Opposition Brief — Friedman's Inc. v. West Virginia ex rel. Dunlap

(3) Supe Com DS

NOV 12 2002

No. 02-315

1 ORIG Ob DHE CLERK

| IN THE |

Supreme Court of the United States

OCTOBER TERM, 2002

FRIEDMAN’S INC. D/B/A FRIEDMAN’S JEWELERS,

AMERICAN BANKERS INSURANCE COMPANY OF

FLORIDA, INC., AND AMERICAN BANKERS LIFE

ASSURANCE COMPANY OF FLORIDA

Petitioners,

v.

STATE OF WEST VIRGINIA EX REL JAMES DUNLAP,

Respondent.

On Petition for a Writ of Certiorari to the

Supreme Court of Appeals of West Virginia

RESPONDENT?’S BRIEF IN OPPOSITION

TO PETITION FOR WRIT OF CERTIORARI

F. Paul Bland, Jr. David Grubb

(Counsel of Record) The Grubb Law Group

Michael J. Quirk 1324 Virginia Street, East

Trial Lawyers for Public Justice, P.C. Charleston, WV 25301

1717 Massachusetts Avenue, NW (304) 345-3356

Suite 800

Washington, D.C. 20036

(202) 797-8600

John W. Barrett

Barrett Law Firm, P.L.L.C.

227 Capitol Street

Suite 400

Charleston, WV 25301

(304) 414-3000

Brian A. Glasser

Bailey & Glasser, L.L.P

227 Capitol Street

Charleston, WV 25301

(304) 345-6555

_~

TABLE OF CONTENTS

Page

ER rr ery Te eT ee eee eee 1

STATEMENT OF THE CASE .......cccccccccccsees 3

A. The Underlying Transaction Between the Parties .. 3

B. Petitioners’ Mandatory Arbitration Clause ....... 4

ie The State Court Proceedings .................. 6

D. The Federal Court Proceedings ................... 8

EEE Gene ne ae ee 9

I. The Decision Below Invalidating a Prohibition

on Punitive Damages Does Not Justify a Grant of

CL ee etek chat ence eeaivesrexes >< 9

A. ~- The Decision Below Does Not Deepen

Or Create a Split of Authority .............. 9

B. The Decision Below Does Not Conflict

with the Decisions of this Court ........... 13

1. This Court Has Consistently Held That

The FAA Does Not Alter Or Override

Generally Applicable State Laws .......... 13

ya This Court Has Consistently Stated

That Arbitration Agreements

Involve A Change In Forum But Not

A Waiver Rights Under Substantive Laws 15

3. Mastrobuono Is Readily Distinguishable

From This Case ipubdad wie aa bees ss 16

Il. The Holding of the Court Below that a

Contractual Ban on Class Actions Prevents

Parties from Effectively Vindicating their

Substantive Rights Does Not Justify a Grant

gk Ory eg Pe Se ree eee ee

A. The Decision Below Neither Creates

Nor Deepens a Split of Authority ....... 17

B. The Decision Below Is Consistent

With this Court’s Decisions ............ 18

Il. There is No Split of Authority on Whether

the FAA Preempts State Contract Law

Concerning Mutuality of Obligations and

the Doctrine of Unconscionability ............. 20

IV. The Lower Court’s Ruling Is Supported by

Three Independent Reasons, and if Any of

Those Reasons Is Supported by Law then

It Would Suffice to Justify the Result .......... a4

ee PP eT Te ee Perr Tree ee 25

ii

TABLE OF AUTHORITIES

Cases Page

Allen v. Marshall Field & Co., 93 F.R.D. 438

OE. osc ee

America Online v. Superior Court, 90 Cal. App. 4" 1

IR ss cnildin Guan yeaa ees

Arnold v. United Companies Lending Corp.,

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

Art’s Flower Shop v. The Chesapeake and Potomac

Telephone Co. of West Virginia, 413 S.E.2d

COV eis ss

Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d

tae tk. re meee mee ae

Davis v. Prudential Securities, Inc., 59 F.3d 1186

SPOR 8 einen

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

NN CON se ee

Dunlap v. Friedman's, 290 F.3d 191 (4" Cir. 2002) ....

EEOC v. Waffle House Corp., 534 U.S. 279 (2002) ...

