Reply Brief — American General Finance, Inc. v. Branch

eP r Supreme Co - US.

SY FYLED

No. 00-1934 ;

SP Te 2001

IN THE ‘

Supreme Court of the Bited Statess4c RK :

AMERICAN GENERAL FINANCE, INC., MERIT

LIFE INSURANCE CO., and YOSEMITE

INSURANCE COMPANY,

Petitioners

v.

MABLE BRANCH,

Respondent

ON PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF ALABAMA

REPLY BRIEF

RosBerT H. RUTHERFORD

F. A. Flowers, III*

BURR & FORMAN LLP

3100 SouthTrust Tower

420 North 20th Street

Birmingham, Alabama 35203

(205) 251-3000

Counsel for Petiitoners

*Counsel of Record

i

STATEMENT PURSUANT TO RULE 29.6

Petitioners’ Rule 29.6 Statements were set forth at

page 11 of their Petition for a Writ of Certiorari, and there are

no amendments to those Statements.

ii

TABLE OF CONTENTS

STATEMENT PURSUANT TO RULE 29.6 ......

TABLE OF CONTEINED ccsccsnscccasscsceses

TABLE OF AUTHORITIES ...2cccccnsssssoses

ARGUMENT IN REPLY ...ccsscccccsscsscess

I.

Il.

Ii.

Respondent Has Completely Misread This

Court’s Decision In First Options of Chicago,

Kec. 0. ROGOOR 6 ib ond nee ca aneeed ernie

There Is Substantial Conflict And Confusion

Among The Federal And State Courts That

Have Addressed The First Options Issue

Presented By This Case. ........cccceeee

Respondent Has Failed To Address The

Argument That The Determinative Factor In

The Decision By The Court Below To

Invalidate The Parties’ Arbitration Agreement

Was The Prevalence Of Arbitration

Agreements In The Marketplace. .........

Respondent’s Own Brief In Opposition

Demonstrates That The Court Below Singled

Out The Parties’ Arbitration Agreement For

Suspect Status In Violation Of The FAA

Based On Lack Of Mutuality Of Remedy. ...

OCONCTAIBOUN oo ciccsccsdnctcnteanesseeuste

Page

ili

TABLE OF AUTHORITIES

Cases: Page(s)

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265

eee eal a See

ca OE A PON ee er ee

Armendariz v. Foundation Health Pyschcare Servs.,

Inc., 24 Cal. 4th 83, 6 P.3d 669 (2000) ........

Arnold v. United Companies Lending Corp.,

511 S.E.2d 854 (W. Va. 1998) ...............

AT & T Tech., Inc. v. Communications Workers,

BIS UB. GOS (1GGB) oon ccc ccc cc cccocccecce

Berkley v. H & R Block Eastern Tax Serv., Inc.,

30 S.W.3d 341 (Tenn. App. 2000), review denied,

Nov. 6, 2000, cert. denied, 121 S. Ct. 1602

Eee Ae ee

Choice Hotels Int’l, Inc. v. BSR Tropicana Resort,

Inc., 252 F.3d 707 (4th Cir. 2001) ............

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

ED ides ee ee ee

Doctor’s Assocs., Inc. v. Distajo, 66 F.3d 438

MEA ee oa lala cw ended css

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

IC ora Sub 6555 6 ou Seki ok ivowews 1, 2,3,4

iv

TABLE OF AUTHORITIES (continued)

Page(s)

Fleming Farms v. Dixie Ag Supply, Inc., 631 So. 2d

or Sh ees errr rer Terr eT cr

Gannon v. Circuit City Stores, Inc., __ F.3d _,

No. 00-3243, 2001 WL 930550 (8th Cir. Aug. 17,

BES ude 8 oka ene ee ea eee

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

yk |) eT eee eT Te eT ere Tt rer re

Harris v. Green Tree Fin. Corp., 183 F.3d 173

et SPP eer reece ver er ree eter rer

In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571

eee rr er on ee ee

Lloyd v. Service Corp. of Alabama, Inc., 453 So. 2d

Fa GR FD 80s ke GS a

Marcrum v. Embry, 291 Ala. 400, 282 So. 2d 49

fk) DEC Ee rE Ee Cre rere Pere rr ee y See

Mastrobuono v. Shearson Lehman Hutton, Inc.,

poets S| ae eer re rer ee

Moses H. Cone Memorial Hosp. v. Mercury Constr.

