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

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es Supreme Geurt, U.S.

JUL 24

No. 99-1235 ta

GLERK

In The see

Supreme Court of the United States

GREEN TREE FINANCIAL CORP. - ALABAMA

AND GREEN TREE FINANCIAL CORPORATION,

Petitioners,

LARKETTA RANDOLPH,

Respondent.

On Writ Of Certiorari

To The United States Court Of Appeals

For The Eleventh Circuit

AMICUS CURIAE BRIEF OF

NATIONAL ASSOCIATION OF

CONSUMER ADVOCATES

IN SUPPORT OF RESPONDENT

PATRICIA STURDEVANT

Be | (Counsel of Record)

| f RECEIVED National Association of Consumer

, ye: Advocates

JUL 45 cow 1717 Massachusetts Avenue, N.W.,

OFFICE OE THE UieRK Th

SUPR ashington, D.C. 6

EME COURT, U8 (202) 332-2500

MicHaet D. DONOVAN

Donovan Miter, LLC

1608 Walnut Street, Suite 1400

Philadelphia, PA 19103

(215) 732-6020

BEST AVAILABLE COPY

TOLL SL, ST eT aS ES bi oi Sik.

TABLE OF CONTENTS

Page

STATEMENT OF INTEREST OF AMICUS.......... 1

UFOS COE ADASUIEEINE ois c eines ceesavaeeus 2

re oe eee Pee her er ore 4

GREEN TREE’S ARBITRATION CLAUSE IS

DESIGNED TO SQUELCH DISPUTES, NOT

WES xe see end ca wus oes ccs sy enes

Arbitration Has Not Proved To Be Less

Expensive Than Litigation................

The Severe Limit On Discovery In Arbitra-

tion Favors Business Interests.............

Arbitration Has Been Adopted To Preclude

Representative Consumer Actions.........

There Is Virtually No Right To Appeal An

Incorrect Arbitrator’s Award..............

Arbitration Undermines Public Accoun-

NE 65-5 banc annd Ra nae ek SeeON Eek es

Arbitration Impedes Development of the

ee eee eee Tee Pere Te Tere

Arbitration Allows the Financial Services

Industry to Deregulate Itself..............

The Benefits of Arbitration Are Illusory.....

Arbitration Also Reflects An Anti-Consumer

Il.

TABLE OF CONTENTS - Continued

Page

IN OPERATION, GREEN TREE’S CLAUSE PER-

MITS PETITIONER TO OBTAIN POSSESSION

OF THE PROPERTY SUBJECT TO THE DIS-

PUTE BEFORE ARBITRATION IS CONCLUDED

GREEN TREE’S ARBITRATION CLAUSE IS

ILLEGITIMATE BECAUSE IT FAILS TO SPEC-

IFY HOW ARBITRATION IS INITIATED AND

IS NOT CONSENSUAL....------seerettrtr

CONCLUSION 2 occ 552 ete et

+n hs ge BRE

iil

TABLE OF AUTHORITIES

Page

Cases

Amchem Products, Inc. v. Windsor, 117 S. Ct. 2231

RES ape ere eee eee 4

Badie v. Bank of America, 79 Cal. Rptr. 273 (1998),

rehearing denied, Dec. 2, 1998, rev. denied, 1999

eB le ere ee ee ery Cre eee Te eT Tere 1

Beasley v. Wells Fargo Bank, N.A., 235 Cal. App. 3d

1383 (1991), review denied, No. S0244, 1992 Cal.

ies Rae (LO). Deas. 12, 1992). .... 2... cccecees 6, 12

Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585

ET Te celine Shed) CAO GH OVE SAD ARS D OK YS One OOS 29

D.H. Overmyer Co. v. Frick Co., 405 U.S. 174 (1972) .... 28

Deposit Guaranty National Bank v. Roper, 445 U.S

i CO eins aver Rd ae Kok R KCK OSS ee ded Ed Eee 13

DiRussa v. Dean Witter Reynolds, 121 F.3d 818 (2d

8: PASE a ap ree er narra 20

First Options, Inc. v. Kaplan, 514 - ». 938 (1995) ..... 19

reemees & Srevint, 407 US. 67 (9972). .........n0ssesss 27

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

RSC RGA sles eran 64x 44n069b 4 60 nbn sad pass bod 18

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker,

ae Wem oe Gree Oe, BODE) 2... cece ese cenecvens 20

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

I Be | 8. eae 2, 4

Moncharsh v. Heily & Blase, 832 P.2d 899 (Cal. 1992)

CCG S N66 1 deh EA eA Chb5 584% SAT a sda we Kode ss 20

TABLE OF AUTHORITIES - Continued

Page

Moses H. Cone Memorial Hospital v. Mercury Con-

struction Corp., 460 U.S. 1 (1983) ...... cere eeeeee 15

Patterson v. ITT Consumer Financial Services Corpo-

ration, 14 Cal. App. 4th 1659 (1993), cert. denied,

SIO US. 1176 (1994)... - ana ec er ce censcccstccsseres 6

Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985) ---- 14

Rodriguez De Quijas v. Shearson/American Express,

490 U.S. 477 (1989) ...---ececrccceecereeeeerceree® 18

Shearson/American Express v. McMahon, 483 U.S.

TOGG CHOI) «on ag 5 nnn cena cen ses scensereeae ws ern: 18

Swarb v. Lennox, 405 U.S. 191 (1972). ....-eeeeeeeeees 28

Volt Information Sciences, Inc. v. Board of Trustees,

489 U.S. 468 (1989) .....--ce cere eee ee reer eeer tee 28

Weinberg v. Hertz Corp., 499 N.Y.S.2d 693 (N.Y.

App. Div. 1986), aff'd, 516 N.Y.S.2d 652 (N.Y.

esas Sarna ce erate heen CREE ICE Or? 14

Wilko v. Swan, 346 U.S. 427 (1953)... . 2c ncrccccenees 18

STATUTES

np ake Myers het REL Ta et henna 12

mae aie Ra ee leer rl 19

VAR A oth es WON OS ret la ae 19

Federal Arbitration Act, 9 U.S.C. §§ 1-16......------- 2

Truth in Lending Act, 15 U.S.C. §§ 1601 ef seq...---- 13

seth aa

TABLE OF AUTHORITIES - Continued

Page

OTHER AUTHORITIES

Alan S. Kaplinsky & Mark J. Levin, Alternative To

Litigation Attracting Consumer Financial Services

Companies, Consumer Financial Services Law

Report, 1102 PLI/Corp. 845 (1999)...7, 12, 16, 21, 22

Alan S. Kaplinsky, Anatomy Of An Arbitration

Clause: Drafting and Implementation Issues Which

Should Be Considered By A Consumer Lender, 1113

Fans A GD CIR ws ona eth ora ae 4

Alan S. Kaplinsky & Mark J. Levin, Excuse me, but

who's the Predator? Banker's side, ABA Bus. L.

Today 24 (May/June 1998).................. 5, 16, 17

Caroline E. Mayer, Win Some, Lose Rarely? Arbitra-

tion Forum's Rulings Called One Sided, The Wash-

mpton Tost, Mier, DOGS is ooo vs bce cc eae 25

David S. Schwartz, Enforcing Small Print To Protect

Big Business: Employee And Consumer Rights

Claims In An Age Of Compelled Arbitration, 1997

WO hes TO Os ies hs bean eeed akan ee 13, 19, 23, 24

Deborah R. Hensler, Does ADR Really Save Money?

The Jury’s Still Out, Nat'l Law J., April 11, 1994.... 11

Dwight Golann, Consumer Financial Services Litiga-

tion: Major Judgments And ADR Response, ABA,

The Business Lawyer, May, 1993................... 6

Dwight Golann, Consumer Litigation In The Age Of

Combat Banking, 45 Bus. Law. 1761 (1990).......... 5

Edward Brunet, Questioning The Quality Of Alter-

native Dispute Resolution, 62 Tul. L. Rev. 1 (1987)

in ah CORKS S KORE RES SURES ADEE TEE eee 12, 21, 22

TABLE OF AUTHORITIES - Continued

Elizabeth Rolph, Erik Moller, Laura Peterson,

Escaping The Courthouse, Rand Institute for Civil

Justice 1 (1994).......seceeeeeeeeerenereee® 11,

Erik Moller, Elizabeth Rolph, and Patricia Ebener,

Private Dispute Resolution in the Banking Industry

Page

12, 23

(QUOT vx dsca tach an canee exer etree eee 7, 9, 22, 23, 24

Harry T. Edwards, Where Are We Heading With

Mandatory Arbitration Of Statutory Claims In

Employment? 16 Ga. St. U. L. Rev. 293 (1999)..

4 Herbert Newberg, Newberg on Class Actions

§ 22.01 (3d Ed. 1992)....----eseereceereereers

James L. Guill, Edward A. Slavin, Jr, Rush to

Unfairness: The Downside of ADR, 28 Judges’

Journal 1 (1989) ....----sseresesrecsersrereees

Jean R. Sternlight, Panacea or Corporate Tool?: Debunk-

ing the Supreme Court's Preference for Binding Arbi-

tration, 74 Wash. U. L.Q. 637 (1996)......---5+5

L. Bingham, Employment Arbitration: The Repeat

Player Effect, 1 Emply. Rts. & Empl. Policy Jour-

ean 1 CUOOT Ys Si we a

Lucy C. Katz, Compulsory Alternative Dispute Reso-

lution and Voluntarism: Two-Headed Monster or

Two Sides of the Coin?, 1993 J. Disp. Resol. 1..

Mark E. Budnitz, Arbitration Of Disputes Between

Consumers And Financial Institutions: A Serious

Threat To Consumer Protection, Ohio State Jour-

nal On Dispute Resolution, Vol. 10, No. 2, 367

(19GB) oo cascucugesnedsavds baeess OME RSMAS ERED

gat ihe OC baht

Rell NEL A

Vii

TABLE OF AUTHORITIES - Continued

Michael Z. Green, Preempting Justice Through Bind-

ing Arbitration of Future Disputes: Mere Adhesion

Contracts Or A Trap For The Unwary Consumer?

Loyola Consumer Law Reporter, 112 (1993)

National Association of Consumer Advocates,

Standards and Guidelines for Litigating and Set-

tling Consumer Class Actions, 176 F.R.D. 370

(1998)

Patricia Sturdevant & Dwight Golann, Face Off:

Should Binding Arbitration Clauses Be Prohibited

In Consumer Contracts? Desp. Resol. Mag., Sum-

mer 1994

Patricia Sturdevant, Mandatory Arbitration and

Access to Justice, Association of Business Trial

Lawyers (ABTL) Report, Vol. 3, No. 1 (Novem-

ber, 1993)

Restatement (Second) of Contracts § 211 comment

b (1979)

Robert D. Raven, Private Judging: A Challenge to

Public Justice, 74 A.B.A. J. 8 (Sept. 1, 1988)

i lial aN Mi ee ee ee Oe ee a i ee i he ae ar ie ee we te

2 ae OF Fee COS ECR SO O46 OS E0 6S 62 Se 6 OS Oe 6 eS OS OD

Se 220: Se Ses. eee Ce OSC OSs Be Gee CSS BOs Oe eS 8

Page

- > Pé

aD Ree TARE He He! SAE s

‘

STATEMENT OF INTEREST OF AMICUS!

The National Association of Consumer Advocates

(“NACA”) is a non-profit organization of private and

public sector attorneys, legal services attorneys, and law

professors concerned with the protection and representa-

tion of consumers. NACA’s mission is to promote justice

for all consumers. NACA maintains a forum for informa-

tion sharing among consumer advocates across the coun-

try and serves as a voice in the ongoing struggle to curb

unfair and abusive business practices.

NACA long has been concerned about the imposition

by businesses of mandatory, pre-dispute arbitration

clauses on their customers. The expense and the inherent

limitations on discovery, injunctive relief, and appellate

review which characterize arbitration materially disad-

vantage consumers, particularly for relatively small indi-

vidual claims. Consistent with its goal of promoting

justice for consumers, NACA has appeared as amicus

curiae in a number of cases challenging mandatory pre-

dispute arbitration clauses, including Badie v. Bank of

America, 79 Cal. Rptr. 273 (1998), rehearing denied Dec. 2,

1998, rev. denied, 1999 Cal. LEXIS 1198, and other cases

involving attempts by financial institutions to obtain an

advantage over consumers by unilaterally selecting a

forum which does not enable consumers to enforce their

statutory rights. NACA has also drafted a Position Paper,

identifying frequent abuse by institutional interests of

' This brief is filed with the consent of all parties, and

letters of consent have been filed with the Clerk. No counsel for

any party authored the brief in whole or in part, and no person

or entity other than amicus curiae made any monetary

contribution to the preparation or submission of the brief.

mandatory binding arbitration and the consequent denial

to consumers of access to the courts and to justice, a copy

of which is attached at Appendix (App.) 1.

SUMMARY OF ARGUMENT

Legitimate arbitration, according to the Court's juris-

prudence, simply substitutes one fair forum for another.

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

473 U.S. 614, 628, 634 (1985). As recognized by the Court

of Appeals below, the present case does not involve legit-

imate arbitration. It involves instead an attempt by a

well-financed and powerful business enterprise, sup-

ported by scores of institutional interests, to gain an

unfair and deceptive dispute resolution advantage over

individual consumers. This type of “arbitration” is not

the type of alternative dispute resolution envisioned by

Congress when it enacted the Federal Arbitration Act in

1925, 9 U.S.C. §§ 1-16 (“FAA”). Nor is it the type of

arbitration the Court has deemed subject to the federal

policy favoring enforcement of consensual arbitration

clauses.

NACA urges the Court to adopt an objective, federal

standard to guide courts, businesses, consumers and arbi-

tral providers as the minimum standard required before

an arbitration clause may be considered legitimate and

therefore subject to the federal policy favoring enforce-

ment of consensual arbitration. NACA submits that a

legitimate arbitration clause must meet the following

three-part test:

1. The clause must not materially shift the eco-

nomic costs or risks of dispute resolution

onto a party who would not otherwise bear

aE AMES MOL Fam

ARI ARD ES SAG dH

those costs or risks before a formal judicial

forum;

2. The clause must not deprive one party of

substantive rights or remedies or permit a

party to obtain possession of the personal or

real property subject to the dispute outside

of the arbitration process; and

3. The clause must identify the manner in

which the arbitration proceeding is to be

commenced.

NACA submits that each of the many arbitration

clauses this Court has confronted under the FAA has met

these minimum standards. The clause involved in the

present case, however, violates each one of these stan- |

dards and should be held to be illegitimate under the

FAA.

As we demonstrate below, and as the Court of

Appeals correctly held, petitioner’s clause dramatically

shifts the economic costs and risks of dispute resolution

away from the party who drafted the clause and onto the

party forced to proceed in arbitration. In addition, peti-

tioner’s clause permits petitioner to take possession of

the property subject to the arbitration dispute by means

of a separate judicial or nonjudicial foreclosure proceed-

ing wholly outside of the arbitration process and before

the arbitration has even concluded. In this way, petitioner

may obtain such an overwhelming economic and tactical

advantage that the arbitration becomes a meaningless

charade. Even more striking is the utter failure of peti-

tioner’s clause to provide any indication of how the alter-

native dispute mechanism is to be commenced. While the

FAA may fill some gaps by enabling a federal court to

appoint an arbitrator where an arbitration clause is silent

on the subject, it cannot fill that gap here. Oddly, peti-

tioner’s clause specifies that petitioner shall choose the

arbitrator, but it totally fails to provide fair notice and an

opportunity to be heard. The clause is, in reality, nothing

more than a tricky drafting device designed to smother

all disputes and squelch even legitimate claims.

