than do the businesses against whom they assert

their claims, and lack the capacity of businesses to monitor

arbitral proceedings on an ongoing basis. See, Cole v. Burns

Int'l Security Services, 105 F.3d 1465, 1476-77 (D.C. Cir.

1997) (discussing disadvantages of individual workers in

arbitration against employers). The power and experiential

disadvantages of consumers in arbitration leave them

vulnerable to burdens that businesses may place on their ability

to enforce their legal rights. The silence of petitioner’s contract

as to arbitration costs, for example, requires respondent and

other mortgage borrowers to face a risk of additional costs not

payable in a court adjudication that may prohibit them from

ever enforcing their statutory rights because their costs may

exceed their expected recovery. Because Congress never

intended or anticipated applications of the FAA that would

create these dangers, courts cannot compel consumer

arbitration by presuming the existence of consensual

arrangements and fair procedures that preserve all of the

consumer’s legal claims. Instead, the party seeking to compel

arbitration must demonstrate that these preconditions to

arbitration have been satisfied.

The discussion during Congressional hearings of what

federal arbitration legislation was not expected to cover

confirms that federal arbitration policy in the FAA does not

extend to petitioner’s contract. In response to questions from

15

Senate Judiciary subcommittee Chairman Sterling and from

Senator Walsh expressing concern about unequal bargaining

power and compelled waivers of the right to litigate, the ABA

drafters repeatedly proclaimed that the Act would not apply to

insurance contracts. Senate Subcommittee Hearing at 9, 10;

Joint Hearings at 15. When pressed by Senator Walsh, ABA

representative W.H.H. Platt also disavowed the applicability of

the proposed legislation to railroad passenger agreements

because of the comparability of arbitration in these cases to

prohibited contractual barriers to litigation, such as coerced

reductions of statutes of limitations. Senate Subcommittee

Hearing at 10 (“I think that ought to be protested against,

because it is the primary end of this contract that it is a contract

between merchants one with another, buying and selling

goods”). The legislators’ concern to avoid compelled waivers

of legal rights, and the drafters’ responses distinguishing

contracts between parties of unequal bargaining power from the

commercial contracts they sought to cover, confirm that the Act

may not be used to alter substantive rights, as petitioner would

do here if it prevails.

The FAA’s exclusion of employment contracts from its

coverage also bolsters the conclusion that the federal policy

regarding arbitration is far narrower than petitioner asserts. As

the bill was first proposed in the Senate in 1922, Section 2 was

silent as to employment contracts, S. 4214, 67th Cong. § 2

(1922). When Committee Chairman Sterling questioned the

ABA’s Platt as to this possible application during the 1923

Senate hearings, Platt disavowed any intent to apply the

proposed law to employment relationships:

It was not the intention of this bill to make an

industrial arbitration in any sense; and so |

suggest that in as far as the committee is

concerned, if your honorable committee should

16

feel that there is any danger of that, they should

add to the bill the following language, “but

nothing herein contained shall apply to seamen

or any class of workers in interstate or foreign

commerce.” It is not intended that this shall be

an act referring to labor disputes at all. Jt is

purely an act to give the merchants the right or

the privilege of sitting down and agreeing with

each other as to what their damages are, if they

want to do it. Now, that is all there is in this.

Senate Subcommittee Hearing at 9 (emphasis added); see also

Id. at 14 (Statement of Secretary of Commerce Herbert Hoover,

proposing identical statutory language). In response to these

proposals, Congress amended Section 1, adopting this

exclusionary language to clarify the Act’s non-application to

employment agreements and its limited application to contracts

between businesses. The purpose of Section 1's exclusionary

clause—to distinguish employment from commercial

contracts—also counsels this Court to proceed carefully when

applying the FAA to contracts purporting to bind individuals to

arbitrate their statutory disputes with businesses.”