Cor, SER UA ECR) kes eexenhess cute

Munoz v. Green Tree Fin. Corp., 343 S.C. 531,

ge ee a ee eee

PaineWebber, Inc. v. Bybyk, 81 F.3d 1193 (2d Cir.

NE kid nan adgne ences deeeietiniieue

Vv

TABLE OF AUTHORITIES (continued)

Page(s)

Perry v. Thomas, 482 U.S. 483 (1987) ........... 3, 6,7

Prevot v. Phillips Petroleum Co., 133 F. Supp. 2d

Pot CODD. We, BOA) ooo vec vecvnaaencnne,, 2

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

Oe NER POP UIOED oo ok dn acd ok 3,4

Rodriquez de Quijas v. Shearson/American Express,

Inc., 490 U.S. 477 (1989) ................... 8,9

Sablosky v. Edward S. Gordon Co., 73 N.Y.2d i33,

335 N.E.2d 643 (1989) ..................... 8

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974) .. 6

Shearson/American Express, Inc. v. McMahon,

GOS US, SIO) nko bo eevee cca, 9

Showmethemoney Check Cashers, Inc. v. Williams,

342 Ark. 112, 27 S.W.3d 361 (2000) .......... 8

Southland Corp. v. Keating, 465 U.S. 1 (1984) ... 6,7

Southland Farms, Inc. y. Ciba-Geigy Corp.,

575 So. 2d 1077 (Ala. 1991) ................ 6

Sphere Drake Ins. Ltd. v. All American Ins. Co.,

256 F.3d 587 (7th Cir. 2001) ................ +

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

Leland Stanford Junior Univ., 489 U.S. 468

eae EET EE eT eee mone ue, 3,4

vi

TABLE OF AUTHORITIES (continued)

Page(s)

Willis Flooring, Inc. v. Howard S. Lease Constr. Co.,

656 P.26 1194 (Alas. IGGS) occccccsccccccees 8

Wilson Elec. Contractors, Inc. v. Minnottee

Contracting Corp., 878 F.2d 167 (6th Cir.

SOD 060008 065460606000b vse 8

United States Constitution:

U.S. Comat. ast. Vi, Gi. sccccccvesessscseverss 6

Statutes:

PUBL GS scccccccvcseccsscrescsesecsesevsa 7

Miscellaneous:

Restatement (Second) of Contracts § 363 (1981) .. 7

S. Rep. No. 536, 68th Cong., Ist Sess. (1924) .... 5

|

ARGUMENT IN REPLY

Respondent has engaged in all sorts of strained legal

and logical gymnastics in an attempt to convince this Court

that the questions presented for review by this case do not

warrant consideration by the Court. Respondent’s own Brief

in Opposition, however, demonstrates that the questions

presented are far from settled and that a decision by this Court

resolving these issues is necessary.

I. Respondent Has Completely Misread This Court’s

Decision In First Options of Chicago, Inc. v. Kaplan.

Respondent’s entire argument on the first question

presented is totally undermined by her blatant misreading

of this Court’s decision in First Options of Chicago, Inc. v.

Kaplan, 514 U.S. 938 (1995). Contrary to respondent’s

erroneous assertion, the issue before the Court was

emphatically not “whether a court or an arbitrator should

decide this dispute over the scope of the arbitration

agreement.” (Brief in Opp. 13) (emphasis added). This

Court’s opinion in First Options is clear that the Kaplans

denied that “they agreed to arbitrate” at all. 514 U.S. at 942.

The Court characterized this disagreement over the question

whether a valid and enforceable arbitration agreement existed

between the parties as one “about the arbitrability of the

dispute.” Jd. (emphasis in original). Respondent is simply

wrong in stating that the issue before the Court was whether

a particular claim or dispute fell within “the scope of a

presumptively valid arbitration clause.” (Brief in Opp. 13).