Flyer Printing Co. v. Hill, 805 So. 2d 829

Ck ee MO. CRA

In re Firstmerit Bank, 52 S.W.3d 749 (Tex. 2001) ...

ili

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

PU CUNOE + 6 600-4 dbbn0n00sseuseeneusens 11,14

General Securities Corp. v. Welton, 135 So. 329

(ROBE) 6s cu veces outdbads Jeicnen eieededs 22

ene Tee tee eer te 18

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

ROUSE ES: vesiuscatA cassescateaietes passim

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

COG Ci: I wens is ett ics KA 23

Johnson v. Junior Pocahontas Coal Co., 234

RR A: . ere eer ee 10

Johnson v. W. Suburban Bank, 225 F.3d 366

(3d Cir. 2000), cert. denied, 531 U.S. 1145

CDSE ss sn Cad Hen ke ihe da ee CAs 18

Mastrobuono v. Shearson Lehman Hutton, Inc.,

S26 TA BO ve Ria he Fis Saeee’s 14, 16

Ex Parte McNaughten, 728 So.2d 592 (Ala. 1998) ...... 22

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Inc., $73 US; G14 (19GS) .....00s weied odes 13, 15

Munoz v. Green Tree Financial Corp., 542 S.E.2d

PES GA, BOOED os cchoviv data en tite Gas kee 22

iv

Murphy v. North American River Runners,

re EO AA) er ee 10

Paladino v. Avnet Computer Tech., Inc., 134 F.3d

a ae ee 12

Penn v. Ryan's Family Steak Houses, Inc., 269 F.3d

pik ebb Hobbie hoa eR, 12

Perry v. Thomas, 482 U.S. 483 (1987) ............ 13-14

Popovich v. McDonald's, 189 F. Supp. 2d 772

rrr ey ee Pree 25

Randolph v. Green Tree, 244 F.3d 814 (11th Cir.

DS rarenbseiiten aA ec Siiae Cok 18

Raytheon Co. v. Automated Business Systems, Inc.,

Se eG te BIG oii kik vie deccaews 10-12

Securities Indus. Ass'n v. Connolly, 883 F.2d 1114

SRO 5. «Esse chaben sbeNWc Ota diweics 12

Smithson v. U.S. Fidelity & Guar. Co., 411 S.E.2d

rey Sr bcd 6a dN 84 chee heed eeeeae 7

Snowden v. CheckPoint Check Cashing, 290 F.3d

Pe I 5s nS Seis eats ceteeseeded 18

U.S. Life Credit Corp. v. Wilson, 301 S.E.2d 169

Sarat cecas bb bess ba0ecs ka bees 10

Wilson Electrical Contractors, Inc. v. Minnotte

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

“Bae aS RIty Roa ERR oN 22-23

Statutes and Regulations:

PUNE BORA ii passim

IT oS kno sek vndicasurweoevens 20

STII, Uiisiccikiccicccarntenn ae 20

Uniform Consumer Credit Code, § 5.108 comment 3 .... 21

Other Materials

Restatement (Second) of Contracts § 184 cmt.b........ 25

West Virginia Attorney General, Annual Reports:

1999, available at www.state.wv.us/wvag/annual

reports/ 1999/an99_ litigation Friedman.htmlg .......... 4

INTRODUCTION

Notwithstanding the high-octane rhetoric in the petition for

certiorari about how the decision below threatens an end to all

arbitration in West Virginia, this case is not really about

arbitration. If the decision below stands, Petitioners will still be

able to hold their West Virginia customers to mandatory

binding arbitration clauses if they so choose. The only limits

imposed by the court below are that Petitioners may not (a)

force customers to relinquish their right to seek substantive

legal remedies, such as punitive damages awards; (b) take away

from customers the right to seek class-wide relief through class

action proceedings (whether in arbitration or in court); or (c)

impose a one-sided arbitration system that gives Petitioners a

choice of forum between court and arbitration for their claims

against customers while forcing customers to go to arbitration

for all of their claims against Petitioners.

None of these features is inherent or unique to arbitration;

indeed, the vast majority of arbitration clauses commonly in use

in the U.S. do not place limits on damages and apply equally to

both parties. Other arbitration clauses also provide that

consumers may pursue claims on a class action basis. As the

opinion below makes clear, any of these provisions or features

would have been unconscionable under generally applicable

West Virginia law had they been contained in a contract that did

not involve arbitration. Petitioners’ position amounts to the

following: even if West Virginia’s general law of

unconscionability would strike down such exculpatory and one-

sided terms in a contract not involving arbitration, that law is

overridden by the Federal Arbitration Act (“FAA”) so long as

such provisions are included in a section of a contract that also

includes an arbitration provision. Nothing in the FAA permits

parties to launder otherwise illegal contract terms and make

them legal merely by sticking them under the heading of

“arbitration,” however, and this Court has never so held.

The opinion below is merely a determination of generally

applicable state contract law by West Virginia’s high court that

comports with principles set forth in a large number of that

court’s decisions in cases not involving arbitration. None of the

decisions from other jurisdictions cited by Petitioners involves

determinations of West Virginia’s state law of exculpatory

clauses, and thus none of those decisions conflict with the

decision below. In addition, most of the cases cited by

Petitioners are inapposite. These cases relate to punitive

damages involve decisions affirming awards of punitive

damages, and most of the decisions cited by Petitioners relating

to class actions involve interpretations of federal statutes that

are entirely unrelated to this case.