ARGUMENT

1. GREEN TREE’S ARBITRATION CLAUSE IS

DESIGNED TO SQUELCH DISPUTES, NOT

RESOLVE THEM.

As conceived and implemented by the consumer

financial services industry, arbitration of consumer dis-

putes does not simply involve an alternative forum, as

this Court envisioned in Mitsubishi. Instead, arbitration of

disputes between consumers and financial institutions is

intended to, and does in operation, significantly disad-

vantage consumers. One of the primary proponents of

arbitration, Alan S. Kaplinsky, counsel for amici American

Bankers Association, American Financial Services Asso-

ciation, Consumer Bankers Association, and National

Home Equity Mortgage Association, candidly admits

that:

Arbitration materially changes the dispute reso-

lution rules that consumers and borrowers are

accustomed to: there is no right to a jury trial,

pre-hearing discovery is limited, class actions

are eliminated and appeals are severely circum-

scribed.

Alan S. Kaplinsky, Anatomy Of An Arbitration Clause:

Drafting and Implementation Issues Which Should Be

ee ee ee he liar

Considered By A Consumer Lender, 1113 PLI/Corp. 655, 657

(1999).

Adoption of arbitration in the consumer financial

services context has been portrayed as a defense against

consumers. “Consumers have been ganging up on banks.

But now the institutions have found a way to defend

themselves.” Alan S. Kaplinsky & Mark J. Levin, Excuse

me, but who's the Predator? Banker's side, ABA Bus. L.

Today 24 (May/June 1998) (“Predator”). This defense

shifts the costs on to consumers, eliminates the con-

sumers’ right to a jury trial, and results in markedly

reduced liability for business. See, e.g., Patricia Sturde-

vant & Dwight C slann, Face Off: Should Binding Arbitra-

tion Clauses Be Prohibited In Consumer Contracts? Desp.

Resol. Mag., Summer 1994, at 5 (App. 5); Jean R. Stern-

light, Panacea or Corporate Tool?: Debunking the Supreme

Court's Preference for Binding Arbitration, 74 Wash. U. L.Q.

637, 684 (1996) (“Panacea”).

Arbitration was first adopted in the consumer finan-

cial services arena by ITT Consumer Financial Services

Corporation in 1989. ITT had been sued for packing

unwanted insurance into consumer loans by govern-

mental and private attorneys in fourteen different juris-

dictions and had lost or settled most of those cases for

substantial sums of money. ITT admitted that it had com-

mitted many improper practices in a consent judgment

with the Arizona Attorney General, settled a case by the

California Attorney General for more than $50 million,

and was facing claims in another case in Minnesota for an

additional $48 million. Dwight Golann, Consumer Litiga-

tion In The Age Of Combat Banking, 45 Bus. Law. 1761,

1762-67 (1990).

In response, ITT inserted an arbitration clause into its

standardized form small loan contracts, and hired Equi-

law, Inc., the parent corporation of the National Arbitra-

tion Forum (“NAF”), to provide a mechanism for

resolving claims by consumer borrowers across the coun-

try.?

A few years later, in 1992, Bank of America became

the first major financial institution to insert arbitration

clauses into its accounts with retail customers. Michael Z.

Green, Preempting Justice Through Binding Arbitration of

Future Disputes: Mere Adhesion Contracts Or A Trap For The

Unwary Consumer? Loyola Consumer Law Reporter, 112,

115 (1993). The bank adopted arbitration as a response to

a series of major judgments and settlements adverse to

California banks, including a $5.2 million jury verdict for

excessive late and overlimit fees on credit card accounts

which was upheld on appeal,* and a $55 million settle-

ment by several major banks of a price fixing case chal-

lenging the interest rates on credit cards. Dwight Golann,

Consumer Financial Services Litigation: Major Judgments

And ADR Response, ABA, The Business Lawyer, May,

1993. The bank publicly admitted it had chosen arbitra-

tion to avoid unpredictably high damage awards by

juries. Press release dated June 2, 1992 (App. 14).

A contemporaneous study on the introduction of pri-

vate, binding arbitration in the banking industry by The

Rand Institute for Civil Justice confirmed that private

2 ITT’s arbitration clause was held to be unconscionable in

Patterson v. ITT Consumer Financial Services Corporation, 14 Cal.

App. 4th 1659 (1993), cert. denied, 510 U.S. 1176 (1994).

3 Beasley v. Wells Fargo Bank, N.A., 235 Cal. App. 3d 1383,

1407 (1991), review denied, No. S0244, 1992 Cal. LEXIS 1220 (Cal.

Mar. 12, 1992).

arbitration mechanisms were adopted to reduce the insti-

tutions’ exposure to liability by limiting the risk of puni-

tive damages and large jury verdicts, and thereby

reducing the incentives for plaintiffs’ attorneys to take

cases. See Erik Moller, Elizabeth Rolph, and Patricia

Ebener, Private Dispute Resolution in the Banking Industry

6-8, 12-13, 32 (1993) (“The Rand Study”). Lenders have

acknowledged elsewhere that the motivating factors trig-

gering the inclusion of arbitration requirements for con-

sumer disputes was the fear of exposure to lender

liability lawsuits and punitive damage verdicts. Lloyd N.

Shields, The Role of Mandatory Arbitration for Financial

Institutions, Arb. J., Dec. 1991, at 49.

The facts therefore fully support the observation of

one eminent commentator that the adoption of arbitration

clauses was “a carefully planned strategy by influential

members of the financial services industry to resolve

lender liability and other claims made by consumers as a

group.” Mark E. Budnitz, Arbitration Of Disputes Between

Consumers And Financial Institutions: A Serious Threat To

Consumer Protection, Ohio State Journal On Dispute Reso-

lution, Vol. 10, No. 2, 367, 369 (1995). Indeed, as industry

counsel have admitted, consumer financial services com-

panies have implemented arbitration programs to gain an

economic and litigation advantage over consumers. Alan

S. Kaplinsky & Mark J. Levin, Alternative To Litigation

Attracting Consumer Financial Services Companies, Con-

sumer Financial Services Law Report, 1102 PLI/Corp.

845, 847 (1999). Thus, the simple but unpleasant fact is

that arbitration is marketed as a way to avoid the costs

and risks of the court system.

Some providers of arbitration services even offer

preferential treatment as an inducement to financial insti-

tutions to utilize their services. For example, at Appendix

27 is a letter dated October 20, 1997 from Edward Ander-

son of NAF (“The Anderson Letter”)4 stating that: “major

American companies are moving all of their contracts to

an arbitration basis as fast as possible. There is no reason

for your clients to be exposed to the costs and risks of the

jury system.” The Anderson Letter emphasizes that:

“Every award is limited to the amount claimed!”

(emphasis in original). A “Legal Memorandum” from

“Forum Counsel” on the subject of “Arbitration & Class

Actions in Financing” is attached to the Anderson Letter

(App. 28). The memorandum advises that: “In the court

system, financing transactions are always at risk for Class

Action treatment... . ” It further states that: “Most often,

the claims of class action plaintiffs’ lawyers are based on

printed or computer-generated documents or standard

procedure manuals, which leave little room to argue

against ‘commonality’ and ‘typicality.’” The memoran-

dum then boasts that rules drafted in the manner of the

NAF’s will preclude class actions, even if the plaintiffs’

4 Documents taken from the 1994 Bankruptcy Petition of

NAF’s corporate parent, Equilaw, Inc., (App. At 33), indicate

that Mr. Anderson was then a director, officer, and major

shareholder of Equilaw. A deposition of Mr. Anderson taken in

1994 indicates that prior to coming to NAF, he was Assistant

General Counsel to ITT Consumer Financial Services

Corporation, (Anderson Deposition Excerpt, App. at 38), and

that he learned of NAF when ITT was searching for an ADR

provider (App. at 39).

eure

claims are “common” and “typical.” Thus, NAF has effec-

tively marketed its arbitration service not as an alterna-

tive forum, but as a defensive measure to squelch

consumer disputes.

It is clear therefore that the purpose and intent of

mandatory arbitration clauses in financial institutions’

standardized form contracts is to limit institutional lia-

bility and change the rules by which disputes are

resolved to the detriment of their customers. The uni-

lateral imposition of arbitration for such purposes pro-

vides an altered, rather than an alternative forum, and

finds no support in sound public policy or in the FAA or

its legislative history.5

Arbitration clauses undoubtedly deter consumers

trom challenging business practices which legislatures

have specified are unlawful, deceptive, or unfair. The

1993 Rand Study found that after Bank of America uni-

laterally adopted mandatory arbitration, substantially

fewer consumers brought claims against the bank. Moller

et al., Private Dispute Resolution in the Banking Industry, at

21-23.

Arbitration in consumer cases does not provide an

alternate forum; it sets up a more favorable private forum

for institutions. Robert Raven, wien he was President of

the American Bar Association, warned that “certain forms

of private judging dispense with many of the most cher-

ished and carefully developed features of our public sys-

tem: open proceedings, written decisions, appellate

° The Brief Amicus Curiae filed by Public Citizen sets forth

the legislative history of the FAA and demonstrates that the Act

was intended only to validate consensual agreements between

business entities to arbitrate their differences without altering

the substantive rights of either party.

review, and the evolution of the common law.” Robert D.

Raven, Private Judging: A Challenge to Public Justice, 74

A.B.A. J. 8 (Sept. 1, 1988). President Raven further

observed: “the potential dangers of providing one system

of justice for the affluent, and another for everyone else,

should stimulate us all to improve our system of public

justice. This 200-year-old system with vital safeguards

cannot simply be replaced by private judging.” Id. Those

cherished features of public adjudication are not present

in arbitration.

A. Arbitration Has Not Proved To Be Less Expen-

sive Than Litigation.

The claim by Green Tree’s amici that arbitration is

beneficial to consumers because it is less expensive (Br.

Amici Curiae of American Bankers, et al., at 4, 14-15)

reflects an initial expectation, or myth, that is devoid of

support in reality. Because providers of arbitration ser-

vices such as the American Arbitration Association

impose filing fees which far exceed the fees charged by

courts, and in addition charge administrative, processing,

and hearing fees, and because the parties must pay for

the time of the arbitrator, while judges and courts are

publicly funded, arbitration is inordinately expensive,

and may be far more costly than litigation. Patricia Stur-

devant, Mandatory Arbitration and Access To Justice, Asso-

ciation of Business Trial Lawyers (ABTL) Report, Vol. 3,

No. 1, 12 (November, 1993).

Few studies have been conducted to determine the

costs of arbitration and even those have produced mixed

results. Scholars from the Rand Institute for Civil Justice

have explored the question in the greatest detail. The

Institute’s Deborah R. Hensler concludes that the answer

to the question whether ADR programs actually reduce

costs for litigants is still largely unknown. Deborah R.

Hensler, Does ADR Really Save Money? The Jury's Still Out,

Nat'l Law J., April 11, 1994, at C2 (App. 40). Another

study of private alternative dispute resolution in Los

Angeles indicates that fees charged in arbitration “usu-

ally greatly exceed those levied by the courts.” Elizabeth

Kolph, Erik Moller, Laura Peterson, Escaping The Court-

house, Rand Institute for Civil Justice 1, 44 (1994). The

study notes that “the fees charged for private ADR ser-

vices can be large” and then summarizes fee structures

for the major private ADR firms. Those firms charge

hearing fees for the arbitrator in the range of $550 a day

to $450 a hour for each party, and also charge administra-

tive fees, transcript fees, reporters’ costs, travel expenses,

and conference room costs. Id. at 40-43.

Thus, it simply has not been demonstrated that arbi-

tration is cheaper than litigation. See Sternlight, Panacea,

supra, at 678-79. Nor has it been shown that arbitration is

faster than litigation. Another commentator notes that

there is little strong data supporting the theory that ADR

saves significant time and money for participants in the

system. Lucy C. Katz, Compulsory Alternative Dispute Reso-

lution and Voluntarism: Two-Headed Monster or Two Sides of

the Coin?, 1993 J. Disp. Resol. 1, 46 (“Two-Headed Mon-

ster”). The myth that arbitration is cheaper is not sup-

ported by any real basis in fact, and the Eleventh Circuit's

concern about the steep costs of arbitration here were

well founded.

B. The Severe Limit On Discovery In Arbitration

Favors Business Interests.

The limits on discovery in arbitration often make it

impossible for consumers to prove the business engaged

in unlawful activity. The FAA provides for only a very

limited type of discovery by permitting arbitrators to

order that witnesses may bring documents to the hearing.

9 U.S.C. § 7 (1982). Most arbitration providers similarly

limit discovery to what an arbitrator, in his discretion,

may order. Commentators agree that arbitration substan-

tially reduces the amount of permissible discovery. Bud-

nitz, supra, at 271; Edward Brunet, Questioning The Quality

Of Alternative Dispute Resolution, 62 Tul. L. Rev. 1, 13

(1987); Kaplinsky & Levin, Alternative, supra, at 847. But

just and fair results of any dispute resolution process

require mechanisms that ensure full disclosure of the

facts. Disputes simply cannot be decided properly with-

out information and evidence. Brunet, supra, at 34.

The unavailability of discovery in arbitration gener-

ally favors corporate interests, to the individual’s detri-

ment. Absent discovery, individuals frequently will be

unable to succeed on their claims, because the corpora-

tion customarily will have exclusive possession of the

information and documents necessary to prove the

claims. Budnitz, supra, at 283-84. Arbitrators frequently

confine their review to documents relating solely to the

affected individual, and do not examine underlying poli-

cies or evidence of business practices which would be

necessary to award broader relief. For example, it would

have been impossible for plaintiffs to prevail on their

challenge to excessive late and overlimit fees in Beasley v.

Wells Fargo Bank, supra, without discovery into the bases

on which the bank decided to impose those charges and

the cost data which it claimed supported the propriety of

the charges. In short, the unavailability of discovery

skews the system in favor of corporate defendants. David

S. Schwartz, Enforcing Small Print To Protect Big Business:

Employee And Consumer Rights Claims In An Age Of Com-

pelled Arbitration, 1997 Wis. L. Rev. 33, 61 (“Small Print’).

C. Arbitration Has Been Adopted To Preclude

Representative Consumer Actions.

Consumers who must resolve their disputes through

arbitration often lose the right to bring representative

actions; as a result, in cases involving small claims they

are denied any effective remedy against unlawful busi-

ness conduct. Statutes such as the Truth in Lending Act,

15 U.S.C. §§ 1601 et seq., rely on private enforcement

through representative actions, and the congressional

design for private enforcement would be frustrated by

compelled arbitration. But mandatory arbitration clauses

are now being relied on by industry to argue that con-

sumers must individually arbitrate each claim and are

deprived of any right they might have to pursue consoli-

dated claims, group or collective actions, or class actions

unless the arbitration clause includes an agr-ement

allowing such procedures. This argument, of course,

ignores the reality that an arbitration clause unilaterally

drafted by the financial institution to limit its liability

will never include a provision permitting such actions.

It also disregards the Court's precedents. In Deposit

Guaranty National Bank v. Roper, 445 U.S. 326, 338 n.9

(1980), the Court stated:

A significant benefit to claimants who choose to

litigate their individual claims in a class-action

context is the prospect of reducing their costs of

litigation, particularly attorney’s fees, by

allocating such costs among all members of the

class who benefit from any recovery. Typically,

the attorney’s fees of a named plaintiff proceed-

ing without reliance on Rule 23 could exceed the

value of the individual judgment in favor of any

one plaintiff. Here the damages claimed by the

two named plaintiffs totaled $1,006.00. Such

plaintiffs would be unlikely to obtain legal

redress at an acceptable cost, unless counsel

were motivated by the fee-spreading incentive

and proceeded on a contingent-fee basis. This,

of course, is a central concept of Rule 23.

