Amicus Curiae Brief — Mehler v. Terminix International Co.

1° ON FILED /™

mai 4 1 2001, (+)

No. 00-1564

In the

Supreme Court of the United States

JEFFREY N. MEHLER AND MARY S. RUSSELL,

Petitioners,

Vv.

THE TERMINIX INTERNATIONAL COMPANY, L.P.,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Second Circuit

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE

AND BRIEF AMICI CURIAE OF PROFESSOR ROBERT

A. HILLMAN AND RISA MISH, CORNELL LAW SCHOOL,

IN SUPPORT OF THE PETITION FOR CERTIORARI

ROBERT A. HILLMAN RISA MISH

Edwin Woodruff Professor Counsel of Record

of Law Cornell Law School

Cornell Law School Myron Taylor Hall

Myron Taylor Hall Ithaca, New York 14853

Ithaca, New York 14853 (607) 255-7349

(607) 255-4902

Amici Curiae

QUESTION PRESENTED

Whether the Second Circuit erred in holding that a

consumer arbitration agreement governed by the Federal

Arbitration Act that imposes an undisclosed $7,000 filing

fee is enforceable where a conclusion that it is unenforce-

able is dictated by generally applicable principles of state

contract law.

MOTION FOR LEAVE TO FILE

ATTACHED BRIEF AMICI CURIAE

Robert A. Hillman, Edwin Woodruff Professor of Law

at Cornell Law School, and Risa Mish, also of Cornell

Law School, move for leave to file the attached brief amici

curiae in support of the petition in this case. Petitioners

consented to the filing of this brief. Respondent refused

to consent to its filing, without explanation, making this

motion necessary.

Robert A. Hillman is the Edwin Woodruff Professor

of Law at Cornell Law School, concentrating on contract

and commercial law over his twenty-six year teaching

career. Professor Hillman has authored or co-authored

five books and over forty articles on contracts and com-

mercial law. Prior to teaching, Professor Hillman clerked

for two federal judges and practiced law with the firm of

Debevoise & Plimpton in New York City. Through his

extensive research and legal writings on contract law and

commercial law, and his teaching, Professor Hillman has

dedicated himself to advancing the public’s understand-

ing of contract law. Risa Mish is director of Alumni

Relations at Cornell Law School. She was formerly a

partner at Collazo Carling & Mish LLP in New York City,

where she represented corporations on issues that

included breach of contract claims. Prior to that she

clerked for a federal judge and practiced at Simpson

Thacher & Bartlett in New York City. As members of the

legal education community, Amici are dedicated to teach-

ing the importance of upholding the rule of law under the

U.S. Constitution, generally, and to teaching the impor-

tance of the role of general principles of contract law to

our system of justice. Neither Amici is affiliated directly,

or indirectly, with Petitioners.

By filing this brief, Amici wish to emphasize that the

issues presented in this case are not limited to the facts at

issue here but are of widespread importance to all parties

who sign standard-form contracts. The unconscionability

issue raised by Petitioners implicates the most fundamen-

tal principles of contract law applicable to determining a

contract’s enforceability. If courts operating under the

Federal Arbitration Act may ignore these principles, as

happened here, such decisions will lead toward the dimi-

nution of the rule of law and the protections it affords

contracting parties such as Petitioners. Consumers, who

are likely targets of oppressive arbitration clauses, have

no protection against such terms except as exist under

general principles of contract law. We wish to bring this

broader perspective to bear on the Court’s consideration

of the case. Accordingly, Amici seek leave to file this brief

amici curiae.