The opinion below is also entirely consistent with this

Court’s decisions. This Court has consistently instructed that

arbitration clauses need not be enforced if they violate generally

applicable principles of state contract law, and do not allow

claimants to effectively vindicate their substantive rights. That

is what happened in this case. Accordingly, the question

presented in the Petition for Certiorari does not warrant a grant

of this Court’s discretionary review.

First, this Court has held that the FAA permits states to

apply generally applicable contract defenses to arbitration

clauses. See, e.g., Doctor’s Associates, Inc. v. Casarotto, 517

U.S. 681 (1996). Following Doctor’s Associates, the court

below applied such a body of state law to invalidate a limitation

on liability. Friedman’s portrayal of that decision as an attack

by the state court on the Federal Arbitration Act (“FAA”) is

baseless. Instead, this Petition raises the question of whether

the FAA overrides West Virginia’s generally applicable

contract law relating to exculpatory clauses. The court below

held that West Virginia law forbids parties from entering into

2

any contract that denies parties the substantive right to recover

punitive damages under West Virginia law. This prohibition on

broad exculpatory clauses claims is a rule of law that West

Virginia courts apply without respect to the forum in which a

case is heard.

This Court has also consistently instructed that arbitration

Clauses are to be enforced only to the extent that they permit

claimants to effectively vindicate their substantive rights. See

EEOC v. Waffle House Corp., 534 U.S. 279, 295 n. 10 (2002).

Because the challenged provisions in Friedman’s contract

would not permit its customers to effectively vindicate their

substantive rights under West Virginia law, the state high

court’s decision to bar such a waiver is entirely consistent with

this Court’s opinions.

STATEMENT OF THE CASE

A. The Underlying Transaction Between the Parties

Friedman’s, Inc. (“Friedman’s”) is a jewelry store chain

doing business in West Virginia. Respondent James Dunlap, a

customer who purchased jewelry through an installment sales

agreement, alleges that Friedman’s has “been carrying out a

systematic, deceptive, and illegal ‘loan packing’ scheme, with

the purpose and effect of surreptitiously adding unrequested

insurance charges to the cost of consumers’ purchases from

Friedman’s.” Petitioners’ Appendix (“Pet. App.”) 3a.

Dunlap alleged that Friedman’s deliberately ordered its

employees to conceal and lie about these added insurance

charges. Pet. App. 4a. Dunlap supported these allegations with

several sworn affidavits from former Friedman’s employees

who testified that Friedman’s directed its employees not to

3

disclose these charges, see Pet. App. 4a-61, and to lie about

them if asked. E.g., Pet. App. 5a (“When I questioned what

should we do if a customer questions the insurance, I was told

that we should tell the customer that it was a computer error.”’)

The State Attorney General investigated the allegations and

found that they were true, reporting that “[a] successful

undercover sting operation conducted by this office verified

illicit wrongdoing by Friedman’s. The Division has further

determined that neither Friedman’s nor its employees have a

license to sell insurance in West Virginia.” West Virginia

Attorney General, Annual Reports: 1999, available at

www-.state.wv.us/wvag/annualreports/1999/an99_ litigation _

Friedman.htmlg (last visited on 9/30/2002).

B. Petitioners’ Mandatory Arbitration Clause

As part of its standard form installment sales contract with

Dunlap and other customers, Friedman’s included a mandatory

arbitration clause. The arbitration provision begins by stating

that it applies to all disputes arising out of the transaction

between the parties:

All disputes, controversies or claims of any kind or

nature between Buyer and Seller, arising out of or in

connection with the sale of goods financed or

refinanced pursuant to the terms of this Agreement

.. . or with respect to negotiation of, inducement to

enter into, construction of, performance of,

enforcement of, or breach of, effort to collect the debt

evidenced by, the applicability of the arbitration

clause in, or the validity of this Agreement or any

earlier agreement (except as specifically set forth in

paragraph 14 below), shall be resolved by arbitration

4

Pet. App. 10a.

More than halfway down the paragraph explaining the

parties’ duties relating to arbitration, Friedman’s inserted an

exception to this obligation for many of its own claims:

The Seller may exercise its right upon default by

Buyer as set forth in the paragraph entitled “default”

above, without resort to arbitration or mediation.

Nothing in this paragraph shall be construed to

prevent either party’s use of bankruptcy or

repossession, replevin, judicial foreclosure, non

judicial foreclosure or any other prejudgment or

provisional remedy relating to any collateral, security

or property interests, for contractual debts now or

hereafter and by either party to the other under this

Agreement. . . .

Id. The arbitration clause thus restricts the rights of Dunlap and

other customers by requiring them to arbitrate any legal claim

they could ever assert against Friedman’s. At the same time, it

enhances the rights of Friedman’s itself by allowing the

company to choose among court, arbitration, or self-help

remedies in asserting repossession and other property-based

claims against its customers.

The arbitration clause concludes by imposing a limitation

on the substantive remedies that are available to parties who

must assert their claims through arbitration, stating that “[nJo

arbitrator may make an award of punitive damages.” Jd. The

arbitration clause thus limits the relief that is available to

customers on all their claims while imposing no comparable

5

limitations on the claims Friedman’s may bring in court.