The Court in First Options then considered the question

whether the trial court or the arbitrator should decide “the

arbitrability of the dispute” between the parties — whether

a valid and enforceable arbitration agreement existed between

them. 514 U.S. at 942. The Court held that the “parties may

2

agree to arbitrate arbitrability” when “there is clear and

unmistakable evidence that they did so.” 514 US. at 943-

44. This is so, the Court explained, because the question

whether the “parties agree[d] to submit the arbitrability

question itself to arbitration,” like other issues involving

arbitration, “is simply a matter of contract between the

parties” that depends upon whether “the parties objectively

revealed an intent to submit the arbitrability issue to

arbitration” in their agreement. Jd. The parties clearly did so

here. (See Pet. App. 3a). Indeed, the parties’ agreement to

“arbitrate all issues of arbitrability” is “inclusive, categorical,

unconditional and unlimited.” PaineWebber, Inc. v. Bybyk,

81 F.3d 1193, 1199-1200 (2d Cir. 1996).

II. There Is Substantial Conflict And Confusion Among

The Federal And State Courts That Have Addressed

The First Options Issue Presented By This Case.

Respondent asserts that no court has held that “parties

must go to arbitration to find out whether or not they entered

into a valid and enforceable arbitration agreement in the first

place.” (Brief in Opp. 15 n.4). Respondent is mistaken.

See In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571,

573 n.3 (Tex. 1999) (holding that “whether the terms and

conditions of an arbitration agreement are themselves

unconscionable is a matter which must be submitted to the

designated arbitrator”); see also Berkley v. H & R Block

Eastern Tax Serv., Inc., 30 S.W.3d 341, 344 (Tenn. App. 2000)

(relying on First Options and holding that the parties agreed

“to arbitrate the question of the validity and enforceability

of the arbitration clause itself”), review denied, Nov. 6, 2000,

cert. denied, 121 S. Ct. 1602 (2001). Contra Prevot v. Phillips

Petroleum Co., 133 F. Supp. 2d 937, 939-40 (S.D. Tex. 2001)

(holding that the issue of unconscionability of an arbitration

3

clause is always a question for the court). Which view is

correct? Only this Court can provide a definitive answer.

Relying on this Court’s decision in Prima Paint Corp. v.

Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), respondent

asserts that a court must always decide whether arbitration

is proper. Respondent’s reliance is misplaced because this

Court expressly held in Prima Paint that the arbitrator,

not the court, should decide the validity of the contract as a

whole, which would necessarily include a determination by

the arbitrator of the validity of the arbitration provision as a

consequence. 388 U.S. at 404. Respondent’s strained

interpretation of Prima Paint, which did not involve a First

Options clause, is also inconsistent with the “central purpose”

of the FAA, which is “to ensure ‘that private agreements to

arbitrate are enforced according to their terms.’ ” Mastrobuono

v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 53-54 (1995),

quoting Volt Info. Sciences, Inc. v. Board of Trustees of Leland

Stanford Junior Univ., 489 U.S. 468, 479 (1989),.?

1. Respondent has also completely ignored the fact that the

parties expressly incorporated into their arbitration agreement the

Commercial Rules of the American Arbitration Association.

(Pet. App. 3a). Rule 8 of the Commercial Rules grants the arbitrator

the power to rule on, among other things, the “validity of the

arbitration agreement.” (R. 399) (emphasis added). In Apollo

Computer, Inc. v. Berg, 886 F.2d 469 (1st Cir. 1989), the First Circuit

held that the “parties contracted to submit issues of arbitrability to

the arbitrator,” including the “validity of the agreement to arbitrate”

itself, when “the parties agreed that all disputes arising out of or in

connection with their contract would be settled ‘in accordance with

the rules of arbitration of the International Chamber of Commerce.’ ”

886 F.2d at 472-73. The decision below is in direct conflict with the

First Circuit’s decision in Apollo Computer, supra.