Respectfully submitted,

Rosert A. HittMAN

Risa MisH*

CorNeELL LAw SCHOOL

Myron Taylor Hall

Ithaca, New York 14853

(607) 255-4902

Amici Curiae In Support of

Petitioners

* Counsel of Record

Date: May 11, 2001

TABLE OF CONTENTS

Page

INTEREST OF AMICI CURIAE .................02. 1

STATEMENT OF THE CASS: «i553 amiasec ace 1

SUMMARY OF ARGUMENT....................05. 1

ADISUBAEINGE oo ok ccicvinsscdkeuuseiekieasaeee 3

A. UncomecioneiGee ..« «sac eiicinto ans eee 6

B. Restatement (Second) Section 211(3).......... 8

C. Doctrine of Reasonable Expectations......... 8

CONCISANON 65 ae Rue ay Vries y

ii

TABLE OF AUTHORITIES

Cases

Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569

CARD. TOE cc cccccccccccecesscssceceeessssense

C & J Fertilizer, Inc. v. Allied Mutual Ins. Co., 227

E.WUSe 36D Gwe TSGEe 6c tscecscevcssecccesee

Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681

(SOE oc cccvcncsuccctecssdeeneesss sae

Green Tree Fin. Corp. v. Randolph, 531 U.S. 79 (2000)

M.A. Mortenson Co., Inc. v. Timberline Software

Corp., 998 P.2d 305 (Wash. 2000)..............

Mastrobuono v. Shearson Lehman Hutton, Inc., 514

Ue 2s: ery rey . dane ceeeaeee

Mehler v. The Terminix Int'l Co., 1998 WL 893149

(ae SS .. Perrier ry ne.

Myers v. Terminix Int'l Co., 697 N.E.2d 277 (Court

Comm. Pleas of Ohio. 1998) ..................

Nelson v. McGoldrick, 896 P.2d 1258 (Wash. 1995) ...

Rodman v. State Farm Mut. Ins. Co., 208 N.W.2d 903

i Bi. PPP PTTrPrrr rrr

Waters v. Min. Ltd., 587 N.E.2d 231 (Mass. 1992).

TABLE OF AUTHORITIES - Continued

Page

CONSTITUTIONAL AND STATUTORY PROVISIONS

D UDA. © Boccececaess0ésssssanaees een 3

ULA.. §& DGRR GE. 3B owccsvccanscetecsiediseeee 6

TREATISES

Proposed Amendments to Uniform Commercial

Code Article 2 - Sales, American Law Institute

Draft, Section 2-302, Preliminary Comment 1

ERP BOSS) os ccvccecccsdcdcccesasbeeassasissdvosans 5

RESTATEMENT (SECOND) OF Contracts (1979) ....... 2, 3, 8

OTHER

E. A. Farnsworth, Contracts, § 4.26 (3d ed. 1999) ..... 4

Friedrich Kessler, Contracts of Adhesion — Some

Thoughts About Freedom of Contract, 43 Covum. L.

ee GP 6 850266 bbb deu ckbdcedbnsdsciveiveiesi 4

INTEREST OF AMICI CURIAE! .

Amici rely on the statement of its interest set forth in

its attached Motion for Leave to File Brief Amici Curiae.

STATEMENT OF THE CASE

Amici rely on the Statement set forth in the Petition

for a Writ of Certiorari.

SUMMARY OF ARGUMENT

This Court should reverse the Second Circuit’s deci-

sion here because, contrary to the express requirement of

the Federal Arbitration Act (“FAA”), the court failed to

apply long standing principles of state contract law that

dictate nonenforcement of the arbitration clause at issue.

Allowing the decision to stand may lead courts to adopt

similar improper approaches that diminish the role of

state contract law under the FAA and would maintain the

split among the circuit courts created by the Second Cir-

cuit’s decision on unconscionability here.

This Court has made clear that Congress expressly

preserved the applicability of general principles of state

1 In conformity with Supreme Court Rule 37, Amici state

that counsel for Petitioner did not author the body of this brief

but did prepare the Table of Authorities, Motion for Leave to

File and cover pages and provided minor editorial comments.

No persons or entities made a monetary contribution to the

preparation and submission of the brief other than for printing

costs, which were paid by Petitioners.

contract law under the FAA. The Court has determined

that in enacting the FAA Congress’s purpose was to

require courts to enforce the terms of the parties’ agree-

ments. The FAA expressly refers to the applicability of

contract law principles that would render an agreement

to arbitrate unenforceable.