Similarly, the contract provides that “recovery hereunder by the

buyer shall not exceed amounts paid by the buyer hereunder.”

C. The State Court Proceedings

In the trial court, Dunlap opposed Petitioners’ motion to

compel arbitration on the grounds (among others) that the

clause prohibited class actions, prohibited punitive damages,

and was one-sided. In a brief two-page opinion, the trial court

held that it was “not persuaded by Plaintiff's arguments that the

arbitration clause is unfair or invalid.” Pet. App. 44a.

On appeal to the West Virginia Supreme Court of Appeals,

that court began with an analysis of the state’s common law of

unconscionability, Pet. App. 12a-13a, and then supplemented

that analysis with an analysis of the provisions of the West

Virginia Consumer Credit and Protection Act relating to

unconscionable contract provisions. Pet. App. 13a-14a. The

Court then analyzed West Virginia law with respect to contracts

of adhesion, Pet. App. 14a-19a, noting that the principle that

provisions in adhesive contracts that are outside of the

reasonable expectations of the parties are unenforceable is “a

provision of equity applicable to all contracts generally. . . .”

The Court then traced how these principles are applied to

exculpatory provisions in contracts of adhesion. It reviewed a

number of its own prior cases, none of which involved

arbitration clauses, Pet. App. 19a-20a, establishing that

“exculpatory provisions in contracts of adhesion are given close

scrutiny, with respect to both their construction and their

potential for unconscionability, particularly where rights,

remedies and protections that exist for the public benefit are

involved.” Pet. App. 19a. The Court then explained that this

6

eatin

principal has been “reinforced by the public policy of this State,

as enacted by the Legislature.” Pet. App. 20a.

The Court next addressed Dunlap’s argument that he had

not knowingly, voluntarily and intelligently waived his right to

a jury trial. It held that “we will for purposes of our decision

give no weight to Mr. Dunlap’s state constitutional rights to a

jury trial in the public court system.” Pet. App. 25a.

The Court then held that the provision in Friedman’s

arbitration clause prohibiting punitive damages was

unconscionable, citing to one of its own prior cases (not

involving arbitration) barring an insurance company from

employing a similar contract provision to insulate itself from

bad faith claims. Pet. App. 26a (citing Smithson v. U.S. Fidelity

& Guar. Co., 411 S.E.2d 850, 857 (W.Va. 1991)).

The Court then held that Friedman’s arbitration clause was

unconscionable, because by foreclosing class actions, it would

prevent Dunlap from effectively vindicating his substantive

rights. “In Mr. Dunlap’s case, the total of $8.46 in insurance

charges that Friedman’s added to his purchase price by

Friedman’s is precisely the sort of small-dollar/high volume

(alleged) illegality that class action claims and remedies are

effective at addressing.” Pet. App. 27a.

The Court then rejected Petitioners’ claims that the FAA

preempted its holdings, noting that otherwise unconscionable

and unenforceable contract provisions are not magically made

legal “merely because the prohibiting or limiting provisions are

part of or tied to provisions in the contract relating to

arbitration.” Pet. App. 31a.

In a footnote, the Court alsc held that the one-sided nature

of the clause reflected that it “lacks even-handedness,” and

provided “additional and independently adequate grounds for

our holding herein.” Pet. App. 31a at n.12.

The Court then rejected Petitioners’ request that it re-write

the arbitration clause to strike the illegal provisions, noting that

it was not authorized “to remake the parties’ contract.” Pet.

App. 39a (citation omitted).

Finally, the Court clarified that its holding was not based

on anything to do with arbitration, but was instead based on

generally applicable law that would apply any time a contract

banned punitive damages or class actions:

We emphasize that the attempted avoidance of legally-

required accountability for wrongdoing under the laws of

West Virginia that Friedman’s has attempted to

accomplish with exculpatory arbitration-related provisions

in a contract of adhesion in the instant case would be just

as objectionable and unconscionable if that attempted

avoidance arose from language that made no mention of

arbitration.

Pet. App. 41a.

D. The Federal Court Proceedings

At the same time that it petitioned the state trial court to

compel arbitration, Petitioners also decided to seek a separate

adjudication of the case in federal court. The U.S. District

Court dismissed Petitioners’ Petition to Compel Arbitration,

and that dismissal was affirmed by the U.S. Court of Appeals

for the Fourth Circuit. See Dunlap v. Friedman's, 290 F.3d 191

8

——— .°. — |

(4" Cir. 2002). That Court also denied without comment

Petitioners’ requests for rehearing en banc.

ARGUMENT

I. The Decision Below Invalidating a Prohibition on

Punitive Damages Does Not Justify a Grant of

Certiorari. -

A. The Decision Below Does Not Deepen Or Create

a Split of Authority

The decision below is an application of generally

applicable West Virginia state contract law involving contract

provisions purporting to strip individuals of their substantive

rights. Given that the West Virginia Supreme Court is the final

authority as to matters of West Virginia contract law, there can

be no split of authority on this point. In addition, each of the

cases cited by Petitioners is readily distinguished from this one.