2. While respondent emphasizes that her “unconscionability

argument goes to the making and original validity of the asserted

arbitration agreement” (Brief in Opp. 14), the “making” and

(Cont'd)

4

In sum, respondent, like Justice Lyons in his special

concurrence on rehearing in the court below, argues that this

case is controlled by this Court’s decision in Prima Paint, supra,

rather than First Options, supra. Five days after the petition

was filed in this case, the Seventh Circuit, in an opinion by

Judge Easterbrook, grappled with the interplay and proper

application of Prima Paint and First Options. See Sphere

Drake Ins. Ltd. v. All American Ins. Co., 256 F.3d 587, 590-

92 (7th Cir. 2001) (rejecting an argument based on Prima

Paint that “sits uneasily alongside AT & T Technologies and

First Options” because it “disregard{ed] the principle that

arbitration is contractual’). This tension between Prima Paint

and First Options provides a solid reason for granting review in

this case, for only this Court can clarify whether Prima Paint

can be read to hold that the issue of unconscionability of an

arbitration provision is always a question for the court even

when a First Options clause is present.

III. Respondent Has Failed To Address The Argument

That The Determinative Factor In The Decision By

The Court Below To Invalidate The Parties’

Arbitration Agreement Was The Prevalence Of

Arbitration Agreements In The Marketplace.

Petitioners and respondent agree that the question

whether respondent had any “meaningful choice” was, in

the Alabama Supreme Court’s view, outcome determinative.

(See Pet. 18 n.7; Brief in Opp. 16). As respondent states, the

court below in the April Reaves case enforced the identical

arbitration agreement (with all its alleged defects) “against

(Cont’d)

“validity” of the arbitration agreement with respect to the Kaplans

was also the issue in First Options, supra. 514 U.S. at 941-42.

See generally Volt Info. Sciences, Inc. v. Board of Trustees of Leland

Stanford Junior Univ., 489 U.S. at 478-79 (parties are generally free

to structure their arbitration agreements as they see fit without

violating § 4 of the Act).

5

another borrower who was shown to have greater choice as

to arbitration at the time of her loans.” (Brief in Opp. 16).

Indeed, the other indicia of unconscionability discussed by

the court applied equally to the Reaves case decided on the

same day as Branch. But eight (8) of the nine (9) members

of the court rejected the defense of unconscionability in

Reaves. (Pet. App. 28a-29a). Respondent’s own brief,

therefore, refutes her position that the decision below on the

unconscionability issue is fact-specific or fact-intensive, for

the decision below turned solely on the “prevalence” of

arbitration agreements in the marketplace.

Recognizing the fundamental flaw in her position,

respondent has not even addressed petitioners’ argument that

the Alabama Supreme Court’s views on the widespread use

of arbitration agreements run headlong into Congress’

objectives in enacting the FAA in the first place. Section 2

of the FAA “ ‘is a congressional declaration of a liberal

federal policy favoring arbitration agreements, notwithstanding

any state substantive or procedural policies to the contrary.’ ”

Perry v. Thomas, 482 U.S. 483, 489 (1987), quoting Moses

H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1,

24 (1983). In enacting the FAA, Congress “had the needs of

consumers, as well as others, in mind.” Allied-Bruce Terminix

Cos. v. Dobson, 513 U.S. 265, 280 (1995). See generally

S. Rep. No. 536, 68th Cong., Ist Sess., 3 (1924) (the Act, by

avoiding “the delay and expense of litigation,” will appeal

“to big business and little business alike, ... corporate

interests [and] individuals”). As discussed in the petition,

arbitration agreements have since flourished nationwide as

a preferred method of resolving disputes. (Pet. 19-21).