* This Court has granted certiorari in Circuit City

Stores, Inc. v. Adams, 99-1379, to determine the scope of the

FAA’s Section | exclusion of employment contracts. Amicus

respectfully urges that the entire discussion of the FAA’s

enactment herein, not merely that of Section 1, informs the

correct disposition of Adams. Courts that have narrowed

Section 1's exclusion have ignored altogether Congress’s work

in enacting the FAA. See, e.g., Cole, 105 F.3d at 1470;

(deeming § 1's legislative history irrelevant to its application);

O'Neil v. Hilton Head Hosp., 15 F.3d 272, 274 (4th Cir. 1997).

Under prevailing Commerce Clause doctrine in 1925, see, e.g.,

17

Supporters of the FAA’s enactment also were

unanimous in their expectation that the Act would reduce the

time and expense of resolving the disputes to which the Act

would apply. The House and Senate Judiciary Committees

identified the delays and costs of litigation as a major impetus

for federal legislation authorizing arbitration of certain

disputes. H.R. Rep. No. 96, 68th Cong., Ist Sess., 2 (1924); S.

Rep. No. 536, 68th Cong., Ist Sess., 3 (1924). In urging

passage of the legislation, the Commerce Department pointed

the Committees’ attention to federal court “delays amount[ing]

to a virtual denial of justice.” Senate Hearing at 14. The

ABA’ brief in support of its legislative proposal recited as one

of the bill’s primary benefits that it would “enable business

men to settle their disputes expeditiously and economically and

will reduce the congestion in the Federal and State courts.” Jd.

Charles Bernheimer of the New York Chamber of Commerce

concurred, informing the Joint Committees that “arbitration

saves time, saves trouble, saves money.” Joint Hearings at 7.

Petitioner’s use of arbitration to impose forum costs on

consumers vindicating statutory claims is wholly at odds with

federal arbitration policy under the FAA. In order to arbitrate

her statutory claim, respondent faces the threat of filing fees

and arbitrator’s fees, which may be in the hundreds of dollars

per day, plus additional forum expenses. These costs

United Leather Workers Int'l Union v. Herkert & Meisel Trunk

Co., 265 U.S. 455, 465 (1924) (““The making of goods and the

mining of coal are not commerce, nor does the fact that these

things are to be afterwards shipped or used in interstate

commerce make their production a part thereof.’’’) (citations

omitted), the exclusion of “seamen, railroad employees, or...any

workers engaged in foreign or interstate commerce,” 9 U.S.C.

§ 1, was tantamount to an exclusion of all workers.

18

effectively prohibit consumers with small claims, like

respondent’s $200 cause of action, from enforcing their legal

rights in arbitration. To preserve the FAA’s guarantee that

parties may vindicate all of their legal claims, the drafter of a

contract that would compel consumers to arbitrate must bear all

of the costs associated with the forum, including filing fees,

arbitrator’s fees, and other hearings costs, that exceed the

equivalent costs to litigants in court. At the very least,

consumers who prevail in arbitration must be guaranteed to

recover these costs plus all those provided for under 28 U.S.C.

§ 1920, or its state law equivalent if the case were pending in

state court.’

The legislative history of the Federal Arbitration Act

demonstrates that the Act may not be invoked to compel

consumers to arbitrate statutory claims at a cost exceeding that

of the equivalent judicial forum. While the Act’s original

application to contractual disputes between businesses has been

expanded in recent years, this Court has ensured that arbitration

continues to serve the underlying purposes of the Act to

preserve parties’ legal claims while allowing them to resolve

those claims in timely and cost-effective proceedings.

Petitioner’s use of arbitration in this case, to threaten individual

consumers with forum-specific costs as the price for asserting

their statutory claims, would undermine the policy goals of the

FAA and therefore the Court may not compel borrowers to

arbitrate these Truth In Lending Act claims.

> Respondent’s Truth In Lending Act claims could also

have been filed in state courts under 15 U.S.C. § 1640(c).