As set forth in the Statement of Facts, the West Virginia

Supreme Court’s opinion in this case is rooted in the generally

applicable state common law of unconscionability and the

provisions of the West Virginia Consumer Credit and

Protection Act. Pet. App. 13a-14a. Both of these sources of

West Virginia law have placed sharp limits on the use of

exculpatory clauses in contracts of adhesion of any sort. The

holding of the court below that a “no punitive damages”

provision in a contract of adhesion is unconscionable is not

rooted in principles of arbitration law, but is instead consistent

with an unbroken line of West Virginia cases not involving

arbitration, all of which held that similar exculpatory clauses

are unconscionable.

In Art’s Flower Shop v. The Chesapeake and Potomac

Telephone Co. of West Virginia, 413 S.E.2d 670 (W.Va. 1991),

for example, the Court held that a contractual provision limiting

the phone company’s liability to twice the cost of an

advertisement was unconscionable as applied to a plaintiff

bringing claims for much larger compensatory and punitive

damages. The Court’s holding in this non-arbitration case that

the terms were “unreasonably favorable” to the defendant, 413

S.E.2d at 675, is entirely consistent with its holding in the

instant case. See also Murphy v. North American River

Runners, 412 S.E.2d 504 (W.Va. 1991) (exculpatory clause

releasing defendant from liability for reckless behavior is void

as against public policy); U.S. Life Credit Corp. v. Wilson, 301

S.E.2d 169 (W.Va. 1982) (credit contract waiving a borrower’s

statutory right to sue if the creditor published his indebtedness

was unconscionable); Johnson v. Junior Pocahontas Coal Co.,

234 S.E.2d 302 (W.Va. 1977) (exculpatory clause could not

insulate strip mining contractor for liability for damages to a

nearby property). None of those cases involves an arbitration

clause, and each establishes that the decision below here is

simply an application of generally applicable state law

involving exculpatory clauses. To the extent that none of the

cases cited by Petitioners involves West Virginia law on this

topic, there can be no conflict between these authorities, except

to the extent that the FAA might ever be construed to preempt

generally applicable state contract law.

In addition, nearly every case cited by Petitioners as

allegedly conflicting with the decision below involve challenges

to arbitrators’ decisions awarding punitive damages to a party

— factual circumstances that are entirely unlike those involved

here. This is true of Davis v. Prudential Securities, Inc., 59

F.3d 1186 (11 Cir. 1995); Baravati v. Josephthal, Lyon &

Ross, Inc., 28 F.3d 704 (7 Cir. 1994); and Raytheon Co. v.

10

Automated Business Systems, Inc., 882 F.2d 6 (1* Cir. 1989).

(Cited in the Petition at 12-13.) Thus, none of these cases

involved a challenge to an arbitration clause prohibiting

punitive damages, or a body of state law prohibiting

exculpatory clauses relating to punitive damages.

These cases are distinguishable on numerous other grounds

as well. For example, several of them purport to be

applications of federal common law, rather than state law. See,

e.g., Raytheon, 882 F.2d at 11 0.5; Baravati, 28 F.3d at 707. As

this Court has subsequently directed, however, generally —

applicable state law (like the West Virginia law at issue here)

should govern the issues of unconscionability or contract

enforcement. See First Options of Chicago, Inc. v. Kaplan, 514

U.S. 938 (1995) (“When deciding whether the parties agreed to

arbitrate a certain matter . . . courts generally . . . should apply

ordinary state-law principles that govern the formation of

contracts.”)

In fact, several of the decisions cited by Friedman’s

actually support the reasoning of the Court below here. For

example, the principal point of the Raytheon case — that

arbitrators should be permitted to award punitive damages — is

entirely consistent with the West Virginia Supreme Court’s

decision here:

[P]unitive damages can serve as an effective deterrent

to malicious or fraudulent conduct. Where such

conduct could give rise to punitive damages if proved

to a court there is no compelling reason to prohibit a

party which proves the same conduct to a panel of

arbitrators from recovering the same damages.

Raytheon, 882 F.2d at 12.

11

Friedman’s claim that the cases listed above conflict with

the opinion below in this case is also belied by other decisions

from those jurisdictions. Each jurisdiction recognizes that

arbitration clauses may not prevent parties from effectively

vindicating substantive rights, and each recognizes that

arbitration clauses are not enforceable where they conflict with

generally applicable state law. The Raytheon case was decided

by the First Circuit, for example, which has recognized that

generally applicable state laws may lead to the invalidation of

particular arbitration contracts. See Securities Indus. Ass’n v.