The inescapable conclusion that the court below

invalidated the parties’ arbitration agreement precisely

because other companies, without any input from petitioners,

have accepted Congress’ open invitation to use arbitration

provisions in their contracts is clear from a comparison of

cam

6

the court’s holding in Branch and its holding in Reaves. The

Alabama Supreme Court’s use of the “prevalence” of

arbitration agreements in the marketplace as the “primary

indicium” of unconscionability (Pet. App. 25a), moreover,

is in direct conflict with the FAA’s liberal federal policy

favoring arbitration agreements. As a result, the state law is

preempted by the FAA and cannot stand. See Doctor's

Assocs., Inc. v. Casarotto, 517 U.S. 681, 688 (1996); Perry

v. Thomas, 482 U.S. at 491-92; Southland Corp. v. Keating,

465 U.S. 1, 16 (1984). See generally U.S. Const. art. VI,

cl. 2. Respondent, however, has dodged this argument entirely.

Respondent has also failed to rebut our argument that

the Alabama Supreme Court’s new unconscionability test did

not “ar[iJse to govern issues concerning the validity,

revocability, and enforceability of contracts generally.” Perry

v. Thomas, 482 U.S. at 492 n.9. Prior to its decision in this

case, the court below had held that when a provision in a

contract has become so “widely used and accepted in a

particular trade,” there is “a prima facie case that the usage

is reasonable.” Fleming Farms v. Dixie Ag Supply, Inc., 631

So. 2d 922, 926 (Ala. 1994); Southland Farms, Inc. v. Ciba-

Geigy Corp., 575 So. 2d 1077, 1080 (Ala. 1991). In this case,

on the other hand, the court applied the opposite presumption,

declaring that the parties’ arbitra.ion agreement is

unconscionable precisely because it was “widely used and

accepted in a particular trade.” (Pet. App. 26a-27a). The

court’s new test is preempted by the FAA because it “singl[es]

out arbitration provisions for suspect status” in violation of

Congress’ mandate that the courts must place arbitration

agreements “ ‘upon the same footing as other contracts.’ ”

Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. at 687, quoting

Scherk v. Alberto-Culver Co., 417 U.S. 506, 511 (1974).

3. The court’s decision in Lloyd v. Service Corp. of Alabama,

Inc., 453 So. 2d 735 (Ala. 1984), does not alter this conclusion.

(Cont'd)

7

IV. Respondent’s Own Brief In Opposition Demonstrates

That The Court Below Singled Out The Parties’

Arbitration Agreement For Suspect Status In Violation

Of The FAA Based On Lack Of Mutuality Of Remedy.

Under general principles of contract law in Alabama,

mutuality of remedy is not a requirement for a valid and

enforceable contract. See, e.g., Marcrum v. Embry, 291 Ala.

400, 403, 282 So. 2d 49, 51 (1973). See generally

Restatement (Second) of Contracts § 363, Comment c (1981)

(“the law does not require that the parties have similar

remedies in case of breach”). The court held directly the

opposite in this case. (Pet. App. 24-25). Compare AT & T

Tech., Inc. v. Communications Workers, 475 U.S. 643, 650

(1986) (parties may exclude certain claims or issues from

arbitration in their agreement). The court’s decision is

preempted by the FAA because it “places arbitration

agreements in a class apart from ‘any contract,’ and singularly

limits their validity.” Doctor’s Assocs., Inc. v. Casarotto, 517

U.S. at 688, quoting 9 U.S.C. § 2.4

(Cont'd)

In Lloyd, the court held that “the enforcement of ‘unbargained for’

exculpatory clauses in residential leases [is] against the best interests

of the citizens of Alabama and contrary to public policy.” 453

So. 2d at 740. The court did “not hold that exculpatory clauses in

residential leases are void per se” because of their widespread use

in the marketplace. /d. at 741. And, while market prevalence may

have been a “relevant” factor in Lloyd (Brief in Opp. 17), it was

outcome determinative here. In any event, a state-law test of

unconscionability based on widespread use of arbitration agreements

must give way to the liberal federal policy favoring arbitration

agreements embodied in the FAA as a matter of federal law.