In Petitioners’ case, the United States Court of

Appeals for the Second Circuit failed to consider or apply

three of the most basic principles of contract law govern-

ing a contract’s enforceability: unconscionability; the rule

established in Section 211(3) of the SECOND RESTATEMENT OF

Contracts; and the doctrine of reasonable expectations.

Even if the Second Circuit correctly determined that

a contract with an agreement to arbitrate governed the

initial treatment (a conclusion with which Amici dis-

agree),? the three principles of contract law discussed in

this brief dictate that the contract should not be enforced.

Amici respectfully request that this Court reverse the

Second Circuit as to the issue of unconscionabilty because

2 Amici disagree with the Second Circuit’s holding that the

arbitration clause applies to this dispute for the reason that the

contract containing the arbitration clause “became effective”

after the initial treatment that caused Petitioners’ damages.

Amici agree with the opinion of District Judge Thompson in this

case. Mehler v. The Terminix Int'l Co., 1998 WL 893149 (D. Conn.

1998). Amici also agree with Petitioners that the Second Circuit’s

approach effects an unauthorized preemption of state contract

law; however, both the scope of the contract and preemption

have been well-briefed by Petitioners and the latter issue is

beyond Amici’s specific expertise. This brief focuses on the issue

of unconscionability. The discussion assumes that the Terminix

arbitration clause applies to the events at issue simply for the

purpose of this analysis.

885 ee ——_”™

it is at odds with the express directives of the FAA and

contract law.

ARGUMENT

The Federal Arbitration Act enforces “private agree-

ments to arbitrate.” Mastrobuono v. Shearson Lehman Hut-

ton, Inc., 514 U.S. 54 (1995). The Act therefore

presupposes an enforceable “agreement” between the

parties to arbitrate and allows challenges to arbitrability

based “upon such grounds as exist at law or in equity for

the revocation of any contract.” 9 U.S.C. § 2. Principles of

state law thus determine the “validity” of arbitration

provisions. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681

(1996). Based on three long-standing principles of state

contract law — unconscionability, Section 211(3) of the

Second Restatement of Contracts, and the doctrine of

reasonable expectations — the arbitration clause here is

unenforceable because the Mehlers never consented to

arbitrate this dispute.

The Terminix “agreement” to arbitrate is contained

within a form contract that is a classical contract of adhe-

sion. Signing it involved a face-to-face meeting at the

customer’s home between an agent of Terminix and the

Mehlers. The printed form presented to the Mehlers con-

tains a few basic terms to be filled in by the parties, with

the rest, including the arbitration provision, pre-printed

by Terminix. In preparing the form, Terminix clearly

planned to use it repeatedly and therefore invested time

and money in preparing it. Customers such as the

Mehlers have no familiarity with forms used in a one-

time transaction. They reasonably understand that the

agent could not and would not bargain over the form’s

pre-printed terms, including a pre-printed arbitration

clause. In the Mehlers’ case, they were unable to secure

any other service and therefore had no alternative but to

contract with Terminix. A customer who is asked to sign

at his home a one page form contract for home services

generally understands that the likelihood of a dispute is

small and would not dream of the consequences that

developed in this case. Customers weighing costs and

benefits would reasonably conclude that the cost of

engaging the professional services necessary to under-

stand all of the implications of the home service form

contract outweigh any benefits of doing so and would

sign the form without comprehending the implications of

the Terminix arbitration clause in the contract here.

Although standard form transactions such as this do

not involve the back-and-forth bargaining envisioned by

classical contract law, Amici do not contest the general

enforceability of standard form contracts. Form contracts

are widely used precisely because they provide signifi-

cant savings to the provider of the form and possibly

savings to the consumer. In brief, form providers stan-

dardize their risks and reduce bargaining costs by offer-

ing one set of terms to all users. See Friedrich Kessler,

Contracts of Adhesion — Some Thoughts About Freedom of

Contract, 43 Cotum. L. Rev. 629, 631-32 (1943);

E. A. Farnsworth, Contracts, § 4.26, at 296 (3d ed. 1999)

(“because a judicial interpretation of one standard

form serves as an interpretation of similar forms, stan-

dardization facilitates the accumulation of experience”).