Since this would open up small claims courts to TILA

claimants, the availability of a low cost judicial forum in this

case makes the deterrent effect of petitioner’s shifting of

arbitral forum costs to consumers that much more pronounced.

19

Il. The Truth In Lending Act’s explicit class

action remedies, which are essential to its

consumer protection goals, cannot be

enforced through arbitration.

Enforcement of the arbitration clause in petitioner’s

retail installment contract would prohibit respondent and other

home mortgage borrowers from vindicating their rights to seek

class-wide relief under the Truth In Lending Act. Petitioner

does not dispute the contention that its arbitration clause

precludes borrowers from proceeding against it as a class, but

instead asserts that individual remedies are sufficient to enforce

TILA. Brief at 46-47. However, TILA’s class action remedies

constitute a critical component of the Act’s civil enforcement

scheme. Because there can be no mandatory arbitration of the

claims of a nationwide plaintiff class, petitioner’s arbitration

clause eliminates class relief under TILA and therefore is

unenforceable.

A. The Truth In Lending Act’s

class action remedies are

essential to the _ effective

enforcement of the Act against

repeat violators.

Contractual arbitration clauses that prevent prospective

litigants from effectively vindicating statutory causes of action

are unenforceable. Mitsubishi, 473 U.S. at 637;

Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,

227 (1987). In Mitsubishi, the Court enforced an arbitration

agreement between an automobile manufacturer and a

distributor as it applied to the distributor’s Sherman Act

counterclaims. The Court did so because the arbitration

tribunal was bound to apply the Sherman Act’s remedial

provisions, concluding that “so long as the prospective litigant

20

may vindicate its statutory cause of action in the arbitral forum,

the statute will continue to serve both its remedial and deterrent

function.” Mitsubishi, 473 U.S. at 637. Under this analysis,

however, petitioner may not compel arbitration of respondent’s

Truth In Lending Act claim because arbitration will deny

respondent TILA’s class action remedies.

The potential for class action liability is essential to the

effective enforcement of the Truth In Lending Act. TILA

requires lender institutions to disclose to borrowers all credit

terms and costs associated with a particular consumer loan. 15

U.S.C. § 1601(a). Civil litigation is the primary and preferred

means. chosen by Congress for the enforcement of TILA

requirements. Sen. Rep. No. 93-278, at 14 (“[t]he purpose of

the civil penalties section under Truth in Lending was to

provide creditors with a meaningful incentive to comply with

the law without relying upon an extensive new bureaucracy”);

see also Watkins v. Simmons & Clark, Inc., 618 F.2d 398, 400

(6th Cir. 1980) (“Congress felt constrained to encourage class

actions in the truth-in-lending context because of the apparent

inadequacy of the Federal Trade Commission’s enforcement

resources and because of a continuing problem of minimal

voluntary compliance with the Act on the part of creditors”).

Since many TILA violations involve a lender’s failure to

disclose a finance charge whose cost to consumers is relatively

low, borrowers suing to enforce the Act bear the risk, if

unsuccessful, of having to incur expenses far in excess of the

value of their individual statutory claims. See 15 U.S.C. §

1640(a) (limiting recovery for individual claimants to actual

damages or $200 to $2,000 in statutory damages, plus attorney

fees and costs). These costs of mandatory individual

proceedings would pose an effective bar to TILA enforcement.

This Court has recognized repeatedly that class actions

are necessary to preserve causes of action where individual

21

claims are of relatively small value:

The ‘aggregation of individual claims in the

context of a class-wide suit is an evolutionary

response to the existence of injuries unremedied

by the regulatory action of government. Where

it is not economically feasible to obtain relief

within the traditional framework of a

multiplicity of small individual suits for

damages, aggrieved persons may be without any

effective redress unless they may employ the

class action device.