The Court reiterated in Amchem Products, Inc. v. Wind-

sor, 117 S. Ct. 2231, 2246 (1997), that absent class actions,

individuals whose damages are small will have no realis-

tic prospect of obtaining relief:

The policy at the very core of the class action

mechanism is to overcome the problem that

small recoveries do not provide the incentive for

any individual to bring a solo action prosecuting

his or her rights. A class action solves this prob-

lem by aggregating the relatively paltry poten-

tial recoveries into something worth someone’s

(usually an attorney’s) labor.

The observation that there is no incentive for individ-

uals with only small potential recoveries to pursue their

claims applies forcefully to this case and others like it. See

Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 809 (1985)

(“Class actions . . . may permit the plaintiffs to pool

claims which would be uneconomical to litigate individu-

ally... . [MJost of the plaintiffs would have no realistic

day in court if a class action were not available.”); Wein-

berg v. Hertz Corp., 499 N.Y.S.2d 693, 696 (N.Y. App. Div.

1986), aff'd, 516 N.Y.S.2d 652 (N.Y. 1987) (“[I]t is notable

that in determining whether a class action is superior to

other viable methods, it is clear that most of the individ-

uals having claims averaging less than $31 would have no

realistic day in court if a class action were not avail-

able.”); 4 Herbert Newberg, Newberg on Class Actions

§ 21.01 at 21-3 (3d ed. 1992) (“There are compelling

reasons for bringing consumer protection class actions. A

class-based effort is more effective than an individual

consumer in getting a defendant to modify its conduct.

Most individual consumers have claims which are too

small to warrant representation by an attorney.”)

Therefore, arbitration is not simply an alternative

forum, but no forum at all for the overwhelming majority

of consumers with small monetary claims. Unless they

are able to aggregate those claims and litigate them in a

class action, consumers will have no effective means of

redress. In the consumer context, where small amounts

are often at stake, in the absence of class litigation,

unlawful and deceptive conduct which deprives large

numbers of people of small amounts of money in viola-

tion of statutory proscriptions will be allowed to continue

with no meaningful deterrent.®

° This is not piecemeal litigation, which the Court indicates

may be necessary to give effect to an arbitration agreement in

Moses H. Cone Memorial Hospital v. Mercury Construction Corp.,

460 U.S. 1, 20 (1983). There, the consequence was simply that the

hospital’s dispute with the construction company might be

decided in arbitration, while the hospital’s claim for indemnity

for any liability it had to the construction company against the

architect, with whom it had no arbitration agreement, would be

resolved in court: “an arbitration agreement must be enforced

notwithstanding the presence of other persons who are parties

to the underlying dispute but not to the arbitration agreement.”

Id. Here, the consequence will be that consumers are deprived

of any remedy whatever because their individual claims are too

Lenders like Green Tree have adopted arbitration

clauses as a way of giving themselves an economic and

tactical advantage by significantly reducing the likeli-

hood of representative litigation. Alan S. Kaplinsky is

quite clear in recommending to his institutional clients

that they adopt arbitration clauses as a way of defending

themselves against class action lawsuits. “Arbitration is a

powerful deterrent to class action lawsuits against

lenders... .” Kaplinsky & Levin, Predator, supra, at 24.

Elsewhere, the same authors have asserted that courts

cannot compel class arbitration if parties have not agreed

to it. Kaplinsky & Levin, Alternative, supra, at 848.

These authors contend that: “[AJll of the dangers

inherent in an individual consumer lawsuit - the threats

of costly and drawn-out litigation, runaway juries, gar-

gantuan punitive damages awards and adverse publicity

- are magnified exponentially when a class of .. .

consumers is certified.” They further assert: “Stripped of

the threat of a class action, plaintiffs’ lawyers have much

less incentive to sue.” Kaplinsky & Levin, Predator, supra,

at 26.

They predict a future free from the threat of con-

sumer challenges to the industry:

It is anticipated that virtually all major banks

and lending institutions will implement con-

sumer arbitration procedures within the next

five years. Lenders that have not yet imple-

mented arbitration programs should promptly

consider doing so, since each day that passes

brings with it the risk of additional multi-

million-dollar class action lawsuits that might

small for them to have any realistic probability of obtaining

relief.

have been avoided had arbitration procedures

been in place.

Id. at 28.

The intent to change the rules to favor business inter-

est at the expense of consumers by eliminating the pri-

mary remedies against abusive practices that deprive

small sums of money from a large number of individuals

could hardly be clearer. In another communication from

NAF, Curtis D. Brown, its Vice President and General

Counsel, states to a prospective industry client that “A

number of courts around the country have held that a

properly-drafted arbitration clause in credit applications

and agreements eliminates class actions and ensures that

credit-related lawsuits will be directed to arbitration, not

a jury trial.” (App. 50) (emphasis in original).

The preclusion of representative actions would result

in consumers with relatively small claims being denied

any effective remedy against unlawful business conduct.

Frequently, many consumers are harmed by the same

wrongful practice, yet individual actions are usually

impracticable because the individual recovery would be

insufficient to justify the expense of bringing a separate

lawsuit. Without representative actions, wrongdoing

businesses would be able to profit from their misconduct,

violate statutory rules with impunity, and retain their ill-

gotten gains. Representative actions by consumers aggre-

gate their interests, enable them to take on economically

powerful institutions, make wrongful conduct less prof-

itable by obtaining disgorgement of ill-gotten gains, and

have a salutary deterrent effect. See National Association

of Consumer Advocates, Standards and Guidelines for Liti-

gating and Settling Consumer Class Actions, 176 F.R.D. 370,

377-78 (1998).

Consumer cases differ significantly from matters

involving securities and age discrimination, where

administrative agency involvement can be relied on to

ensure the sufficiency of the arbitration procedures to

adequate enforcement of statutory protections. In Shear-

son/American Express v. McMahon, 483 U.S. 1056 (1987), the

Court noted the importance of the oversight authority of

the Securities and Exchange Commission and found arbi-

tration procedures which had been approved by the Com-

mission adequate to protect statutory rights. Here, in

stark contrast, the arbitration provider and procedures

are unknown, so their adequacy to protect statutory

rights is wholly speculative.

Similarly, in Gilmer v. Interstate/Johnson Lane Corp.,

500 U.S. 20 (1991), the Court found reason to believe that

statutory rights would be safeguarded even if individuals

could not bring class actions because the EEOC could

bring actions on behalf of classes of persons. Here, by

contrast, there is no requirement for first filing charges

with an agency comparable to the EEOC which could

then bring actions for damages and equitable relief on

behalf of a class. Hence, there is no meaningful check

against abusive and predatory arbitration processes

imposed on consumers.

The Court has recognized the important distinction

between consumer and commercial contracts in Rodriguez

De Quijas v. Shearson/American Express, 490 U.S. 477, 484

(1989), overruling Wilko v. Swan, 346 U.S. 427 (1953),

which held that claims arising under the Securities Act of

1933 were not subject to arbitration, saying: “We now

conclude that Wilko was incorrectly decided and is incon-

sistent with the prevailing uniform construction of other

federal statutes governing arbitration agreements in the

setting of business transactions.” (Emphasis added). The

Court thus specifically limited its holding to arbitration

in the commercial context.

Thus, for the consumer dispute involved here, there

will be no effective brake against illegitimate and abusive

arbitration clauses absent intervention by the Court.

D. There Is Virtually No Right To Appeal An

Incorrect Arbitrator’s Award.

The FAA establishes only very limited bases for

appealing an arbitral award in 9 U.S.C. § 10, and for a

court to vacate, modify, or correct an award in 9 U.S.C.

§ 11. An arbitrator’s award may only be reversed on a

showing that it was obtained by corruption, fraud, or

prejudicial misconduct. Combining that standard with

the fact that arbitrators generally need not rule according

to the law, and need not give reasons for the decision, the

effect is that any right to appeal is essentially eliminated,

and decisions will not be reversed even if they are

wrongly decided.

As this Court has noted, a court will set an arbitra-

tor’s decision aside only in very unusual circumstances

First Options, Inc. v. Kaplan, 514 U.S. 938, 942 (1995). In

fact, courts virtually never reverse arbitral decisions.

Sternlight, Panacea, supra, 18 n.9; Schwartz, Small Print,

supra, at 3. This raises serious questions about the fair-

ness of arbitration, because parties lose the important

ability to remedy mistakes of fact or law, which does not

exist when an erroneous trial court decision is appealed.

Even in the limited circumstances in which a court can

overturn an arbitrator’s decision, because arbitrators

need not explain the bases for their decisions or make a

complete record of the proceedings, aggrieved individ-

uals are often ill-equipped to satisfy their burden of proof

on appeal. See, e.g., Merrill Lynch, Pierce, Fenner & Smith,

Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986).7

Petitioners’ contention that post-arbitration review

would be sufficient to remedy any refusal to award a

prevailing plaintiff costs and attorney’s fees (Brief of

Petitioners at 41) is belied by the case law. For example,

the Second Circuit refused to find that an arbitrator’s

failure to award attorneys fees in an age discrimination

case met the manifest disregard of the law standard. In

DiRussa v. Dean Witter Reynolds, 121 F.3d 818 (2d Cir.

1997), the court held that although a prevailing plaintiff’s

entitlement to attorney’s fees under the ADEA was well-

defined, explicit, and clearly applicable, the manifest dis-

regard standard was not met because there was no per-

suasive evidence that the arbitrator had understood that

an award of attorney’s fees was mandatory and yet had

intentionally refused to comply with the law. It would be

virtually impossible to satisfy such a stringent test, so

there is no assurance whatever that post-arbitration

review would result in awards of attorney's fees to pre-

vailing plaintiffs, as the statute mandates.

7 A decision by California’s highest court indicates the

degree of deference accorded an arbitral decision. In Moncharsh

v. Heily & Blase, 832 P.2d 899, 900 (Cal. 1992) (en banc), an

arbitrator’s decision was found not generally reviewable, even

if it was incorrectly decided as a matter of fact, or erroneously

decided on the law.

E. Arbitration Undermines Public Accountability.

Another reason financial institutions attempt to com-

pel arbitration is to escape the publicity which accom-

panies litigation. Budnitz, supra, at 271, 285. The defense

bar has admitted that arbitration reduces the risk of

adverse publicity. Kaplinsky & Levin, Alternative, supra,

at 847. Arbitration is essentially conducted in private.

Brunet, supra, at 13. Both the proceedings and the deci-

sions are required to remain confidential. Id.

‘Businesses favor this privacy, preferring customer

disputes to remain free from the disinfecting rays of

public scrutiny. Businesses naturally fear that publicity

may reduce customers’ trust, alert regulators to unfair

practices or spotlight illegal conduct. Budnitz, supra, at

285.

The publicity accompanying litigation, in contrast,

enhances accountability and furthers the public interest

in ensuring the laws are enforced. The publicity following

a verdict of fraud or deceptive practices lets consumers

and regulators know about illegal practices. Budnitz,

supra, at 313. The inability of consumers to learn about

the experiences of other people closes off access to an

important source of this useful information, and allows

companies to control information. “The lack of publicity

may be particularly detrimental in the context of con-

sumer claims because one set of consumers will not be

able to learn from the misfortunes of others.” Sternlight,

Panacea, supra, at 695 & n.326. Confidentiality undermines

the governmental enforcement and regulatory apparatus

designed to protect the consumer and ensure a fair mar-

ketplace. Budnitz, supra, at 327.

Requiring that disputes be resolved by arbitration,

from which governmental entities are excluded, also cre-

ates a disincentive for consumers to complain to agencies.

That deprives agencies of the data they need to identify

patterns and practices of unlawful behavior and limits

their ability to take appropriate enforcement and regula-

tory action. Budnitz, supra, at 312-313. The lack of public-

ity also reduces the likelihood that other companies will

modify their practices, as often occurs after a publicized

court decision or jury award.

F. Arbitration Impedes Development of the Com-

mon Law.

Resolving disputes privately also impedes the contin-

ued development of a body of consumer protection law.

Budnitz, supra, at 312. Industry counsel readily acknowl-

edge that because arbitrations are confidential and arbi-

trators are not required to issue a written opinion,

development of the common law is stifled. Kaplinsky &

Levin, Alternative, supra, at 848. Stunting the development

of this common law clearly harms consumers. See Brunet,

supra, at 19-20.

The Rand Study expresses grave concern about arbi-

tration’s lack of public standards:

Since the results of private arbitration are not

usually matters of public record, they cannot be

used in these fashions, to establish standards of

conduct for the future or to bring attention to

unwanted behavior. This brings into serious

question the legal system’s ability to effect

changes in the common law and in statutory

interpretation when private ADR is widespread.

Moller et al., supra, at xiii.

The Rand Study also notes the adverse public conse-

quences of private dispute resolution. It describes the

danger that arbitration will silence cases involving poten-

tially damaging precedents or information, and that cases

that would once have been part of the common law

through litigation will be lost to the system, thus failing

to provide a guide for future behavior. Id. at 10 and 32. In

a later study, scholars from the Rand Institute for Civil

Justice further explain that the most significant threat to

the evolution of case law is posed by the prospect that

whole classes of disputes might be removed from the

public sector. Rolph, et al., Escaping the Courthouse, supra,

at 62. That threat, unfortunately, is being realized in the

consumer financial services arena.

G. Arbitration Allows the Financial Services

Industry to Deregulate Itself.

The use of arbitration clauses gives large firms power

to displace the judiciary from its role in enforcing statu-

tory rights. Schwartz, supra, at 37. By selecting mandatory

binding arbitration, institutions avoid applicable prece-

dent or resort to regulatory agencies, and limit their

liability, so that the arbitration clauses function as a kind

of corporate self-deregulation. Forcing disputes involving

Statutory claims into arbitration delegates to arbitrators

the role of industry regulator. Budnitz, supra, at 320. “The

real problem comes when parties who are otherwise pro-

tected by an important public law are compelled to use

an ADR procedure in lieu of coming to court and then

have no meaningful review in court.” Harry T. Edwards,

Where Are We Heading With Mandatory Arbitration Of Stat-

utory Claims In Employment? 16 Ga. St. U. L. Rev. 293, 295

(1999). Judge Edwards emphasizes that a public enforce-

ment mechanism is required to protect statutory rights.

Id. at 297.

H. The Benefits of Arbitration Are Illusory.

Not only is there no proof that arbitration is cheaper,

but there also is no support for the claim that it is better

for individuals. Arbitration awards for consumers gener-

ally are smaller. Schwartz, supra, at 9. This is confirmed

by the Rand Study, which found that awards in arbitra-

tion decisions were typically less than those in jury ver-

dicts. Moller et al., supra, at 11.

The claim of Amici American Bankers, et al. that

consumers will be successful in arbitration because one

commentator found that employees do well (Brief at

19-20), is thus contravened by the limited existing data,

and unpersuasive, in light of their own admission that

“there are no major studies analyzing arbitration in the

consumer context.” Id. at 17.

I. Arbitration Also Reflects An Anti-Consumer

Bias.

Arbitrators are often biased in favor of large corpo-

rate “repeat player” clients. Arbitrators face powerful

economic incentives that can affect their neutrality. If an

arbitrator rules against a corporate client too often, the

company can easily take its business to another arbitrator.

Sternlight, Panacea, supra, at 684-85; Schwartz, supra, at

60-61. “Considering the parties’ frequency of need for an

arbitrator, the arbitrator’s necessary qualifications for

being selected, and the payment plan, the odds are

against the individual plaintiff versus the manufacturers,

health providers, and corporate landlords who will likely

be parties to dispute resolution time and again.” James L.