Connolly, 883 F.2d 1114, 1121 (1* Cir. 1989). The Seventh

Circuit, which decided Baravati, has also struck down

arbitration clauses that run afoul of “ordinary state law contract

principles.” Penn v. Ryan's Family Steak Houses, Inc., 269

F.3d 753, 759 (7® Cir. 2001). The Davis case was decided by

the Eleventh Circuit, which has struck down an arbitration

clause that had “provisions that defeat the remedial purposes of

the statute. .. .” Paladino v. Avnet Computer Tech., Inc., 134

F.3d 1054 (11 Cir. 1998). Taken in context, then, there is no

conflict between the opinion below and the complete body of

law on this subject in any of the jurisdictions relied upon by

Petitioners. Each of those courts endorses the principles relied

upon by the court below — that arbitration clauses do not permit

the drafters of contracts to eliminate other parties’ substantive

rights to remedies, and that courts may refuse to enforce clauses

that attempt to eliminate such rights under generally applicable

rules of state contract law, without running afoul of the FAA.

In short, Petitioners have identified no authority that

conflicts with the West Virginia Supreme Court’s decision.

12

B. The Decision Below Does Not Conflict with the

Decisions of this Court.

1. This Court Has Consistently Held That The

FAA Does Not Alter Or Override Generally

Applicable State Laws.

The West Virginia Supreme Court’s holding that a court

may not enforce a contractual provision prohibiting the award

of punitive damages under state law is a routine application of

the Federal Arbitration Act’s express provisions and this

Court’s interpretations of the Act.

Section 2 of the FAA states that contractual arbitration

clauses are enforceable “save upon such grounds as exist at law

or in equity for the revocation of any contract.” 9 U.S.C. § 2.

The West Virginia Supreme Court’s decision below is

consistent with this command of the FAA and this Court’s

opinions interpreting the Act to subject contractual arbitration

provisions to the same rules of state law that apply to other

contracts. In Doctor’s Associates, Inc. v. Casarotto, 517 U.S.

681 (1996), this Court explained that Section 2 of the FAA

places arbitration agreements on the same footing with other

contracts so that “generally applicable contract defenses such as

fraud, duress, or unconscionability, may be applied to invalidate

arbitration agreements without contravening § 2.” Jd. at 687.

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

20 (1991), this Court highlighted Section 2's savings provision

and warned that “‘courts should remain attuned to well-

supported claims that the agreement resulted from the sort of

fraud or overwhelming economic power that would provide

grounds for the revocation of any contract.”” Jd. at 33 (quoting

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473

U.S. 614, 627 (1985) (internal quotation omitted)). In Perry v.

13

Thomas, 482 U.S. 483 (1987), the Court held that state law

applies to arbitration clauses covered by the FAA “if that law

arose to govern issues concerning the validity, revocability, and

enforceability of contracts generally,” while the Act only

preempts those rules or principle of state law that “take [their]

meaning precisely from the fact that a contract to arbitrate is at

issue.” Jd. at 492 n.9 (emphasis in original). The Court has

since held on numerous occasions that the FAA applies state

contract law to determinations regarding the interpretation and

enforceability of arbitration agreements.’

As Part C of the Statement of the Case and Part I-A of the

argument, supra, make plain, West Virginia law forbidding

parties from waiving liability for punitive damages is generally

applicable to all contracts, whether they involve arbitration or

not. Thus, the decision below is not directed against arbitration,

but against a limitation on liability that is not uniquely related

to arbitration. Petitioners suggest that the state court here was

not applying generally applicable law, but was instead acting

out of hostility to arbitration. But that is not so. This Petition,

therefore, does not truly focus on arbitration, but instead on

West Virginia general state contract law for exculpatory

contracts.

' See, e.g., Mastrobuono v. Shearson Lehman Hutton, Inc., 514

U.S. 52, 62 and 63 n.9 (1995) (applying Illinois and New York common law

rule that ambiguous language should be construed against contract’s drafter);

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995)

(applying Illinois and Pennsylvania law to determination of scope of

arbitration clause).

14

2. This Court Has Consistently Stated That

Arbitration Agreements Involve A Change In

Forum But Not A Waiver Of Rights Under

Substantive Laws. )

This Court has stated that arbitration is acceptable as an

alternative to litigation in court because it is simply a “different

forum” — one with somewhat different and simplified rules, but

nonetheless one in which the basic mechanisms for obtaining

justice permit a party to “effectively vindicate” his or her rights.

See, e.g., EEOC v. Waffle House Corp., 534 U.S. 279, 295 n. 10

(2002); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20,

28 (1991), Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614, 637 (1985). The Court has

explained that “by agreeing to arbitrate a statutory claim, a party

does not forgo the substantive rights afforded by the statute; it

only submits to their resolution in an arbitral, rather than a

judicial, forum.” Gilmer, 500 U.S. at 26. Petitioners’

arbitration clause in this case falls far short of this baseline

standard.