Deposit Guaranty Nat'l Bank v. Roper, 446 U.S. 326, 339

(1980); see also Eisen v. Carlisle & Jacquelin, 417 U.S. 156,

161 (1974); Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 809

(1985). The TILA’s class action remedies even out the

incentives by authorizing class recoveries of up to $500,000

plus costs and attorney fees, 15 U.S.C. § 1640(a)(2)(B), and

simultaneously encourage voluntary compliance with the Act

through the threat of these substantial enforcement penalties.

Congress adopted the TILA class action remedies to

ensure effective civil enforcement while protecting violators of

the Act from the threat of insolvency. The 1974 amendments

represent a congressional response to courts’ refusal to certify

TILA plaintiff classes because, if each member recovered the

statutory minimum, the aggregate recovery might render the

lender insolvent. Sen. Rep. No. 93-278 at 14. By expressly

authorizing TILA class actions, but capping class recoveries,

Congress rejected the finance industry’s defense of the judicial

status quo and adopted the Federal Reserve Board’s position

that “potential class action liability is an important

encouragement to the voluntary compliance which is so

necessary to insure nationwide adherence to uniform

22

disclosure.” /d. at 15 (quoting Federal Reserve Board opinion).

When Congress later amended Section 1640 to raise the class

recovery ceiling to $500,000, it reiterated that private litigation

was the Act’s chief enforcement tool, that the statutory cap on

class recoveries was not meant to discourage class actions, and

that any impediment to class proceedings would “‘frustrate[] the

enforcement policy for which class actions are recognized.”

Sen. Rep. No. 94-590, at 438; see also Watkins, 618 F.2d at 402

(“the legislative history surrounding these amendments

convinces us that Congress did intend, by them, to encourage

class actions and to use the threat of class action recoveries to

force compliance with the Act”); Johnson v. Tele-Cash, Inc., 82

F. Supp.2d 264, 270 (D. Del. 1999) (holding short-term loan

dealer’s arbitration clause unenforceable when it denies class

action remedies and compels individual arbitration of TILA

claims).

Petitioner’s invocation of Gilmer v. Interstate/Johnson

Lane Corp., 500, U.S. 20 (1991), is of no avail in this case

because remedies in an _ individual plaintiffs Age

Discrimination in Employment Act case, such as Gilmer,

include recovery of unpaid wages, reinstatement, other

equitable relief, liquidated damages for willful violations, plus

attorney fees and costs. 29 U.S.C. §626(b) (incorporating

remedies of 29 U.S.C. § 216). Individual employment

discrimination claims thus are viable on their own, and it is

comparing apples and oranges to apply Gilmer’s analysis to

Truth In Lending Act claims such as this one, where individual

remedies are limited to $200 to $2,000, or actual damages (here

$15), plus fees and costs. See 15 U.S.C. § 1640(a)(1) and

(2)(A). Unlike the plaintiff in Gilmer, TILA claimants

effectively lose their claims when they are denied their

statutory right to proceed as a class.

23

This Court has held that congressional intent to override

the Federai Arbitration Act’s enforcement of contractual

arbitration clauses must be deducible from the overriding

statute’s text or legislative history or from an “inherent conflict

between arbitration and the statute’s underlying purposes.”

McMahon, 482 U.S. at 226-27. The legislative history of the

Truth In Lending Act’s class action provisions, and the Act’s

underlying purpose to empower consumers to provide effective

enforcement through civil actions, demonstrate that petitioner’s

attempt to subvert class action proceedings through mandatory

individual arbitration is in irreconcilable conflict with TILA.

Since petitioner is using its arbitration clause to compel

individual arbitration, the clause is unenforceable as applied to

respondent’s Truth In Lending Act claim.

B. The claims of the proposed

plaintiff class cannot be

ordered to arbitration because

arbitrators do not have

authority to bind absent class

members to their judgments.

Respondent filed this suit seeking certification of a

nationwide class of home mortgage borrowers attempting to

vindicate their claims under the Truth In Lending Act.