Guill, Edward A. Slavin, Jr., Rush to Unfairness: The Down-

side of ADR, 28 Judges’ Journal 1, 8, 11 (1989). A study of

this phenomenon in the employment context concludes

that employees recover a lower proportion of their claims

in repeat player cases than in non-repeat player cases. L.

Bingham, Employment Arbitration: The Repeat Player Effect,

1 Emply. Rts. & Empl. Policy Journal 1 (1997).

Another example of arbitrations conducted by NAF

for First USA is illustrative. In almost 20,000 cases, the

vast majority of them brought by the company, NAF

arbitrators ruled for First USA 99.6% of the time. Caroline

E. Mayer, Win Some, Lose Rarely? Arbitration Forum's Rul-

ings Called One Sided, The Washington Post, March 1, 2000

(App. 52). Such an overwhelming disparity in results

raises serious questions about the fairness of the process.

In short, Green Tree’s arbitration clause is illegitimate

because petitioner has adopted it not to obtain an alterna-

tive forum, but to obtain an unfair advantage over its

consumers.

II. IN OPERATION, GREEN TREE’S CLAUSE PER-

MITS PETITIONER TO OBTAIN POSSESSION OF

THE PROPERTY SUBJECT TO THE DISPUTE

BEFORE ARBITRATION IS CONCLUDED.

Not only does petitioner’s clause materially shift the _

economic costs and risks of dispute resolution onto

respondent, but it also allows petitioner to take posses-

sion of the property subject to the dispute outside of the

arbitration process. In particular, Green Tree’s clause pro-

vides:

Notwithstanding anything hereunto the con-

trary, we retain the option to use judicial or non-

judicial relief to enforce a mortgage, deed of

trust, or other security agreement relating to the

real property secured in a transaction underly-

ing this arbitration agreement, or to enforce the

monetary obligation secured by the real prop-

erty, or to foreclose on the real property. Such

judicial relief would take the form of a lawsuit.

The institution and maintenance of an action for

judicial relief in a court to foreclose any collat-

eral, to obtain a money judgment or to enforce

the mortgage or deed of trust, shall not consti-

tute a waiver of the right of any party to compel

arbitration regarding any other dispute or rem-

edy subject to arbitration in this contract,

including the filing of a counterclaim in a suit

brought by us pursuant to this provision.

. (J.A. 36). By its plain terms, this clause allows Green Tree

to split all disputes with its customers and to obtain

judicial or non-judicial foreclosure and even a money

judgment prior to or even in spite of a contrary ruling by

an arbitrator. Green Tree therefore retains the significant

threat of repossession and claim preclusion outside of the

arbitration process. Since Green Tree itself controls how

the arbitration process is commenced, including the costs

involved, it can time that process to maximize its litiga-

tion leverage (including claim and issue preclusion) by

proceeding with repossession while relegating even con-

sumer counterclaims to arbitration. Thus, while petitioner

and its amici trumpet the supposed merits and efficiency

of arbitration, they have, in fact, stacked the litigation

deck in their favor by reserving for themselves alone the

right to proceed in a judicial forum.

The illegitimacy of such a provision is apparent in the

fact that a consumer is left powerless under the contrac-

tual language. Any plea to an arbitrator to enjoin Green

Tree from proceeding with a foreclosure or money judg-

ment claim would certainly be met with the argument that

the arbitrator lacked such power. Indeed, the same clause

expressly reserves the judicial option to Green Tree, thus

precluding arbitral review or intervention.

This unique contrivance certainly distinguishes the

present clause from all the other arbitration clauses the

Court has previously considered under the FAA. In con-

trast with those cases, the clause here is clearly intended

to tilt the dispute resolution landscape in petitioner’s

favor. It is not intended to provide an alternative forum.

It is intended to lock consumers away in a private,

unspecified process, the initiation and costs of which are

totally controlled by Green Tree. Neither Congress nor

the Court ever intended the FAA to permit such a result.

III. GREEN TREE’S ARBITRATION CLAUSE IS ILLE-

GITIMATE BECAUSE IT FAILS TO SPECIFY

HOW ARBITRATION IS INITIATED AND IS

NOT CONSENSUAL.

Petitioner’s clause lacks an essential element neces-

sary for legitimacy under the FAA - notice of how the

dispute resolution mechanism is initiated. Under the

clause, Green Tree selects the arbitrator. But there is abso-

lutely no notice of how that selection process is initiated.

Does the consumer simply write to Green Tree? Does the

consumer call? Does the consumer refuse to pay his or

her bill?

In Fuentes v. Shevin, 407 U.S. 67 (1972), the Court

emphasized that “a waiver of constitutional rights in any

context must, at the very least, be clear.” Id. at 95. In this

regard, notice and an opportunity to be heard have been

the hallmarks of the Court’s due process analysis. The

Fuentes Court emphasized that form contractual provi-

sions in consumer transactions purporting to waive these

basic due process rights would not be enforced if evi-

denced only by a consumer’s signature on the contract.

See id.; see also Swarb v. Lennox, 405 U.S. 191 (1972); cf.

D.H. Overmyer Co. v. Frick Co., 405 U.S. 174 (1972).

In this case, the impact of petitioner’s tilted arbitration

clause is no less drastic to consumers than were the confis-

catory confession of judgment clauses struck down in

Fuentes and Swarb. As in those cases, Green Tree’s cus-

tomers here confront the very real likelihood of losing

their property without any effective notice or opportunity

to be heard to prevent that eventuality. Although there is

the sham appearance of such an opportunity, the alterna-

tive arbitration forum and process is so controlled by

Green Tree and the remedies are so restricted that the

arbitration is really a modern-day confession of judgment.

Applying fictional concepts of consent to adhesion-

ary contracts between financial institutions and con-

sumers distorts the law of contract and the traditional use

of the arbitration mechanism beyond recognition. Arbi-

tration is a creature of contract, premised on the ability of

parties of equal bargaining power to choose what method

of resolving disputes will best serve their mutual needs.

This Court has frequently acknowledged that arbitration

is premised on consent. Volt Information Sciences, Inc. v.

Board of Trustees, 489 U.S. 468, 479 (1989) (arbitration is a

matter of consent, not coercion).

Meaningful consent simply does not exist in the pre-

sent case. Unlike the parties to most contracts between

business entities, individuals contracting for goods and

services generally do not have equal bargaining power. In

most instances, a marked imbalance in knowledge and

power characterizes such contracts. Adhesionary con-

tracts are not freely negotiated, but are offered on a take-

it-or-leave-it basis. They are imposed by a powerful party

on a relatively powerless party who has no ability to

negotiate. Budnitz, supra, at 328. Indeed, the essence of

form contracts is that they can rarely if ever be negotiated

by the consumer. Sternlight, Panacea, supra, at 676-77.

The Restatement (Second) of Contracts notes that “lal

party who makes regular use of a standardized form of

agreement does not ordinarily expect his customers to

understand or even to read the standard terms.” Restate-

ment (Second) of Contracts § 211 comment b (1979).

When the party with superior sophistication, knowledge,

and financial resources inserts a mandatory arbitration

clause into a form contract, individuals usually are

unaware of and cannot reasonably be said to have con-

sented to these terms. See Carnival Cruise Lines, Inc. v.

Shute, 499 U.S. 585, 599 (1991) (“the common law ...

subjects terms in contracts of adhesion to scrutiny for

reasonableness”). Rather, the reality is, as Professor

Sternlight points out,8 consumers do not understand

either the terms or their import.

Unilateral imposition of mandatory, binding arbitra-

tion in adhesionary contracts has none of the indicia of

choice, consent, or bargaining. Instead, it is well recog-

nized that: “[w]ith the growth of ADR has come a strong

element of compulsion and coercion.” Katz, Two-Headed

Monster, supra, at 1.9 The compulsion and coercion here

8 Sternlight, Panacea, supra, at 688-693, and studies cited at

n.290, 289, and 300.

° The compulsion and coercion which are inherent in the

mandatory imposition of alternative dispute resolution

mechanisms has led the European Commission to file comments

opposing alternatives which preclude consumers’ recourse to

the courts in e-commerce disputes. (App. 59).

has deprived respondent of basic due process and ren-

ders petitioner’s clause illegitimate under the FAA.

CONCLUSION

The FAA does not legitimate one-sided agreements

which attempt to give the institutional party an unfair

advantage over its consumer customers. So long as man-

datory, pre-dispute clauses are used to change the rules

by which disputes are resolved, and limit industry lia-

bility, their use will not accomplish the ostensible goals of

inexpensive, prompt and fair dispute resolution. Where,

as here, business interests seek to gain an unfair advan-

tage, preclude class and representative actions, constrict

the availability of statutory remedies, limit or eliminate

any challenge to their deceptive business practices, and

increase costs to consumers, their abusive arbitration

clauses should be deemed unenforceable.

Respectfully submitted,

PATRICIA STURDEVANT

(Counsel of Record)

National Association of Consumer

Advocates

1717 Massachusetts Avenue, N.W.,

Suite 704

Washington, D.C. 20036

(202) 332-2500

MicHAEL D. DONOVAN

Donovan Miter, LLC

1608 Walnut Street, Suite 1400

Philadelphia, PA 19103

(215) 732-6020

July 24, 2000

App. 1

NATIONAL ASSOCIATION OF

CONSUMER ADVOCATES

1717 Massachusetts Avenue, Suite 704

Washington, D.C. 20036

Telephone (202) 332-2500

Fascimile (202) 332-4152

POSITION PAPER: REASONS TO OPPOSE

PRE-DISPUTE ARBITRATION CLAUSES

IN CONSUMER CONTRACTS

I. Overview.

Recent years have witnessed an assault on the rights

of consumers to access to the courts, and to trial by judge

and jury. Banks, credit card companies and other financial

institutions are jeopardizing consumers’ rights to the pro-

tections afforded them by statutory and case law through

the use of mandatory, binding arbitration clauses. These

clauses are drafted by the financial institutions and uni-

laterally inserted in adhesionary contracts with con-

sumers, without negotiation or consent. Arbitration as a

method of resolving disputes is a creature of contract

premised on the ability of parties of equal bargaining

power to choose what method of resolving disputes will

best serve their mutual needs. Free choice is the founda-

tion of all alternative dispute mechanisms, including arbi-

tration, and the reason such clauses are enforceable is

because they reflect the bargain between the parties. Uni-

lateral imposition of binding arbitration raises trouble-

some issues for consumer advocates because of the

——————_—_—_— 4

App. 2

potential for abuse by institutional interests and the con-

sequent denial to consumers of access to the courts and to

justice.

II. Specific Problem With Pre-Dispute Arbitration

Clauses.

A. The purpose and intent of such clauses is to insulate

unlawful, unfair, or deceptive practices from any

meaningful review by making it difficult to obtain

discovery, impairing consumers’ ability to proceed

on behalf of a class, and to reduce compensatory and

punitive damage awards.

B. By placing arbitration clauses into contracts before a

dispute arises, the consumer is deprived of any way

to intelligently decide if she really wants arbitration

or if it will be an appropriate way to resolve that

particular dispute.

C. Discovery is not available as a matter of right, but is

within the discretion of the arbitrator. This can make

the proceedings very unfair to consumers if they

need to obtain documents from the defendant to

demonstrate the nature and scope of challenged busi-

ness practices.

D. Arbitration, unlike the court system, requires that the

parties pay a high filing fee as well as a daily fee to

the arbitrator(s), and may impose other fees for hear-

ings, processing, and administration. The costs of

arbitrating may exceed the costs of litigating, and are |

often in excess of the amount in dispute. |

E. The arbitrator need not follow precedent or explain

the reasons for his or her decision, so consumer

protection statutes and case law can be ignored.

App. 3

The proceedings are secret, so challenged practices

will not be brought to the attention of the public

generally or to the regulatory authorities such as the

Federal Trade Commission, making it more difficult

for abusive practices to be uncovered.

An arbitrator does not have the power to order

injunctive relief. The consumer victimized by a wide-

spread business practice may obtain individual

recovery, but may not be granted an order that the

wrongful practice cease.

The arbitrator’s decision is immune from judicial

review, except on very narrow grounds, such as

fraud by the arbitrator, and a decision is final and

binding even if it is wrongly decided as a matter of

fact or incorrect as a matter of law.

The company chooses the forum, which can lead to

proceedings which are conducted in an inconvenient

forum and are inordinately expensive.

The supposed preference for arbitration as a means

of resolving disputes is derived from a series of

Supreme Court cases between commercial entities

which had bargained for the speed and efficiency of

arbitration, so the Court was merely enforcing a

freely negotiated contractual agreement between par-

ties of equal bargaining power. That rationale is inap-

plicable to cases involving consumers who did not

know about, negotiate, or accept the clause.

Defendants argue that arbitration may not proceed

on a class wide basis, requiring consumers to pursue

each case individually and depriving them of a very

important procedural tool for stopping wrongful

conduct and obtaining meaningful relief.

Future consumers are deprived of the clarification

and development of consumer law through the

courts. Statutes and regulations are full of ambiguity

App. 4

and uncertainty which case, law could rectify and

which the drafters of new and revised laws need for

informed decisionmaking.

App. 5

DISPUTE RESOLUTION

MAGAZINE

Volume 1, Number 2 Summer 1994

[LOGO]

FACE OFF:

Should Binding Arbitration

Clauses be Prohibited in

Consumer Contracts?

[LOGO]

FACE-OFF

Should Binding Arbitration Clauses

be Prohibited in Consumer Contracts?

by Patricia Sturdevant and Dwight Golann

YES: NO:

Pre-Dispute Arbitration Binding Arbitration is the

Clauses are Unfair to Only Practical Solution to

Consumers Many Consumer Disputes

Patricia Sturdevant - - Dwight Golann

YES Mandatory binding arbitration imposed by a busi-

ness entity on a consumer should have no place in our

justice system. Arbitration as a method of resolving dis-

putes is a creature of contract premised on the ability of

parties of equal power to choose what method of resolv-

ing disputes will best serve their mutual needs. Free

choice is the foundation of all alternative dispute mecha-

nisms, including arbitration. Unilateral imposition of

App. 6

those alternatives raises troublesome issues for consumer

advocates because of the potential for abuse by institu-

tional interests and the consequent denial to consumers

of access to the courts and to justice.

The essence of arbitration is that it is consensual. The

Federal Arbitration Act does not express any preference

for arbitration, but simply for enforcing privately negoti-

ated agreements to arbitrate, like other contracts, accord-

ing to their terms. The purpose of the Act was to enable

merchants who had negotiated arbitration agreements to

enforce those agreements. It was never intended to force

parties to arbitrate disputes they had not agreed to sub-

mit to that forum.

Because the consequences of arbitration are severe,

consent should never be uninformed or implied. Even

arbitral decisions that are wrong as a matter of fact or law

and result in a manifest injustice cannot be overturned on

appeal. (See, for example, Moncharch v. Heily & Blase, 832

P2d 899 (Cal. 1992).) The rationale for tolerating the

possibility of an unfair or incorrect resolution of a dispute

is that parties who have made the bargain to arbitrate,

knowing a decision is final and binding, should be held

to it. But this rationale is wholly inapplicable when, as in

most consumer contracts, there is no actual agreement to

arbitrate. No system of resolving disputes can be consid-

ered fair if it exposes the parties to manifest injustice

without their consent. Nor does a system of speedy, eco-

nomical injustice solve the problem of court overcrowd-

ing in a socially acceptable way.