Providers may pass on some of the savings to consumers

by lowering prices for the goods or services.

In light of the benefits of standard forms, courts

generally and correctly enforce them. Nevertheless, the

analysis cannot end here as it did with the Second Cir-

cuit’s decision. Courts applying general principles of con-

tract law must also focus on the potential for the form

provider to include objectionable terms precisely because

of the dynamics of standard-form transactions - the rea-

sonable failure of the user to read the form, the lack of an

opportunity to bargain over terms, the absence of reason-

able alternatives for the consumer, etc. Applying state

contract law, courts have readily stepped in when the

form provider goes too far. In fact, the drafters of the

revised Article 2 of the Uniform Commercial Code

recently noted that “courts have been particularly vig-

ilant when the contract at issue is set forth in a standard

form.” Proposed Amendments to Uniform Commercial

Code Article 2 - Sales, American Law Institute Draft,

Section 2-302, Preliminary Comment 1 (May 2001).

In sum, current state contract law creates a presump-

tion of assent to negotiated terms and reasonable standard

terms, with courts empowered to strike unreasonable or

unfair clauses. Courts base their decision to strike a pro-

vision on one or more of the following three doctrines,

the application of any one of which would render the

arbitration agreement in this case unenforceable.

A. Unconscionability

Under the long-established unconscionability doc-

trine, courts strike contracts or terms in order to prevent

“oppression and unfair surprise.” See, e.g., U.C.C. § 2-302,

cmt. 1; Waters v. Min. Ltd., 587 N.E.2d 231 (Mass. 1992).

The doctrine allows courts to police unfair terms directly

rather than covertly by manipulating other rules such as

misrepresentation or duress. Generally, courts investigate

the manner in which the parties entered the contract

(“procedural unconscionability”) and weigh the fairness

of the resulting substantive terms (“substantive uncons-

cionability”).

Procedural unconscionability consists of a “ ‘lack of a

meaningful choice, considering all the circumstances sur-

rounding the transaction’ including ‘the manner in which

the contract was entered,’ whether each party had ‘a

reasonable opportunity to understand the terms of the

contract,’ and whether ‘the important terms [were] hid-

den in a maze of fine print. .. .’ ” M.A. Mortenson Co., Inc.

v. Timberline Software Corp., 998 P.2d 305, 325 (Wash. 2000)

(quoting Nelson v. McGoldrick, 896 P.2d 1258 (Wash. 1995)).

Because Terminix’s agent presented the Mehlers with a

take-it-or-leave-it preprinted form contract that did not

reveal the costs or details of arbitration, but only incorpo-

rated the “Commercial Arbitration Rules” of the Ameri-

can Arbitration Association, the Mehlers never had a

reasonable opportunity to understand the ramifications

of agreeing to arbitrate, including the duty to pay a fee of

$7,000 and additional expenses. The arbitration agree-

ment was therefore procedurally unconscionable.

iB isi as Seg ty cae iis eas — = a

Substantive unconscionability encompasses terms

that are manifestly unjust, “one-sided or overly harsh.”

M.A. Mortenson, 998 P.2d at 323 (quoting Nelson, 896 P.2d

1258). For example, a clause is unconscionable when it

conflicts with public policy, denies a party substantially

what she bargained for, or has no reasonable purpose. In

one recent case, for example, a court found substantively

unconscionable a mandatory arbitration provision and

stated, “Barred from resorting to the courts by the arbi-

tration clause in the first instance, the designation of a

financially prohibitive forum effectively bars consumers

from this forum as well; consumers are thus left with no

forum at all in which to resolve a dispute.” Brower v.

Gateway 2000, Inc., 676 N.Y.S.2d 569, 573 (A.D. 1998).