Petitioner has invoked its arbitration clause to preclude

respondent from resorting to TILA’s class action remedies

without addressing the question of whether the nationwide class

could pursue its claims for class-wide relief in arbitration. The

District Court answered this question in the negative after

summarily concluding that class actions are merely procedural

devices under TILA. Randolph v. Green Tree Financial Corp.,

991 F. Supp. 1410, 1423-24 (M.D. Ala. 1997). Respondent

argues that the absence of an explicit class action provision in

petitioner’s arbitration clause precludes mandatory arbitration

24

of individual claims. We agree. But respondent also argues

that, if there were such a provision, the TILA claims of a

nationwide class could be resolved through mandatory

arbitration. We disagree because an arbitral resolution of the

claims of a plaintiff class cannot have preclusive effect on

absent class members since arbitrators have no authority to

bind absent parties.

This Court held in Philips Petroleum Co. v. Shutts, 472

U.S. 797 (1985), that an absent plaintiff class member’s cause

of action for money damages is a constitutionally protected

property interest which entitles the absentee to due process

guarantees before an adverse judgment of a court of law may

permanently extinguish the claim through res judicata. Id. at

807, 811; see also Hansberry v. Lee, 311 U.S. 32, 42 (1940)

(“there has been a failure of due process only in those cases

where it cannot be said that the procedure adopted, fairly

insures the protection of the interests of absent parties who are

to be bound by it”); Martin v. Wilks, 490 U.S. 755, 761-62

(1989). Due process protections for absent plaintiff class

members include the right to notice of the pending disposition

of the cause of action, the opportunity to be heard and

participate in the pending proceedings, the opportunity to opt

out of the class, and the right to adequate representation by the

named plaintiff at all times during the proceedings. Shutts, 472

U.S. at 812; Ortiz v. Fibreboard Corp., 119 S. Ct. 2295, 2315

(1999). The determination as to whether, for example, the

notice provided to absent class members was the best

practicable to afford them the opportunity to present objections,

Mullane v. Central Hanover Bank and Trust Co., 339 U.S. 306,

314-15 (1950), or whether the named plaintiffs adequately

represent the absent parties, Hansberry, 311 U.S. at 42-43,

must be made by the state, which alone has constitutional

authority to extinguish a claim of a non-party. Otherwise, a

property right would be extinguished without due process.

25

An arbitrator’s decision has no preclusive effect as to

constitutional questions relating to the arbitration proceeding.

In McDonald v. City of West Branch, 466 U.S. 284 (1984), this

Court unanimously held that a federal court hearing a Section

1983 claim could not give preclusive effect to a prior

arbitration award. /d. at 292. The plaintiff in McDonald first

arbitrated and lost a wrongful discharge claim under a

collective bargaining agreement, then asserted in his Section

1983 suit that his city government employer violated his First

Amendment rights by firing him in retaliation for his

engagement in protected speech and petitioning activity. /d. at

285-86. The McDonald Court held that the unappealed

arbitration decision did not preclude the plaintiff from litigating

his First Amendment claim because the Full Faith and Credit

Act, 28 U.S.C.§ 1738, applies only to judicial proceedings, not

to unappealed arbitration awards, and because judicial

preclusion rules apply only to claims that are enforceable

through courts, not private dispute resolution systems. /d. at

288-89. In so holding, the Court explained that:

Although arbitration is well suited to resolving

contractual disputes, our decisions in Barrentine

and Gardner-Denver compel the conclusion that

it cannot provide an adequate substitute for a

judicial proceeding in protecting the federal

statutory and constitutional rights that § 1983 is

designed to safeguard. As a result, according

preclusive effect to an arbitration award in a

subsequent § 1983 action would undermine that

statute’s efficacy in protecting federal rights...

..An arbitrator may not, therefore, have the

expertise required to resolve the complex legal

questions that arise in § 1983 actions.