Arbitration works best in resolving disputes of a factual

nature between parties who desire to continue an existing

App. 7

business relationship and who have willingly agreed to

submit their disputes to arbitration. Proponents of pre-

dispute arbitration clauses in consumer contracts often

obscure the crucial distinction between voluntary arbitra-

tion, which can be extremely useful, and mandatory arbi-

tration, which is a contradiction in terms, like minor

surgery. Proponents of these clauses also ignore the fact

that the purposes of such arbitration clauses are to avoid

jury trials and to minimize the institution’s exposure for

high compensatory and punitive damage awards. Yet,

because it is constitutionally guaranteed, the right to trial

by jury can only be waived voluntarily with an awareness

of the existence of the right and the consequences of

giving it up. Pre-dispute arbitration clauses in contracts

that are not negotiated seldom meet those standards.

Twice recently the California Court of Appeals has

refused to enforce arbitration clauses in adhesion con-

tracts on the grounds that such clauses are outside the

reasonable expectations of consumers. In Patterson v. ITT

Consumer Financial Corp., 18 Cal. Rptr. 2d 563 (Ct. App.

1993), the court found that an arbitration clause that was

not pointed out to the borrowers by the lender constitu-

ted an unfair surprise, and that arbitration in a distant

forum was beyond the borrowers’ reasonable expecta-

tions. The court concluded that the clause was uncon-

scionable because the proceedings were costly, the rules

for obtaining a local forum were incomprehensible, and

the process seemed designed to discourage borrowers

from obtaining a hearing. And in Bell v. Congress Mortgage

Co., 30 Cal. Rptr. 2d 205 (Ct. App. 1994), the court consid-

ered the entire context of the transaction: the disparity in

bargaining strength between the parties, the borrowers’

App. 8

relative lack of sophistication, the absence of negotiation,

the obscuring of the arbitration provision in voluminous

text and in the midst of a recitation of rights secured to

the borrowers, and the lender’s failure to point out the

clause. The court held that under this combination of

circumstances “an adhesion contract must elicit a clear

and informed waiver” of the right to trial by jury, and

that the contract in question had not done so.

These judicially imposed limits on enforceability rec-

ognize the reality that non-negotiated, non-consensual

pre-dispute clauses between parties of unequal power are

potentially abusive. Federal law on unconscionability

also limits the enforceability of pre-dispute clauses that

are outside the reasonable expectations of the weaker

party, or are procedurally and substantively unconscion-

able.

Businesses can reduce their litigation expenses and

better serve their shareholders’ and customers’ interests

in a variety of fair and legitimate ways. They can describe

the various alternative dispute mechanisms available and

allow consumers to elect one or none at the time a dis-

pute arises. Or they can require arbitration by contract,

but allow a consumer dissatisfied with the result the

option of litigation. Fither of these alternatives would

reduce costs and speed dispute resolution while provid-

ing safeguards against abuse and unfairness.

Alternative dispute resolution mechanisms can serve

a useful and important purpose when the parties agree to

them. But to create both the appearance and reality of

fairness and justice, arbitration, like sex, must be based

on consent, not on coercion.

App. 9

Patricia Sturdevant is a partner with the firm of Sturdevant &

Sturdevant, in San Francisco, California.

NO If all consumers had access to a skilled, tenacious

advocate like Pat Sturdevant and a jury available to hear

their case, it would be harder to argue for pre-dispute

arbitration clauses. In the real world, however, con-

sumers usually don’t have either. So well written ADR

clauses make sense, both for businesses and their cus-

tomers.

Corporations often write arbitration clauses into con-

sumer contracts to avoid high litigation costs, inexpert

judges, and, let’s be candid, juries. Although some com-

panies are concerned about the attitudes of jurors, what

many businesses say they fear most is their unpredic-

tability. A few companies also seem to be attempting to

create an improper “home-field advantage” by specifying

inaccessible venues, little-known ADR administrators,

and the like.

The fact that the pre-dispute arbitration clauses may

be good for businesses, however, does not necessarily

mean that they are bad for consumers. Let me tell you

about my heat pump. What’s a heat pump? It’s an engi-

neering marvel that both heats and cools a room by

pulling heat out of the air. Like many other innovations,

heat pumps seem to work better in California than in the

frigid air of New England. Ours died, was resuscitated at

great expense, and died again. The unit was still under an

implied warranty, but the manufacturer refused to fix it.

I have a breach of warranty claim worth about $3,000,

as well as statutory legal rights. But how can I enforce

them? I can’t go to small claims court with this claim: it’s

App. 10

twice the jurisdictional limit. I could sue in district court

and have a jury trial for breach of warranty (although not

for violation of Massachusetts’ “little FTC” act). But to get

a trial I need a lawyer, and no one will take a $3,000 case

on contingency. Even if they did, our local court has a

year’s backlog, which only begins to run after discovery

is completed. Thus, a decision is at least two years away,

assuming no appeals are taken.

Things look almost as bad for the pump manufac-

turer. Its lawyer’s fee will probably exceed my claim, so it

might agree to settle. But it hasn’t yet, and as the plaintiff

I have to move first. In these circumstances most con-

sumers, neither knowing their rights nor being able to

enforce them, simply “lump it.” Compared to these bleak

options, a quick, cheap, and final system of contractual

arbitration looks very attractive.

There are, of course, much bigger consumer claims,

such as cases involving new-car lemons and mortgage

violations. But even these grievances usually don’t

involve large sums of money per claimant. And as the

size of the claim increases, so do the complexities and

individual variations. I recently asked a nationally known

advocate for the poor why more mortgage class actions

aren’t being brought. “We get calls from class-action law-

yers,” she said, “but they usually want ‘cookie cutter’

cases.” In other words, they want the kind in which

essentially identical claims can be litigated or settled en

masse. I would too if I were a plaintiffs’ lawyer, but this

approach automatically rules out most cases that involve

individualized facts — like misleading mortgage pitches

and my broker heat pump.

App. 11

Reforming the Litigation System. One solution would be

court reform: raising small claims limits, adding judges,

and the like. Most of us are not patient or hopeful enough

to wait for this. Another might be the system Pat Sturde-

vant advocates, where litigants negotiate over arbitration

after the claim arises and the issues are known. If arbitra-

tion offered a fair solution to both sides, litigants would

presumably choose it voluntarily.

But this assumes that the consumer has pursued his

or her case and found a lawyer who understands arbitra-

tion, an unlikely event in my experience. Also, once a

claim is filed, the defendant usually hires an outside

litigator, and national companies often engage local coun-

sel. As more than one corporate general counsel has

complained, litigators often come up with endless rea-

sons why a case has to remain in the court system.

Although they may suspect that they are being milked for

fees, corporate counsel often feel that they must defer to

the litigator’s knowledge of the local legal culture. For all

these reasons, once a case enters the judicial system, it

rarely gets out, even when arbitration would make sense

for everyone.

Making Arbitration Work for Consumers. This said, there

are serious problems with some of the form arbitration

clauses being used today. The question is how to make

arbitration work for both sides in consumer transactions.

I don’t think consumers can realistically be expected to

bargain for themselves or will have lawyers to represent

them. Thus, legislation will be needed. And since the

Federal Arbitration Act has been held to preempt most

state laws governing arbitration, the solution must come

from the federal government. Examples of the kind of

App. 12

legislation I have in mind are the Magnuson-Moss War-

ranty Act, which imposed minimum federal standards on

consumer warranties, and the Federal Trade Commis-

sion’s Credit Practices Rule, which outlawed several

unfair collection remedies in consumer contracts.

What should such legislation or regulations cover?

It’s hard to specify a “one size fits all” system, but among

the key provisions should be the following:

Guarantees of neutrality. Arbitration administrators and

neutrals should meet minimum requirements for inde-

pendence from litigants; they should not depend for more

than a minor portion of their revenue on any single

customer.

Compliance with law. Consumer arbitrators should be obli-

gated to apply the extensive body of consumer legislation

that has been adopted over the past generation, not sim-

ply their personal ideas of fairness.

Venue. Arbitration should take place where the transac-

tion occurred.

Fees. Administrative fees for consumers should be compa-

rable to those imposed by courts; businesses that want to

arbitrate should bear the extra cost of doing so.

Graduated discovery. Consumers need streamlined discov-

ery, in proportion to the amount at stake in the case.

Reasoned opinions and appeals. Parties need not have broad

rights of appeal except perhaps in the largest cases, but

arbitrators should provide a summary of their reasoning,

as an internal check on their performance.

App. 13

Ability to grant relief. Arbitrators are sometimes referred

claims, such as class actions, that they are incapable of

administering, and sometimes receive requests for relief,

such as for punitive damages, that they may have no

legal power to grant. A claim should not go to arbitration

unless the arbitrator can administer it and has the author-

ity to grant the relief available from a court.

Conclusion. With these reforms, some businesses may no

longer be interested in using arbitration clauses. But with

such protections, a pre-dispute commitment to arbitrate

can be a good deal for everyone.

Dwight Golann is Professor of Law at Suffolk University Law

School, in Boston Massachusetts. He is an active mediator and

serves as Chair of the Consumer Financial Services Committee

of the ABA's Section of Business Law.

App. 14

[LOGO]

Bank America Corporation NEWS

Peter Magnani For release:

(415) 953-2418 IMMEDIATE

BANK OF AMERICA ADOPTS

ALTERNATIVE DISPUTE RESOLUTION

SAN FRANCISCO, June 2, 1992 — Bank of America

has modified all of its deposit and Bankcard account

contracts to provide for alternative methods of resolving

legal claims arising from complaints by customers. The

move is expected to provide customers a means of resolv-

ing disputes with the bank that is faster, less costly, and

more reliable than litigation, while enabling the bank to

manage the costs of resolving customer complaints more

effectively.

Beginning immediately, if a customer files a lawsuit

against the bank, either party can elect to have the matter

resolved through binding arbitration under the rules of

the American Arbitration Association. The Association

then appoints an arbitrator — usually a practicing attorney

_ from a list that is acceptable to both parties. The arbitra-

tor conducts an informal hearing and renders a decision,

which is binding on both parties.

“The great majority of customer complaints are

resolved quickly and routinely, often with a simple tele-

phone call,” said Winslow Christian, Senior Vice Presi-

dent and Director of Litigation at Bank of America. “But

occasionally, we are unable to resolve a dispute satisfac-

torily and the customer feels that the only available

recourse is to file a lawsuit. This is an expensive and time

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App. 15

consuming effort for us and our customers. We believe

that alternative dispute resolution will be a preferable

option in most cases.”

Christian said that a dispute which might take

months to litigate, can be settled in a matter of weeks by

binding arbitration. “Customers can have their legitimate

grievances addressed without having to pay the high

court costs and attorneys fees associated with litigation

and the bank tends to be less exposed to unpredictably

high damage awards.”

Christian, a former California appellate court judge

and advocate of alternative dispute resolution, said that

organizations that have used binding arbitration have

found that claimants tend to be more likely to be awarded

compensation from binding arbitration than from litiga-

tion, but less likely to be awarded amounts significantly

in excess of the actual damages they claim to have suf-

fered. He said that binding arbitration has been used

extensively by medical practitioners, construction com-

panies and stock brokers, but is relatively new for banks.

Banks of America began including binding arbitration in

its commercial loan contracts four years ago, Christian

said.

In addition to binding arbitration for individual com-

plaints, Bank of America has instituted a procedure

known as “judicial reference” for complaints made as

class actions. Judicial reference is a long-standing, but

seldom-used alternative dispute resolution procedure. If

either party elects judicial reference in a class action, the

judge refers the matter to a referee selected in the same

way as for binding arbitration. After hearing the case, the

App. 16

referee submits his decision to the trial judge, who is

required to make it his judgment. After that, the normal

judicial appeal process ensues.

“Judicial reference provides the same cost-saving and

time-saving benefits for customers as binding arbitration,

but it is also appealable, which we think is appropriate

for class action compiaints, since they are more likely to

be complex and precedent-setting,” Christian said.

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App. 17

ASSOCIATION OF BUSINESS TRIAL LAWYERS

abtl

NORTHERN CALIFORNIA

REPorT Volume 3 No.1

NOVEMBER '93

Mandatory Arbitration

and Access to Justice

In the March 1993 issue of the ABTL Report, Bank of

America’s Assistant General Counsel Arne D. Wagner

defends the Bank’s recent attempt to impose an alterna-

tive dispute resolution (ADR) requirement on its cus-

tomers. It is reasonable to anticipate that other banks will

follow suit. Wells Fargo Bank has already done so. This

development bodes ill for consumers’ ability to enforce

their rights and safeguards under consumer protection

Statutes and would make equal access to justice depen-

dent upon financial resources.

Bank ADR clauses typically mandate arbitration of

individual disputes and judicial references for class

actions and private attorney general cases that challenge

business practices and seek relief for all affected cus-

tomers. Such clauses attempt to deprive bank customers

of access to the courts, particularly in class actions, and

insulate banks against large jury verdicts. In the words of

the architect of the Bank of America’s ADR plan, Winslow

Christian, this change will make the Bank “less exposed

to unpredictably high damage awards.” The Purpose of

these clauses plainly is to alter the rules governing dis-

pute resolution to favor banks.

App. 18

The advantages of arbitration and reference which

Mr. Wagner enumerates may provide sound reasons why

parties of equal bargaining power might choose to agree

to resolve their disputes in the arbitral forum. Like sex,

arbitration is fine between consenting adults. Imposing

arbitration and judicial reference on unwilling consumers

in order to reduce bank exposure is, however, unjust.

Bank ADR clauses coerce parties of unequal bargaining

strength into a forum which is perceived to be more

hospitable to the financial institution.

The notion of mandating arbitration should have no

place in our justice system. Arbitration as a method of

resolving disputes is a creature of contract premised on

the ability of parties of equal power to choose what

method of resolving disputes will best serve their mutual

needs. Arbitration arose in the context of labor relations,

where unions and management negotiated a way of rap-

idly resolving disputes before a highly skilled labor arbi-

trator who is trusted by both sides in order to avoid

strikes and labor unrest that jeopardized the pecuniary

interests of both parties and the societal interest in indus-

trial stabilization.

Thereafter, the use of arbitration to resolve disputes

expanded. It was frequently negotiated at arm’s length in

commercial contracts between experienced and sophisti-

cated business entities who desired to continue their

business relationships. Part of those negotiations typ-

ically included a choice of which law would govern trans-

actions between entities in different states or countries. In

this commercial context, parties should be able to freely

negotiate arbitration agreements in the expectation that

they will be enforced. Requiring arbitration in the bank-

App. 19

consumer context, however, distorts the process and

raises serious issues of fairness. x

The essence of arbitration is that it is consensual. The

Federal Arbitration Act does not express any preference

for arbitration, but simply for enforcing privately negoti-

ated agreements to arbitrate, like any other contract,

according to their terms. The consequences of arbitration

are severe: even decisions that are wrong as a matter of

fact or law and result in a manifest injustice cannot be

overturned on appeal. See Moncharsh v. Heily & Blase, 3

Cal. 4th 1 (1992), and Code of Civil Procedure § 1280, et

seq. The rationale for tolerating the possibility of an

unfair or incorrect resolution is that parties who bar-

gained to arbitrate should be held to it. This rationale

requires a knowing consent to arbitrate. No system of

resolving disputes can be considered fair if it can expose

parties to manifest injustice without their knowing con-

sent.

The Bank of America’s method of communicating

this change in contract terms is unlikely even to inform

consumers, and does not seek (or obtain) their express

consent. The Bank’s notice of change of terms states:

CHANGE OF TERMS NOTICE FOR BANK-

AMERICARD VISA, MASTERCARD, VISA

GOLD, GOLD MASTERCARD, AND APOLLO

ACCOUNTS

Dispute Resolution - If you or we request, any

controversy with us will be decided either by

arbitration or reference. Controversies involving

one account, or two or more accounts with at

least one common owner, will be decided by

arbitration under the Commercial Arbitration

App. 20

Rules of the American Arbitration Association.