Numerous lower courts have interpreted this Court’s

direction in the same manner as the Court below, and directly

contrary to the approach urged by Friedman’s. In case after

case, courts around the nation have applied this Court’s

jurisprudence to hold that arbitration provisions which limit a

party’s access to substantive legal remedies that are available in

court may not be enforced. See Pet. App. 15a-17a (citing more

than a dozen U.S. Courts of Appeal or U.S. district court

opinions making this point). These cases — just like the West

Virginia Supreme Court’s decision below — merely followed

this Court’s guidance that arbitration is to be favored and

allowed only where it is just another forum for adjudicating a

party’s statutory rights, not a means of denying those rights.

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3. Mastrobuono Is Readily Distinguishable From

This Case.

Friedman’s claims that the decision below conflicts with

this Court’s decision in Mastrobuono v. Shearson Lehman

Hutton, Inc., 514 U.S. 52 (1995), pointing to language in that

case where this Court spoke of enforcing arbitration clauses as

written. E.g., Pet. at 11-12. In fact, the decision below is

perfectly consistent with Mastrobuono.

To begin with, Petitioners read far too much into

Mastrobuono. As set forth above, this Court has recognized

two major exceptions to the doctrine that arbitration clauses are

to be enforced as written. Mastrobuono did not involve a

challenge to a contract provision prohibiting arbitration clauses,

but instead involved a challenge to an arbitrator’s award of

punitive damages to a party. Accordingly, the case did not

involve a generally applicable body of state law, such as that

applied by the court below here. In addition, the arbitration

clause in Mastrobuono did not strip any party of his or her

ability to effectively vindicate any substantive right under state

law, as did the arbitration clause in this case.

Mastrobuono merely suggests that, as a general matter,

parties may contract away any of their rights unless there is

some affirmative body of substantive law that prohibits such a

waiver. It was against this general backdrop, and not in the face

of any particular positive state law to the contrary, that this

Court suggested in Mastrobuono that parties are free to contract

as they wish with respect to the right to recover punitive

damages.

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Il. The Holding of the Court Below that a Contractual

Ban on Class Actions Prevents Parties from Effectively

Vindicating their Substantive Rights Does Not Justify

a Grant of Certiorari.

A.. The Decision Below Neither Creates Nor Deepens

a Split of Authority.

The decision below relating to the effective ban on class

actions is a straightforward application of West Virginia’s long-

standing and generally applicable state law relating to

exculpatory clauses, and therefore is not in conflict with the

cases cited by Petitioners. As the Court below made plain, a

prohibition on class actions in a contrac: of adhesion that did

not involve arbitration would also be unconscionable under

West Virginia’s state law. Pet. App. 41a. The Court found that

Mr. Dunlap, with his claim for $8.46, and other Friedman’s

customers with similarly small claims, would not have been

able to effectively vindicate their rights without being permitted

to proceed on a class action basis.

To the extent that any of the cases cited by Petitioners

reach opposite conclusions contrary to this result, this reflects

a difference between the varying law of exculpatory clauses in

different states. There is a growing body of law around the

nation addressing the issue of whether contracts of adhesion

may prohibit consumers from bringing their claims on a class

action basis in cases that do not involve arbitration. It is clear

from this body of law that entirely apart from arbitration issues,

different states have reached different results on the question.

Compare America Online v. Superior Court, 90 Cal. App. 4" 1,

8 (2001) (forum selection clause that required consumers to

bring claims in Virginia, a state which does not permit class

actions, held unconscionable under California law because

17

consumers could not effectively vindicate their rights in this

forum) (case not involving any arbitration clause), with Gilman

v. Wheat, First Securities, 692 A.2d 454 (Md. 1997) (enforcing

identical forum selection clause, as it was not unconscionable

under Maryland law) (case not involving any arbitration

clause).”

Friedman’s cites to a great many cases that do not involve

state law unconscionability issues, or state law limitations on

exculpatory clauses, but instead address questions of federal

statutory interpretation. Decisions such as Randolph v. Green

Tree, 244 F.3d 814 (11th Cir. 2001) and Johnson v. W.

Suburban Bank, 225 F.3d 366 (3d Cir. 2000), cert. denied, 531

U.S. 1145 (2001), involve discussions of the language and

legislative history of the Truth in Lending Act. These cases say

nothing about what state law may or may not be with respect to

exculpatory clauses.

B. The Decision Below Is Consistent With this

Court’s Decisions.

Petitioners excoriate the decision below as being

counter to law, on the grounds that the FAA supposedly sweeps

? This rule of Maryland state contract law, which differs from the

law in some other states, explains why the Fourth Circuit’s decision in

Snowden v. CheckPoint Check Cashing, 290 F.3d 631 (4" Cir. 2002), does

not conflict with the decision below but instead merely involves an

application of a different state’s contract law. The fact that the Fourth

Circuit held that a contract involving Maryland residents and a Maryland

business was not unconscionable because it banned class actions is an

application of Maryland state law as expressed in the Gilman decision, and

cannot be found to be in conflict with the decision below unless the FAA

somehow preempts substantive state contract law by making the illegality of

these types of provisions an issue of federal common law of contracts.