26

Id. at 290. The disposition of the legal claims of a nationwide

class would necessarily involve due process determinations that

similarly exceed the authority and competence of a private

arbitrator.

Beyond the issue of an arbitrator’s power to bind

anyone who has not consented to the specific proceeding, it

would be an enormous stretch to apply the Federal Arbitration

Act to compel arbitration of a class action, especially in light of

the Act’s history discussed above. For example, the

determination of whether absent plaintiffs’ interests are

adequately represented involves complex legal questions that

an arbitrator presiding over a class action would have to decide.

Adequate representation by named plaintiffs requires an

alignment of interests between the named and absent parties,

identification of conflicting interests within the class and

separate representation of such interests, and an allocation of

recovered resources that is responsive to the differing interests

of any subclasses. See Ortiz, 527 U.S. at 854-58; Amchem

Products, Inc. v. Windsor, 521 U.S. 591, 626-27 (1997); In re

General Motors Corp. Pick-Up Truck Fuel Tank, 55 F.3d 768,

801 (3d Cir. 1995). The arbitrator would also have to ensure

that absent class members have been adequately represented by

counsel. This would require the arbitrator to examine the

timing and terms of any disposition, differentiate counsel’s

interest in maximizing hourly fees from the party’s interest in

a just recovery, and search for evidence of collusion between

defendants and plaintiffs’ counsel against the interests of some

or all of the class. Jd. at 802-03. Such complex legal

determinations, which are grounded in due process standards,

not the law of the marketplace, far exceed the competency and

authority of private arbitrators and bear no resemblance to the

kind of business to business arbitration that those who drafted

the FAA envisioned.

27

Finally, arbitral resolutions of these complex legal

questions pertaining to the rights of absent class members

would almost certainly be beyond review of any court. In

contrast to the searching appellate review which Amchem and

Ortiz illustrate to have been so vital in protecting absent class

members from the pressures that named parties may exert on

decision-makers, judicial review of the merits of arbitral

determinations under Section 10 of the FAA is exceedingly

deferential and would necessarily sacrifice this protection. See,

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

942 (1995) (court will set aside merits of arbitrable decisions

“only in very unusual circumstances” such as fraud, corruption,

or manifest disregard of the law); Halligan v. Piper Jaffray,

Inc., 148 F.3d 197, 202 (2d Cir. 1998) (to modify an arbitral

award on the merits, court must find that “(1) the arbitrators

knew of a governing legal principle yet refused to apply it or

ignored it altogether, and (2) the law ignored by the arbitrators

was well defined, explicit, and clearly applicable to the case”).

The FAA’s failure to provide meaningful judicial review of

arbitral determinations further shows why the Act was never

intended to apply to class-based claims.

In attempting to compel individual arbitration under the

Federal Arbitration Act, petitioner is effectively preventing

consumers from enforcing the Truth In Lending Act’s class

action remedies for serial violations. To allow compelled

arbitration in this situation would sever application of the FAA

from the congressional purposes and policy goals that

underpinned its enactment. The use of mandatory arbitration

to preclude the award of class-wide relief would undermine the

TILA’s civil enforcement scheme by abrogating the Act’s

strongest deterrent penalty. Even if the parties attempted to

arbitrate the claims of a TILA class, the proceeding would

exceed the authority and competency of private arbitral

decision-making far beyond anything ever contemplated, much

28

less ratified, by Congress in the Federal Arbitration Act, or

permitted by the Due Process Clause as applied to absent class

members.

CONCLUSION

The decision of the court of appeals declaring

petitioner’s arbitration clause unenforceable should be

affirmed. :

Respectfully submitted,

ALAN B. MORRISON

(Counsel of Record)

PAUL LEVY

MICHAEL J. QUIRK

_ PUBLIC CITIZEN LITIGATION GROUP

1600 20th Street, N.W.

Washington, D.C. 20009

(202) 588-1000

Attorneys for Amicus Curiae

Public Citizen

July 24, 2000