All other controversies will be decided by a

reference under California Code of Civil Pro-

cedure § 638 and related sections. A reference

who is an active attorney or retired judge will be

appointed by the court after selection by the

American Arbitration Association using its pro-

cedures for selecting arbitrators. The arbitration

or reference will take the place of a trial before a

judge and jury. (This is a new provision for

Cardmember and Apollo Account Agreements.

If you continue to use your account, this new

provision will apply to all past and future trans-

actions.)

The notice was inserted as a “stuffer” in the monthly

statement to credit card holders and checking account

customers. It is highly questionable whether customers

even read such notices, which are included with other

material such as a newsletter from the Bank and solicita-

tions to purchase luggage, insurance and other goods or

services.

Moreover, the notice does not say it is a contract and

does not look like the Bank’s standardized cardholder

agreement. It has none of the indicia of a valid and

binding contract. There is no manifestation of assent by

consumers to be bound to these new terms. Instead,

consumers are deemed to have consented to the arbitra-

tion and reference requirements if they use their credit

cards. But continuing to make charges on a credit card

cannot reasonably be construed to indicate assent to arbi-

tration or judicial reference. Nor is this purported new

contract term supported by consideration. There is no

benefit conferred upon the cardholder, nor any detriment

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App. 21

suffered by the Bank. Instead, cardholders are being

deprived by the Bank of substantial rights to unimpeded

discovery, trial by judge or jury, and a court system

funded by the taxpayers while getting nothing in return.

Finally, the terms of this new contract provision are

not fully described. Nothing informs the Bank’s cus-

tomers that arbitration and reference will be costly or that

discovery will be limited. Only those who obtain and

read the rules of the American ‘Arbitration Association

will learn these important facts. Nor does the Bank

explain that, as it interprets the ADR requirement, a

referee’s decision will automatically become the trial

court’s judgment. Only if the Bank’s consumer customers

happen to read a newspaper article that quoted Mr.

Christian’s press release of June 2, 1992, would they learn

that the Bank construes its ADR clause to deny any

judicial oversight of a referee’s decision. Nor will con-

sumers understand that case law specifies that arbitral

decisions will be final and binding even if they are based

on a misrepresentation of fact, apply the law incorrectly,

or are unfair. Under these circumstances, no real agree-

ment to arbitrate exists.

Even if there were a contract it would be adhesionary

and unconscionable and therefore unenforceable. The

ADR term is procedurally unconscionable because it is

contained in a standardized form insert that is not negoti-

ated but simply imposed by the party with greater bar-

gaining power on a take-it-or-leave-it basis. Such a

Provision is not within the reasonable expectation of the

consumer party. Moreover, the failure to describe many

important features and consequences of arbitration and

reference means that these will come as an unpleasant

App. 22

surprise to consumers only after a dispute has arisen.

Consumers who do not know what they are losing will

have no reason to consider moving their accounts to

banks that do not require arbitration and reference of

disputes, even if they were financially able to do so.

Moreover, particularly in today’s economy, not every con-

sumer is able to pay off existing balances or obtain credit

elsewhere without doing so.

The arbitration and reference provisions are also sub-

stantively unconscionable because they deprive con-

sumers of constitutionally guaranteed rights. Article 6,

§§ 21 and 22 of the California Constitution vest the judi-

cial power in duly appointed or elected judges and limit

the functions of commissioners and referees to “subordi-

nate judicial duties.” Consistent with this constitutional

mandate, the case law uniformly holds that consent of the

parties is required before cases may be decided by per-

sons other than judges. Without such consent, as

numerous cases hold, the findings of commissioners or

referees are advisory only. In In Re Edgar M., 14 Cal.3d

727 (1975), the Supreme Court held that the adjudication

of a juvenile court matter by a referee acting without any

procedures for judicial review and without the parties’

consent violates the constitutional limitation of a referee

to “subordinate judicial duties.” Id. at ye

In In- Re Horton, 54 Cal.3d 82 (1991), the Supreme

Court again confirmed that the jurisdiction of a court

commissioner, or any other temporary judge, to try cases

depends on the parties’ stipulation. Since the judicial

power of the state is vested in the courts, a judgment

entered by a court commissioner without a proper stipu-

lation would be void.

App. 23

In order to meet constitutional muster, a referee’s

decision, in the absence of a stipulation, must be advisory

only and subject to judicial review. The People v. Perrone

C., 26 Cal.3d 49 (1979); In Re John H., 21 Cal.3d 18 (1978).

Therefore, the bank’s attempt to make an arbitrator’s or

referee’s findings “the judgment of the court” without the

opportunity for a rehearing by a judge is an unconstitu-

tional delegation of the judicial power.

These constitutional requirements are also reflected

in the statutory scheme governing reference. Code of

Civil Procedure § 638 requires a written stipulation for

any reference. The case law consistently requires the writ-

ten affirmation of both parties before a reference is per-

mitted. See e.g., In Re Hart's Estate, 11 Cal.2d 89 (1938);

Fooshe v. Sunshine, 96 Cal.App.2d 336 (1950).

Without consent, the reference of specific issues must

be advisory only and the referee’s decision becomes effec-

tive only after approval by the court. Holt v. Kelly, 20

Cal.3d 560 (1978). In Bird v. Superior Court, 112

Cal.App.3d 543 (1980), a reference exceeded statutory

authority where the petitioner had not consented to refer-

ence, the issues referred were not those encompassed in

Code of Civil Procedure § 639, and the referee’s deter-

mination was not advisory only. Accord, International Jet

Ski Boating v. Superior Court, 232 Cal.App.3d 112 (1991).

Indeed, § 638 has been held to be constitutional speci-

fically because the referee’s report may be accepted or

rejected by the court. Sandoval v. Salazar, 57 Cal.App. 756

(1922).

Finally, the constitutional guarantees of due process

and equal protection contained in Article 1, § 7A also

App. 24

require that the findings of a referee or other non-judicial

officer be advisory only. The People v. Perron C., supra. In

the Matter of Gregory M., 68 Cal.App.3d 1085 (1977), held

that due process and equal protection require a judge to

review a referee’s determinations, Hebert v. Harn, 133

Cal.App.3d 465 (1982), ruled that the statutory scheme for

judicial arbitration, in order to be constitutional, required

a right to de novo trial, by court or jury, as to law and

facts. If judicial arbitration requires these constitutional

safeguards, then non-judicial and non-consensual arbitra-

tion and reference must require no less.

Arbitration is particularly inadequate for resolving

disputes about bank conduct because the typical arbitra-

tion clause seeks to avoid any discovery. Under Califor-

nia law, the right to discovery is deemed to be

incorporated in agreements to arbitrate only for personal

injury or wrongful death claims. In all other disputes,

discovery is available only if the arbitration agreement

expressly so provides. Since the typical bank ADR clause

does not provide for discovery, banks would have to

make available only those documents they intend to offer

in support of their own claim. This would deprive con-

sumers challenging the legality of bank charges of the

evidence they need to prove their claims.

The substantive unconscionability of bank ADR

clauses is exacerbated because it would greatly increase

expense to consumers. Arbitration is inordinately expen-

sive. The filing fees are $300 for a claim up to $25,000

(more than four times the $74 filing fee for Municipal

Court) and $500 for a claim of $25,000 to $50,000 (almost

three times the $182 fee for Superior Court). The maxi-

mum fee is $4,000 for a claim in excess of $5,000,000. If no

RRR POTENT

BP eel ELE: FNS

Spars hee mae

Satie oz toot aris

UN Cie aaneth

RAITT MT IS:

Bai aick sad Mad ikaue. Gate oedse eae

App. 25

amount can be stated, the filing fee is $1,000, subject to

adjustment. If injunctive relief is sought, the fee may be

any sum deemed “appropriate” by AAA. In cases involv-

ing more than two parties, an additional 10% of the

administrative fee is due for each additional party. The

parties must also pay fees for Processing the case: $150

per party for the first 180 days and $150 per party for

every 90 days thereafter that the case is pending; $100 per

day for each party for hearings, for postponing hearings,

and for renting hearing rooms. In addition, the parties

must compensate arbitrators. Requiring these substantial

fees in order to challenge bank practices is Particularly

egregious because cardholders, as taxpayers, have

already paid for-the court systems so which banks would

deny them access. They often cannot afford to pay a

second time in order to challenge the bank’s acts or

practices.

Even if discovery is available in referenced disputes,

it is still unconscionable to deprive consumers of access

to the courts, which are established and supported by the

State to afford forums for the rich and poor alike to

present controversies at minimal cost to the litigants.

Instead, a class of bank customers seeking to challenge

unlawful conduct would be forced to bear the burden and

expense of paying referees to handle law and motion

issues, discovery disputes, and trial. Particularly in class

actions and unlawful business practices cases, costs of

reference could be many times more than litigation in

court.

Bank ADR clauses would effectively insulate wrong-

ful practices from any effective challenge. They would

deprive customers of their constitutional rights without

App. 26

their knowledge or consent and subject them to the risk

of speedy injustice. Alternative dispute resolution mecha-

nisms can serve a useful and important purpose where

the parties agree to them, but to afford both the appear-

ance and reality of fairness and justice, they must be

based on consent, not on coercion.

Ms. Sturdevant is a partner in the firm of Sturdevant &

Sturdevant.

acon no DR SR SRM ESA IARC eR A

Rion. hee

paripos be Cubmaniaes Beh Sh

eae at Bhat

RRS SS ei ears

App. 27

Ill

NATIONAL

ARBITRATION

FORUM

Monday, October 20, 1997

The Supreme Court has cleared the way and major Amer-

ican companies are moving all of their contracts to an

arbitration basis as fast as possible. There is no reason for

your clients to be exposed to the costs and risks of the

jury system.

But all arbitration systems are not the same!

At the National Arbitration Forum:

Every issue is resolved according to the law!

Every decision is made by a legal professional!

Every award is limited to the amount claimed!

Every claim is decided on its own merits!

I have enclosed our complimentary Legal Memorandum,

Arbitration & Class Actions in Financing. If we can

answer more questions, give us a call at 800/474-2371!

Sincerely,

/s/ Edward C. Anderson, Esq.

Edward C. Anderson, Esq.

ECA:mkm

Enc

App. 28

Legal

Memorandum

DATE: October 1, 1997

TO:

FROM: Forum Counsel

SUBJECT: Arbitration & Class Actions in Financ-

ing

CONCLUSION: Forum Arbitrations may not be consoli-

dated into class actions unless all par-

ties consent.

AUTHORITIES: Champ v. Siegel Trading Company, 55

F.3d 269 (7th Cir. 1995); Gammaro v.

Thorp Discount, 828 F. Supp. 673 (D.

Minn. 1993)

In the court system, financing transactions are always at

risk for Class Action treatment. Rule 23 of the Federal

Rules of Civil Procedure (and the state equivalents) pro-

vides that claims will be consolidated if:

1. There are common questions of law or fact;

and,

2. The claims of the “representative” are typical

of those of the purported members of the

class.

Most often, the claims of class action plaintiffs’ lawyers

are based on printed or computer-generated documents

or standard procedure manuals, which leave little room

to argue against “commonality” and “typicality”. Even

when “fraud” claims are made, which sometimes are

more “personal”, lenders run the risk that some court will

find the requisite standard.

CLS es tes eR ARGON A cann se

SA aS: o Se SETS

App. 29

Faced with this reality, even spurious “class” claims will

frequently be settled, since the costs and risks (even when

discounted for probability) are so extreme that defense

cannot be economically justified. Numerous commenta-

tors have argued that these cases are among the most

prominent examples of abuse of the court system, but no

change in these standards seems likely in the near term.

Since California banks began using arbitration in financ-

ing transactions in 1985, attention has been focused on

the interplay between arbitration procedures and “class

action” type consolidation of claims. In these and other

cases, plaintiffs’ lawyers have argued that, although a

case will be decided outside the court system, Rule 23

standards should be applied to the “bundling” of claims.

Defendants, for the most part, have resisted. Accordingly,

the courts have addressed the issue in a variety of cir-

cumstances.

PRE-SOUTHLAND OPINIONS

Prior to the application of the Federal Arbitration Act to

virtually all arbitration agreements by the U.S. Supreme

Court (see opinions Southland v. Keating, 465 U.S. 1 (1985)

through Allied-Bruce Terminex v. Dobson, 115 S.Ct. 834,

(1995)), some courts relied on the express language of the

parties to the contract, the arbitration rules, or state law

to allow “consolidation” or “joinder” of multiple parties

into a single arbitration. The ieading case in this regard is

Compania Espanola de Petroleos v. Nereus Shipping, 527 F.2d

966 (2d Cir. 1975). Although procedurally complex, this

case stood for the proposition that, absent language or

arbitration rules to the contrary, under state law, the court

App. 30

had the authority to have the arbitrator(s) decide the

claims of multiple parties, over the objection of one or

more of the parties.

However, even prior to the “ federalization” of arbitration

law, the majority of federal courts had declined to adopt

that standard. These courts held that, in cases in which

the Federal Arbitration Act applied, the courts’ authority

was restricted to that granted by Section 4 of the Act. The

court could only enforce the agreement of the parties, as

reflected by the language of the agreement or the agreed

rules of arbitration. Weyerhauser v. Western Seas Shipping,

743 F.2d 835 (9th Cir. 1984), cert. denied, 469 U.S. 1061

(1984); Del Webb Construction v. Richardson, 823 F.2d 145

(Sth Cir. 1987); Baesler v. Continental Grain, 900 F. 2d 1193

(8th Cir. 1990). Unless the arbitration rules provided for

class treatment, there would be no class action.

“FEDERALIZATION” OF ARBITRATION LAW

Beginning in 1985, the U.S. Supreme court began to hear a

series of cases which, when resolved, would “federalize”

the law regarding all arbitration agreements. In the first

of these opinions, Southland v. Keating, supra, the court,

for the first time, prohibited state legislatures, courts and

regulators from applying higher standards to arbitration

agreements than those applied to any other contract term,

in a group of opinions culminating with the Terminex

case, the court changed the law of arbitration to make it

clear that the Federal Arbitration Act controlled almost

all arbitrations.

These cases involved nearly every kind of agreement and

every type of arbitration clause, including the consumer

ste ois aes mishaas NT

App. 31

contracts litigated in Terminex. The Supreme Court regu-

larly expanded the reach of FAA authority to the full

breadth of the Commerce clause. This result was reiter-

ated in 1998, in Doctor’s Associates, Inc. v. Casarotto, 116

S.Ct. 1652 (1995); where, after the Montana Supreme

Court attempted to create a narrow exception to the

blanket rule created by the Supreme Court, the Court

held that arbitration agreements were always enforceable,

except on the grounds that apply to all contract terms,

such as fraud or unconscionability.

CLASS CLAIMS UNDER THE FAA

After the Supreme Court effectively applied the Federal

Act to all arbitrations, few attempts have been made to

claim “class” status for arbitrable claims. Those that have

been asserted have been soundly rejected. Courts have

addressed the issues squarely and have held that, where

the arbitration rules did not specifically provide for arbi-

tration on a class basis, under the FAA, the court may not

order it. Champ v. Siegel Trading Company, 55 F.3d 269 (7th

Cir. 1995); Gammaro v. Thorp Discount, 828 F. Supp. 673 (D.

Minn. 1993); McCarthy v. Providential Corp. 1994 WL

387852 (N.D. Cal. 1994). Of note, Gammaro (app. dis-

missed, 15 F.3d 93 [8th Cir. 1994]), involved a consumer

lending document which incorporated the Code of the

National Arbitration Forum. Although the claims were

both “common” and “typical”, Forum Rule 19A was held

to prohibit “class” treatment.