See Perry v. Thomas, 481 U.S. at 493; Southland Corp. v. Keating,

465 U.S. at 16-17.

4. Respondent correctly points out that the Arkansas, California

and West Virginia state courts have held thai lack of mutuality of

(Cont’d)

8

It is clear from the face of respondent’s brief that her

arguments, like the decision by the court below, constitute

“generalized attacks on arbitration” that “ ‘rest on suspicion

of arbitration as a method of weakening the protections

afforded in the substantive law to would-be complainants.’ ”

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 30

(1991), quoting Rodriquez de Quijas v. Shearson/American

(Cont'd)

remedy in an arbitration agreement governed by the FAA renders

the provision either unconscionable or otherwise unenforceable.

See Showmethemoney Check Cashers, Inc. v. Williams, 342 Ark. 112,

121, 27 S.W.3d 361, 367 (2000); Armendariz v. Foundation Health

Pyschcare Servs., Inc., 24 Cal. 4th 83, 118-19, 6 P.3d 669, 692-93

(2000); Arnold v. United Companies Lending Corp., 511 S.E.2d 854,

862 (W. Va. 199 ‘n the other hand, the Second, Third, Fourth

and Sixth Circuits, as well as the courts of at least three states, have

held that lack of mutuality of remedy in an arbitration agreement

governed by the Act does not render the provision unconscionable

or unenforceable. See Choice Hotels Int'l, Inc. v. BSR Tropicana

Resort, Inc., 252 F.3d 707, 711 (4th Cir. 2001); Harris v. Green

Tree Fin. Corp., 183 F.3d 173, 180-83 (3d Cir. 1999); Doctor's

Assocs., Inc. v. Distajo, 66 F.3d 438, 451-53 (2d Cir. 1995); Wilson

Elec. Contractors, Inc. v. Minnottee Contracting Corp., 878 F.2d

167, 169 (6th Cir. 1989); Munoz v. Green Tree Fin. Corp., 343 S.C.

531, 542, 542 S.E.2d 360, 365 (2001); Sablosky v. Edward S. Gordon

Co., 73 N.Y.2d 133, 137-39, 535 N.E.2d 643, 646-47 (1989); Willis

Flooring, Inc. v. Howard S. Lease Constr. Co., 656 P.2d 1184, 1185-

86 (Alas. 1983). This is yet another issue regarding the proper

application of the FAA that is far from settled.

Furthermore, the refusal of the court below to sever the alleged

invalid cap on punitive damages in the parties’ arbitration agreement

pursuant to the agreement’s severability clause (R. 96) is in conflict

with the Eighth Circuit’s decision in Gannon v. Circuit City Stores,

Inc., __ F.3d __, No. 00-3243, 2001 WL 930550 (8th Cir. Aug. 17,

2001). Only one of the cases cited by respondent involved an

arbitration provision containing a cap on punitive damages and none

of the provisions in the cases cited by respondent contained a

severability clause. (See Brief in Opp. 20-21 n.7).

9

Express, Inc., 490 U.S. 477, 481 (1989). As such,

- Fespondent’s arguments and the decision below are “ ‘far out

of step with [this Court’s] current strong endorsement of the

federal statutes favoring this method of resolving disputes.’ ”

Gilmer, supra, quoting, Rodriquez de Quijas, supra.

See generally Shearson/American Express, Inc. v. McMahon,

482 U.S. 220, 232 (1987) (“there is no reason to assume at

the outset that arbitrators will not follow the law’).

We have shown that this case raises important and

recurring questions of federal law under the FAA and that

there is substantial conflict and confusion among the federal

and state courts that have addressed these issues. The Court

should issue the writ because litigants, the federal and state

trial courts, and the federal and state appellate courts, in the

absence of a decision by this Court, will have to waste

additional valuable time and resources briefing, debating and

deciding the substantial questions presented herein.

10

CONCLUSION

For the foregoing reasons, as well as for the reasons

stated in the petition, the petition for a writ of certiorari

should be granted.

Respectfully submitted,

RoBERT H. RUTHERFORD

F. A. Flowers, III*

BURR & FORMAN LLP

3100 SouthTrust Tower

420 North 20th Street

Birmingham, Alabama 35203

(205) 251-3000

Counsel for Petitioners

*Counsel of Record