Here, Terminix’s mandatory arbitration provision

was substantively unconscionable because, by incorporat-

ing by reference the Rules of Commercial Arbitration of

the American Arbitration Association, the provision

would require the Mehlers to pay a $7,000 filing fee that —

effectively denies the Mehiers an opportunity to air their

grievances concerning the catastrophic harm they have

suffered. Generally, such strategies by form providers can

only discourage consumers from pursuing their state law

rights when form providers breach their contracts. In fact,

other courts have already recognized the uncons-

cionability of Terminix’s arbitration clause. Myers v. Ter-

minix Int'l Co., 697 N.E.2d 277 (Court. Comm. Pleas of

Ohio, 1998). This Court has also recognized that “large

arbitration costs [can] preclude a litigant . . . from effec-

tively vindicating . . . rights in the arbitral forum.” Green

Tree Fin. Corp. v. Randolph, 531 U.S. 79 (2000).

B. Restatement (Second) Section 211(3)

Section 211(1) of the Second Restatement of Contracts

memorializes the traditional duty-to-read standard of

contract law. See RESTATEMENT (SECOND) OF CONTRACTS

§ 211(1) (1979) (“where a party to an agreement signs or

otherwise manifests assent to a writing, he adopts the

writing as an integrated agreement with respect to the

terms included in the writing”). In dismissing without

discussion the Mehlers’ unconscionability claim, the Sec-

ond Circuit adhered to the duty-to-read principle without

considering the substantial body of doctrine represented

by Section 211(3): “Where the [form provider] has reason

to believe that the party manifesting such assent would

not do so if he knew that the writing contained a particu-

lar term, the term is not part of the agreement.” Applying

Section 211(3) to the Terminix-Mehler contract, the issue

is whether Terminix should reasonably have compre-

hended that the Mehlers would not have agreed to arbi-

tration had they understood that they would have to pay

a fee of $7,000 before any of their grievances relating to a

catastrophic breach by Terminix would be aired. The

answer is clearly that Terminix reasonably should have

understood that the Mehlers would not have agreed to

arbitrate under such conditions. The arbitration provision

is therefore unenforceable under Section 211(3).

C. The Doctrine of Reasonable Expectations

The reasonable expectations doctrine, most promi-

nent in insurance form-contract cases, but not limited to

them, holds that

[t]he objectively reasonable expectations of

applicants and intended beneficiaries regarding

the terms of insurance contracts will be honored

even though painstaking study of the policy

provisions would have negated those expecta-

tions.

C & J Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169,

176 (Iowa 1975) (quoting Rodman v. State Farm Mut. Ins.

Co., 208 N.W.2d 903, 906 (Iowa 1973)).

The doctrine is easily transferable to other types of

standard forms, including the Mehler-Terminix contract.

The principle authorizes courts to overturn express con-

tract language if the term contradicts the form user’s

reasonable expectations. The doctrine therefore creates an

affirmative duty on the part of the form provider to point

out and explain reasonably unexpected terms even if they

are stated in the contract. The doctrine reflects the reality

that form users do not read their contracts and that they

agree to be bound only to reasonable boilerplate. Applied

here, the question is whether the Mehlers reasonably

expected to have to pay $7,000 and other expenses in

order to arbitrate a dispute over Terminix’s calamitous

negligence. Without any forewarning from Terminix con-

cerning the ramifications of agreeing to arbitration, there

is no reason why the Mehlers should have expected such

an unfair result.

CONCLUSION

General principles of state contract law provide an

excellent, workable solution to the problem of policing

unbargained-for standard form contracts and to the

10

issues raised here. The law presumes the generai

enforceability of standard forms, but it negates terms

procured unfairly or that are reasonably unexpected

because unjust or indecent. By enforcing the arbitration

provision here, where the consequences of agreeing to

arbitration were reasonably unexpected and unreason-

able, the Second Circuit violated both the FAA’s directive

to apply state contract law as well as the outcome dic-

tated by applicable contract principles concerning

enforceability. In short, Petitioners never agreed to arbi-

trate on the contract’s terms. The Second Circuit’s deci-

sion should be reversed.

Respectfully submitted,

Rosert A. HILLMAN

RisA Muisn*

CorNELL Law SCHOOL |

Myron Taylor Hall

Ithaca, New York 14853

(607) 255-4902

Amici Curiae In Support of

Petitioners

* Counsel of Record

Date: May 11, 2001