Courts have specifically held that signers of a mandatory

arbitration agreement are excluded from a class action by

App. 32

similarly situated plaintiffs (who had not signed the arbi-

tration agreement). Collins v. Int'l Dairy Queen, Inc., 169

E.R.D. 690 (M.D. Ga. 1997). Similarly, where claimed class

members had signed an agreement to arbitrate, the class

action would be enjoined and individual arbitrations

would be ordered. Doctors Associates v. Hollingsworth, 949

F.Supp. 77 (D. Conn. 1996).

The current status of the law is that the FAA covers all

but the most unusual arbitration agreements. Under the

FAA, the courts’ authority to consolidate claims in any

way is severely limited and always limited by the arbitra-

tion rules.

Therefore:

If the parties provide for “class” treatment, by

agreement or by arbitration rules, the court will

order such a procedure;

If the rules prohibit such treatment, as the

Forum Code does, the courts will not order

“class” treatment:

If the rules are silent, as are the AAA rules and

others, the result could vary from state to state

or Circuit to Circuit.

App. 33

DECLARATION CONCERNING

DEBTOR’S SCHEDULES

DECLARATION UNDER PENALTY OF PERJURY

BY INDIVIDUAL DEBTOR

~ (NOT APPLICABLE)

DECLARATION UNDER PENALTY OF PERJURY

ON BEHALF OF CORPORATION OR PARTNERSHIP

I, the Secretary of the corporation / partnership

named as debtor in this case, declare under penalty of

perjury that I have read the following summary and

schedules, consisting of 15 sheets plus the summary page,

and that they are true and correct to the beast of my

knowledge, information, and belief.

Date 1/5/94 Signature /s/ Edward C. Anderson

Edward C. Anderson

Secretary

Penalty for making a false statement or concealing prop-

erty. Fine of up to $500,000 or imprisonment for up to 5

years or both. 18 U.S.C. § 152 and 3571.

None

[ ] d. List all financial institutions, creditors and other

parties, including mercantile and trade agencies, to

whom a financial statement was issued within the

two years immediately preceding the commence-

ment of this case by the debtor.

App. 34

NAME AND ADDRESS DATE ISSUED

Norwest Bank Minnesota, N.A.

18. INVENTORIES

None

[X] a. List the dates of the last two inventories taken of

your property, the name of the person who super-

vised the taking of each inventory, and the dollar

amount and basis of each inventory.

None

[X] b. List the name and address of the person having

possession of the records of each of the two invento-

ries reported in 18a., above.

19. Current Partners, Officers, Directors and Share-

holders

None

[X] a. If the debtor is a partnership, list the nature and

percentage of partnership interest of each member

of the partnership.

None

[ ] b. If the debtor is a corporation, list all officers and

directors of the corporation, and each stockholder

who directly or indirectly owns, controls, or holds 5

percent or more of the voting securities of the corpo-

ration.

App. 35

NATURE AND

PERCENTAGE

NAME AND OF STOCK

ADDRESS TITLE OWNERSHIP

Edward C. Director, officer, 4,500 shares

Anderson shareholder

Roger S. Director,

Haydock shareholder 1,000 shares

Stephen P. Doyle Director, office,

shareholder 4,500 shares

20. Former partners, officers, directors and share-

holders

None

[X] a. If the debtor is a partnership, list each member

who withdrew from the partnership within one year

immediately preceding the commencement of this

case.

None

[ ] b. If the debtor is a corporation, list all officers, or

directors whose relationship with the corporation

terminated within one year immediately preceding

the commencement of this case.

NAME AND TITLE DATE OF

ADDRESS TERMINATION

Roger S. Haydock Officer 11/1/93

resigned as officer

App. 36

UNITED STATES BANKRUPTCY COURT

District of Minnesota

In re: EQUILAW, INCORPORATED Case No. __

41 /1601581 Chapter 7

List of Equity Security Holders

REGISTERED NAME

OF HOLDER OF

SECURITY LAST KIND OF

KNOWN ADDRESS CLASS NUMBER INTEREST

OR PLACE OF OF SECU- REGIS- REGIS-

BUSINESS RITY TERED TERER

Edward C. 4,500 Share-

Anderson holder

Roger A. Haydock 1,000 Share-

holder

Stephen Doyle 4,500 Share-

holder

App. 37

[1JSTATE OF MINNESOTA DISTRICT COURT

COUNTY OF FOURTH

HENNEPIN _ JUDICIAL DISTRICT

ITT Commercial Finance Corp.,

Plaintiff,

vs. Court File No. MX 92-3469

Wangerin, Inc., Ervin Wangerin,

individually, and Sharon Wangerin,

Defendants.

2A GEAR AA EE EE EE

DEPOSITION OF

EDWARD CHARLES ANDERSON, JR.

Me A a a a a a a a a a a a a 2

DATE TAKEN: 06/01/94 REPORTED BY:

CINDY M. TRATTLES

* * *

[12] a ‘73.

Q And what is your present occupation?

A I'm the president of Pan Am Systems.

Q And how long have you been president of Pan

Am Systems?

A Three years.

Q And when did that start, month and year?

A Early ’91. I’m sorry I don’t know the month.

App. 38

Q And have you retained this position of president

throughout that term?

A Yes.

Q Through today’s date?

A Yes.

Q And who was your employer previous to that

employment?

A_ ITT Consumer Financial Corporation.

Q And how long were you employed with them,

what time period?

A About 1986 or ‘85 until the beginning of ‘91.

Q When you say beginning of 1991, is that when

you went over to Pan Am?

A Yeah.

Q There was no gap period in there with another

employer?

A No.

Q And what was your position with ITT Consumer

Financial Corporation?

A Assistant general counsel.

Q Was that the same position you held throughout

the time

* * x

[19] I referred to ITT’s attorney had a conversation with

Mr. Anderson’s attorney, it was Ms. Gabrielle Hils; cor-

rect?

App. 39

MS. HILS: Correct.

Q (By Mr. Hoverson) Going back to my earlier ques-

tion, Mr. Anderson, when did you first become aware of

National Arbitration Forum?

A Middle 1980's.

Q And how was it that you became aware of the

National Arbifration Forum?

A Our office was conducting a nation-wide search

for ADR providers. They were one of a dozen or so that

were contacted.

Q Could you tell me what you mean by ADR?

A Alternative dispute resolution.

Q And when you say your office, do you mean ITT

Commercial Finance or ITT Consumer?

A The general counsel’s office of Consumer Finan-

cial Corporation.

Q And what were the circumstances that you first

became aware of Equilaw, Inc.?

A The same way.

Q Could you describe for me the relationship

between Equilaw, Inc., and National Arbitration Forum?

A National Arbitration Forum is a wholly-owned

subsidiary of Equilaw, Incorporated. They’re both corpo-

rations.

App. 40

RAND/RP-327

Does ADR Really Save Money? The Jury’s Still Out

Deborah R. Hensler

Reprinted from The National Law Journal

Does ADR Really Save Money?

The Jury’s Still Out

For those who hope ADR can reduce costs, the

research is proving somewhat disappointing.

By DesoraAH R. HENSLER

SPECIAL TO THE NATIONAL LAW JOURNAL

FACED WITH INCREASING caseloads and decreasing resources

for handling their civil calendars, courts around the coun-

try look to alternative dispute resolution programs to

reduce the public costs of civil case disposition. In the

private sector, corporate counsel look to such programs to

reduce their legal bills. But what’s the evidence that ADR

programs actually achieve cost savings for taxpayers and

litigants? Ask a researcher who has been studying these

programs and the answer may be “mixed,” “ambiguous”

or simply “not available.”

The issue is not whether individual litigants can

achieve cost savings by using ADR in specific disputes -

the answer to that question is almost certainly yes.

Rather, the question is whether courts or litigants can

achieve aggregate cost savings — reductions that show up

on the bottom line - by substituting ADR for litigation in

large classes of disputes. The answer to this question is

still largely unknown.

App. 41

The most conclusive evidence on the effect of ADR on

costs comes from studies of mandatory court-administered

non-binding arbitration. These programs, which had been

adopted by at least half the nation’s state trial court

systems, as well as a handful of federal districts, by the

end of the 1980s,1 have been subjected to numerous

detailed studies by researchers at many institutions. The

results many researchers have come up with are some-

what disappointing to those who had hoped such pro-

grams would reduce the public and private costs of civil

case disposition.

Few Cases Diverted

Briefly, researchers have found that in most jurisdic-

tions that adopt court-administered arbitration, too few

cases are diverted from trial - the single most costly court

“event” in the course of civil litigation — to balance the

public costs of implementing an arbitration program .?

The problem is not that individual arbitration hear-

ings are themselves very costly, or that very many parties

reject the non-binding arbitration award and proceed to

1 S. Kellitz, G. Galls and R. Hanson, “State Adoption of

Alternative Dispute Resolution: Where Is It Today?” 12 State

Court J. 4 (1988).

* These studies have been conducted in state trial court

jurisdictions in California, Colorado, Hawaii, New Jersey, North

Carolina and Pennsylvania and in 10 federal district courts. For

summaries of research results, see D. Hensler, “Court-Ordered

Arbitration: An Alternative View.” 1990 U. Chl. Leg. Forum 399

(1990), and R. MacCoun, E. Lind and T. Tyler, “Alternative

Dispute Resolution in Trial and Appellate Courts.” In

Handbook of Psychology and the Law (1992).

App. 42

trial. The typical hearing costs the court just a fraction of

what it would cost to mount a trial, and in most jurisdic-

tions only a tiny fraction of the cases that enter the

arbitration program insist on a judge or jury trial.

But because these programs typically are put in place

in jurisdictions in which only a small fraction of civil

cases would go to trial absent arbitration, there is not

much room for further reduction in the trial rate. Con-

versely, with so many cases in these jurisdictions poised

to forgo trial - whether because of costs, delay or some

other reason - a large pool of litigants and attorneys see

in the arbitration program their only real opportunity to

have their cases heard before a neutral third party.

In a number of studies,> researchers have found that

once arbitration is put in place, cases that previously

would have settled without any court intervention, or

would even have been dropped without being formally

joined, remain on the court calendar, only to settle just

before or just after the arbitration hearing. As a result,

court-annexed arbitration programs operate more as

enhancements to the settlement process than as trial-

diversion procedures. And the aggregate costs to the

court of providing arbitration hearings to thousands of

cases may off-set any public cost savings from reductions

in the trial caseload.

3 See, e.g., R. MacCoun, “Unintended Consequences of

Court Arbitration: A Cautionary Tale From New Jersey,” 14

Justice System J. 229 (1991), and E. Lind, “Arbitrating High

Stakes Cases: An Evaluation of Court-Annexed Arbitration in a

U.S. District Court” (1990).

4 See, e.g., D. Hensler and E. Rolph, “Judicial Arbitration in

California: The First Year” (1981).

App. 43

Moreover, court-administered arbitration programs

have had mixed success in reducing litigants’ costs for

legal fees and expenses. Probably because court-arbitrated

cases usually do not proceed to trial, empirical data does

not provide much support for opponents’ claims that

such programs will increase legal costs by adding another

layer of procedure.

But research has shown that court-administered arbi-

tration often does not reduce legal fees much either,

unless the program rules operate to change the pretrial

process in a significant fashion — for example, by strictly

limiting discovery. Without such ancillary changes, what-

ever effects arbitration may have on lawyers’ activities

don’t make much of a dent on the lawyers’ bills.5

Interpreting the Findings

Two important lessons, with applicability beyond the

court-administered arbitration context, emerge from

these research findings.

First, inserting any new procedure in the litigation

process — a process characterized by a combination of

routinized “standard operating procedures” and complex

strategic decision-making - is likely to produce unantici-

pated outcomes. Not only does the new procedure

change the rules regarding a particular stage of the litiga-

tion process; it also changes myriad decisions made by

the parties and their representatives, from the moment

5 See, e.g., R. MacCoun, “Unintended Consequences,” and

E. Lind, Arbitrating High Stakes Cases, supra, note 3.

App. 44

they first consider filing a lawsuit through their final

decision to resolve the dispute.

Court-administered arbitration proponents were

seeking a low-cost means of diverting cases from trial. To

their surprise, they created a quasi-adjudicative system

that is so popular that it diverts cases from settlement -

and commands enough support in the legal community

that in many jurisdictions it is deemed worth implement-

ing whether or not it reduces court costs.

Second, despite widespread concern about costs in

the legal community and widespread acceptance of the

“law and economics” model of settlement behavior -

which asserts that parties will reach settlement whenever

costs of proceeding to trial exceed the difference between

the plaintiff’s demand and the defendant’s offer — liti-

gants’ and attorneys’ disputing behavior are influenced

by non-economic as well as economic factors.

Research on court-administered arbitration suggests

that lay litigants - and many experienced litigants as well

- place a value on having their cases heard that goes

beyond whatever impact such a hearing might have on

the ultimate monetary decision.6 And, as every practi-

tioner knows, many cases involve non-monetary, as well

as monetary, stakes.

¢ E. Lind, R. MacCoun, P. Ebener, W. Felstiner, D. Hensler,

J. Resnik and T. Tyler. “In the Eye of the Beholder: Tort Litigants’

Evaluations of Their Experiences in the Civil Justice System,” 24

Law & Society Rev. 953 (1990).

App. 45

Studies on Family Mediation

Family law mediation programs also have been the

subject of extensive empirical research. The researchers’

findings regarding the cost consequences of these pro-

grams parallel the findings for court-administered arbi-

tration.”

Courts generally have been found to realize little cost

savings from these programs, for three reasons. First,

they require parties to appear in court before or after

mediation. Second, mediation may encourage parties to

review and revise child custody agreements over time,

necessitating additional mediation hearings. Finally,

properly implemented mediation programs require addi-

tional expenditures to pay trained mediators and pro-

gram administrators.

The evidence of private cost Savings is stronger for

family law mediation than for court-administered arbitra-

tion; most researchers report some Significant savings.

But in this context, as with arbitration, there is some

evidence that billing practices may dilute the impact that

mediation might otherwise have on legal fees charged to

clients.®

Much less is known about the cost consequences of

other court-administered ADR programs — from the old-

est of such programs, judicial settlement conferences, to

7 This research is summarized in J. Pearson, “Family

Mediation,” A Working Paper Prepared for the National

Symposium on Court-Connected Dispute Resolution Research,

Oct. 1993.

8 Id.

App. 46

the newest methods, early neutral evaluation, mandatory

mediation of civil damage suits and summary jury trials.

There are few systematic studies of judicial settle-

ment programs or summary jury trials. And no recent

studies apply the comparative analytic design that is

necessary to determine whether there is a difference, in

costs or other outcomes, between resolving cases with or

without such procedures in place. Analyses of early neu-

tral evaluation and mandatory mediation of civil damage

suits are ongoing, but have yet to produce conclusions

relative to cost savings.

True Cost Impact

Logically, court-sponsored and privately initiated

ADR programs can reduce the costs of civil litigation in

three ways: by reducing the number of claims brought,

thereby reducing the total court costs to process cases and

the aggregate payouts by defendants; by reducing the

expected value of claims - that is, the probability of a

plaintiff victory multiplied by the average payout for

successful claims; and by reducing legal fees and other

transaction costs.

Court-instituted programs are directed only at the

transaction-cost dimension. To obtain support for manda-

ting the use of ADR in cases that are brought before them,

many courts implicitly strive to design programs that will

not change the pattern of outcomes in these cases. Nor

are most court ADR programs intended to reduce the

number of cases filed - although some, such as medical

malpractice screening panels, are intended to eliminate

App. 47

“frivolous” lawsuits. Indeed, if court ADR programs suc-

ceed in reducing transaction costs for civil cases - either

directly, by providing lower-cost mechanisms for disposi-

tion or indirectly, by reducing congestion of the trial

calendar - they may well induce increased filings.

Privately initiated programs, however, may have

among their objectives reducing average payouts and

thereby reducing claims filing. For example, in jurisdic-

tions that bar the award of punitive damages in private

binding arbitration, adopting arbitration limits the value

of certain classes of cases, which may in turn make these

cases less attractive to plaintiffs’ attorneys. Similarly, sub-

Stituting an expert arbitrator for a lay jury might be

viewed as a means of reducing the value of certain

claims, with questionable liability but high damages.

There is little systematic evidence of such types of

cost reductions resulting from the institution of private

ADR agreements. But a recent RAND Institute for Civil

Justice study of the introduction of ADR in the banking

industry found that the number of lender-liability claims

against several major banks dropped dramatically after

these banks instituted private binding arbitration.?

Claims Encouraged?

Conversely, private ADR programs, like their public

counterparts, may increase the total costs of disputing if

they encourage claims filing by providing a relatively

low-cost means of dispute resolution.

° E. Moller, E. Rolph and P. Ebener, “Private Dispute

Resolution in the Banking Industry” (RAND 1993).

App. 48

For example, studies of medical malpractice reform?°

have found that the inception of medical malpractice

arbitration in certain states was accompanied by a rise in

the total number of malpractice claims brought against

health care providers. Although the average payout for

all medical malpractice claims declined with the advent

of these programs, the aggregate payout for malpractice

claims increased, suggesting that arbitration encouraged

the filing of meritorious smaller-value claims that indi-

viduals could not economically pursue in the trial sys-

tem.?!

Analyzing the effects of privately initiated ADR on

parties’ total costs is complicated by the potential for

ADR to change parties’ filing strategies. Analyzing pri-

vate ADR’s effects on transactions costs alone should be a

simpler matter, but that research remains to be done.

It is clear that providers’ fees to dispose of cases far

exceed the typical court filing fee, particularly when com-

mercial cases are involved.!2 The increasing enthusiasm

in the business community for substituting private ADR

for litigation suggests that parties believe the economic

benefits of ADR outweigh these additional costs. But for

parties who contemplate adopting or extending their use

of private ADR, it would be useful if systematic evidence

were available about the cost impact of using specific

10 See, e.g., P. Danzon, “New Evidence on the Frequency

and Severity of Medical Malpractice Claims” (RAND 1986).

3 Id.

12 See R. Reuben, “The Dark Side of ADR.” Calif. Lawyer 53

(Feb. 1994). |

App. 49

ADR procedures - arbitration, mediation, mini-trials and

so on — for different types of disputes.

In the long run, whether public or private ADR pro-

grams achieve the promise of cost savings they hold out

to courts and litigants will probably depend not so much

on differences between which ADR approach is chosen or

which entity provides the service but rather on how

much they change patterns of disputing and lawyering.

Parties who use litigation as an aggressive business tactic

and lawyers who engage in excessive practices as a

means of increasing their legal fees will find ways of

pursuing their objectives through ADR procedures.

The evidence to date, although fragmentary and

inconclusive, strongly suggests that ADR is not a magic

bullet for reducing costs. ADR procedures may, however,

provide a means of achieving such cost reductions for

parties and attorneys who share that objective.

Dr. Hensler is director of the Institute for Civil Justice at

the Rand Corp. in Santa Monica, Calif., and professor of

law and social science at the University of Southern

California Law Center.

App. 50

Ill

NATIONAL ARBITRATION FORUM

January 14, 1999

Robert S. Banks, Jr.

KOIN Center, Suite 1450; 222 S.W. Columbia

Portland, OR 97201

Dear Robert:

A number of courts around the country have held that a

properly-drafted arbitration clause in credit applications

and agreements eliminates class actions and ensures that

credit-related lawsuits will be directed to arbitration, not

a jury trial.

All arbitration is not the same. The Forum is one of the two

largest arbitration providers in the country for a reason.

The forum is nationwide, with arbitrators in every

federal judicial district.

Forum arbitrators make decisions based on the law —

not “equity” like some other arbitration providers. At

a minimum, they have more than 15 years of legal

experience and have arbitrated commercial, financial,

and business disputes.

The Forum’s fees are reasonably priced to be access-

ible to consumers and businesses alike, making it the

only system that truly works in consumer disputes.

We have a number of information resources on arbitration law

and how arbitration will make a positive impact on the bottom

App. 51

line. Contact Leslee Nelson at 800-474-2371 for a free

information packet.

Regards,

/s/ C. Brown

Curtis D. Brown

V.P. and General Counsel

CDB/Ikf

Enclosure

App. 52

[The Washington Post]

BUSINESS

WEDNESDAY, Marcu 1, 2000

Win Some, Lose Rarely?

Arbitration Forum’s Rulings Called One-Sided

By CAROLINE E. MAYER

Washington Post Staff Writer

Like many banks car dealers and retailers, First USA

N.A., the nation’s second-largest issuer of credit cards, no

longer permits its customers to sue it in court. Instead,

any disputes must be resolved through arbitration by a

firm chosen by First USA.

Businesses such a First USA say that for everyone

involved, arbitratior is faster, more efficient and cheaper

than litigation. But arbitration may also mean that the

company wins most of the time - at least according to

data recently submitted in a lawsuit in an Alabama state

court.

The data, disclosed last month by First USA in a

class-action lawsuit challenging mandatory arbitration,

show that not only had the company sought arbitration

far more often than consumers, it has also won in 99.6

percent of the cases that went all the way to an arbitrator.

First USA’s experience in the two years since it

imposed its arbitration requirement is likely to become a

focal point in the debate over the arbitration rules con-

tained in many consumer contracts. Arbitration has for

App. 53

years been a means to resolve disputes between busi-

nesses, but increasingly companies are including arbitra-

tion clauses in consumer agreements and employment

contracts. In First USA’s case, consumers were notified by

a fine-print insert in their monthly bills that by using

their cards, they agreed to take disputes to arbitration.

Dozens of lawsuits around the country are contesting

the arbitration rules, with mixed results. At least three of

these suits also question the impartiality of the arbitra-

tion firm selected by First USA and many other credit-

card firms and retailers, such as American Express and

Best Buy.

These suits contend that the firm, the National Arbi-

tration Forum, is so financially dependent on the banking

industry that it can seldom afford to rule against com-

panies. Furthermore, they say the forum’s own marketing

materials, promising a “positive impact on the bottom

line,” suggest that the organization is inherently biased

against consumers.

A spokesman for Bank One, which owns First USA,

declined to discuss the suits, saying the company doesn’t

comment on pending litigation.

Edward Anderson, managing director of the forum,

dismissed the allegations in the lawsuits, saying, “We are

impartial, and more importantly our arbitrators — former

judges, lawyers and law professors - are impartial.”

Anderson said the lawsuits “are merely an attempt by

trial lawyers to find a way to avoid arbitration” so they

can continue to collect high fees in big class-action court

cases. In arbitration, high lawyer fees are unlikely

App. 54

because almost all involve individual claims for relatively

small amounts.

The controversy over arbitration will get attention

today in Congress. The Senate Judiciary subcommittee on

administrative oversight and the courts will hold a hear-

ing on the growing number of contracts that require

employees, businesses and consumers to agree, in

advance of any disputes, to give up their rights to sue

and submit all future disputes to arbitration.

Subcommittee Chairman Charles E. Grassley (R-

Iowa) said he is a proponent of arbitration as a means of

unclogging the courts. But he said he wants to “make

suer consumer interests are protected in the process and

that the arbitration is being conducted in a fair way.”

Rep. Luis V. Gutierrez (D-IIl.) introduced a bill in the

House last year that would bar mandatory-arbitration

provisions in consumer contracts, and Sen. Russell

Feingold (D-Wis.) plans to introduce similar legislation.

He tried to attach such a provision to the bankruptcy

legislation recently passed by the Senate, but he dropped

the attempt in exchange for the subcommittee hearing.

Since First USA implemented its arbitration clause in

early 1998, it has filed 51,622 claims against consumers

with the forum. In the cases that First USA filed, the

forum has made 19,705 awards. First USA prevailed in

19,618, card members in 87. (Of the remaining cases, First

USA said more than 28,000 had “expired” because the

customers had not been notified in a timely fashion as is

required by the forum’s rules. More than 3,600 cases are

still pending.)

App. 55

Meanwhile, only four consumers have filed cases

against First USA with the forum. In two of these four

cases, the arbitrators made awards against First USA; one

case was settled, and another is still pending.

The fact that the company sends cases to arbitration

far more often than consumers is a function of economics,

say consumers’ lawyers. It costs $49 to file a complaint

with the forum, an amount that may be reasonable to big

businesses trying to collect large unpaid debts. But for a

consumer challenging late fees of about $29 or high inter-

est rates, the filing fee may not be worthwhile. In the

past, these consumers might have joined a class-action

suit to fight the companies. Costs for such suits are mini-

mal because most lawyers take them on a contingency

basis.

While Bank One spokesman Thomas Kelly deciined

to talk about the lawsuits, he said “the overwhelming

majority” of cases that First USA filed at the forum “are

claims against customers who are more than six months

delinquent” in paying their bills.

To the forum’s Anderson, the figures are meaningless

because First USA would probably have had a similar

success rate had it pursued the same cases in court.

Anderson said creditors win about 98 percent of collec-

tion actions brought against debtors in federal courts.

While declining to discuss the specific numbers provided

by First USA, saying they were confidential, Anderson

said “expired” cases should be counted as victories for

consumers.

As companies have adopted these clauses, business

has grown for the forum, a private firm where 20,000

App. 56

cases were filed last year, up from 16,000 the year before,

according to Anderson. It is the second-largest arbitration

firm in the country, behind the nonprofit American Arbi-

tration Association, which handled more than 140,000

cases last year. Officials at the American Arbitration

Association said almost all of those were commercial

cases that didn’t involve consumers. In contrast, arbitra-

tion industry experts say, the forum’s business involves

more corporate-consumer disputes, in large part because

of the company’s aggressive marketing.

The forum’s marketing letters are an issue in at least

three lawsuits that question its impartiality. In one letter,

Anderson wrote: “There is no reason for your clients to

be exposed to the costs and risks of the jury system.”

Another letter urged lawyers to contact the forum to

see “how arbitration will make a positive impact on the

bottom line.”

A coalition of public interest groups that includes the

Trial Lawyers for Public Justice, AARP, the National

Association of Consumer Advocates and the Association

of Trial Lawyers argues that these letters suggest that the

forum will take the companies’ side.

“If a court were to solicit business from a party that

might come before it with strong hints that the solicited

party would get a good deal in her or his courtroom,

there is no doubt that this would be improper and sanc-

tionable behavior,” the group said in a friend-of-the-court

brief filed in a case challenging First USA’s arbitration

clauses.

App. 57

Anderson said the letters simply state the law and

economics of arbitration. “The letters say you save money

through arbitration, and that’s true - all parties save

money. . . . There’s nothing secret about the way we

market. We market to everybody - to attorneys general,

consumer protection administrators, anybody who will

listen,” he said.

Britton D. Monts, a Dallas Lawyer who has filed a

class-action suit against First USA in a federal court in

Texas alleging improper late fees, said evidence collected

in his lawsuit shows that “virtually all” of the forum’s

income comes from First USA collection fees, making its

business vital to the future of the company.

Anderson said that is a “complete fabrication” and

“there’s no evidence that it’s true.” He declined to dis-

close specific financial data, saying the forum was a pri-

vately held company. The company did submit its

financial records to the federal court in Dallas, after a

court order, but on the condition that they be kept confi-

dential.

First USA papers filed in the Dallas case show that

the company paid the forum $5.3 million between Janu-

ary 1998 and November 1999. “Without question, loss of

First USA’s business would result in a major financial

blow to [the forum] and is the kind of loss [the forum]

would necessarily have to avoid,” Monts said. “The idea

of a private court being financially dependent on a liti-

gant appearing before it is an insult to the integrity of our

justice system.”

App. 58

Alan Kaplinsky, a Philadelphia lawyer who repre-

sents several financial institutions and is a strong advo-

cate of mandatory-arbitration clauses, said such charges

are unfair. “The forum has put together an extensive list

of experienced, highly reputable arbitrators,” he said. “To

suggest that the forum would basically become partial

because of the First USA fees impugns the integrity of

their arbitrators.”

App. 59

ADRO

adrworld.com

EC Says ADR for E-Commerce Disputes Should Not Be

Compulsory

June 21, 2000

By Tony Kreindler, ADRWorld.com

The use of online alternative disputes resolution systems

by e-commerce companies to settle complaints over trans-

actions should not preclude consumers from exercising

their right to go to court, according to comments filed by

the European Commission with the U.S. Federal Trade

Commission on June 19.

According to the EC, the use of any “exhaustion princi-

ples” — requirements for a consumer to exhaust all ADR

remedies before being allowed to start a court action -

could lead to protracted disputes and undermine con-

sumer confidence in dispute resolution systems. “In addi-

tion, in many jurisdictions such compulsion would be

viewed. as unfair,” the EC said in its comments. “By

producing an agreement that gives with one hand and

takes away from another is unlikely to fill a consumer

with confidence.”

The EC filed its comments in response to a recent work-

shop sponsored by the FTC and Department of Com-

merce to explore the use of online ADR mechanisms to

foster consumer confidence in e-commerce by providing a

more efficient and cost-effective way to settle disputes.

The agencies, as well as business representatives and

consumer advocates, hope that online ADR mechanisms

can solve the jurisdictional problems and complexities of

resolving disputes over cross-border transactions through

App. 60

traditional legal channels. One issue that was discussed

at the workshop and that remains a subject of debate is

whether consumers and businesses should be bound to

use ADR systems if a dispute arises.

According to the EC’s comments, “Existing legal frame-

works ensure a legal safety net which will underpin

consumer confidence in shopping on-line cross-border,”

and the reassurances provided by those frameworks are

particularly important to e-commerce because it is still in

the embryonic stage. “But ADR and legal redress are two

separate issues,” the EC said, and access to legal redress

“should not be made conditional on the use or even the

exhaustion of the possibilities of the former.” The EC

added that an effective and fair ADR system that gives

consumers confidence will be used without the need for

compulsion.

Role of Government

In its comments, the EC reiterated its long-standing posi-

tion that public authorities should not develop ADR sys-

tems or codes of conduct themselves, but instead pursue

a partnership with all stakeholders. “Industry should be

encouraged not just to develop ADRs in isolation, but to

create a package of measures inciuding the trustmarks

and codes of conduct,” the EC said, and public authori-

ties “must act as honest brokers in this process allowing

standards to be established by consensus through the

exchange and development of these stakeholders experi-

ence. The EC added that it has just begun such a “co-

App. 61

regulation” process to address the need for general prin-

ciples covering codes of conduct and accreditation, as

well as principles for mediation and conciliation.

The EC also reiterated its position that a recognizable seal

or trustmark for e-tailers who adhere to a code of conduct

“will play an important role” by providing consumers

with a reference point and serving as an effective tool for

enforcement. Codes of conduct should encourage a mar-

ket environment that rewards best business practices, and

they should include effective monitoring, sanctions and

consumer complaint mechanisms.

The FTC and Commerce Department are accepting public

comment on the use of online ADR for consumer disputes until

June 29. For more information and full text of comments

received visit www.ecommerce.gov/adr on the World Wide

Web.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.