18

away state exculpatory law as it relates to the class action issue.

This claim is simply incorrect. As set forth in Part I-B above,

the FAA does not preempt generally applicable state law

contract doctrines such as limitations on exculpatory clauses.

Petitioners attempt to get around this difficulty by

claiming that any application of state law relating to

exculpatory clauses to bans on class actions would necessarily

bar arbitration in all cases where a class action might be

pursued, and therefore that such law is preempted by the FAA.

This argument is simply wrong on the merits, as there is

nothing inherent to arbitration that bars class-wide relief. No

one disputes that Petitioners could have drafted a contract that

explicitly permits consumers to bring appropriate claims on a

class action basis, but simply chose not to do so. No legal

doctrine “forced” petitioners to draft their contract of adhesion

in a way that would insure that their customers could never

effectively vindicate their rights.

Petitioners also argue that the decision below is

incorrect because West Virginia’s law of exculpatory clauses is

supposedly preempted by this Court’s decision in Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). In fact,

this Court’s ruling in Gilmer that the right to bring a class

action under the federal Age Discrimination in Employment

Act (ADEA) might be waivable in an arbitration contract, 500

U.S. at 32, is readily distinguishable from this case. This

Court’s decision in Gilmer was based entirely on the text and

legislative purpose of the ADEA, and was in no way an

interpretation of any state’s contract laws with respect to

exculpatory contracts.

Gilmer is also very different from this case because in

Gilmer there was no reason to imagine that a ban on class

19

actions would bar the plaintiff from effectively vindicating his

substantive rights. The ADEA provides for greater individual

relief in the form of unpaid wages, reinstatement, other

equitable relief, liquidated damages, attorney fees and costs. See

29 U.S.C. § 626(b) (incorporating remedies available under 29

U.S.C. §216(b)). Congress apparently was aware of the fact that

ADEA claims are very different from run of the mill consumer

claims (such as Mr. Dunlap’s claim relating to an illegal charge

of $8.56), as class actions under the ADEA proceed on an “opt-

in” basis and are not governed by Rule 23's opt-out provisions

for mass claims. See, e.g., Allen v. Marshall Field & Co., 93

F.R.D. 438, 441 (N.D. Ill 1982). The waiver of class-wide relief

in consumer cases involving very small sums of money, such as

the instant case, thus poses a far greater threat to plaintiffs’

ability to enforce their rights. See, e.g., Deposit Guar. Nat'l

Bank v. Roper, 445 U.S. 326, 339 (1980); Phillips Petroleum

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

Ill. There is No Split of Authority on Whether the FAA

Preempts State Contract Law Concerning Mutuality

of Obligations and the Doctrine of

Unconscionability.

Petitioners’ assertion that the decision below

exacerbates a conflict of authority on “whether Section 2 of the

FAA preempts state law concerning mutuality of obligation to

arbitrate” completely misses the mark. As set forth in Part I-

B(1), supra, this Court has made clear that the FAA does not

preempt generally applicable state law contract principles. Not

one of the decisions cited by Petitioners holds that the FAA

preempts such general state contract law principles of

unconscionability as they would apply to a non-negotiable and

one-sided arbitration provision. Although some of the

decisions cited by Petitioners reach different results after

20

examining similar types of contracts, these results reflect

variations in state contract law. Those laws in no way implicate

the FAA’s preemptive effect. Petitioners are unable to identify

conflicting authority on the federal law issue of preemption that

they raise because this Court has already answered the question

conclusively in the negative.

The holding of the court below — that Petitioners’

arbitration clause is unconscionable based in part on the one-

sided nature of its obligations — involves a routine application

of state contrast law principles. In discussing the doctrine of

unconscionability under West Virginia law, the court relied on

its own precedent applying general statutory standards:

The basic test is whether, in the light of the

background and setting of the market, the needs

of the particular trade or case, and the condition

of the particular parties to the conduct or

contract, the conduct involved is, or the contract

or clauses involved are so one-sided as to be

unconscionable under the circumstances

existing at the time the conduct occurs or is

threatened or at the time of the making of the

contract.

Pet. App. 14a (quoting Arnold v. United Companies Lending

Corp., 511 S.E.2d 854, 859-60 (W. Va. 1998) (quoting Uniform

Consumer Credit Code, § 5.108 comment 3)). Based on the

standards of unconscionability set forth in the Uniform

Consumer Credit Code, the court held that “Friedman’s

retention of the right to use the courts for its most important

remedies, at the same time that it denies that forum to Mr.

Dunlap with respect to his most important remedies, meets our

established criteria for unconscionability in the context of a

21

contract of adhesion.” Pet. App. 3lan. 12. This application of

the same state contract and consumer protection law standards

as would apply to any other provision in Petitioner’s contract

documents does not conflict with any of the decisions cited in

the petition for certiorari.

The differences in outcome in the state and federal court

cases cited by Petitioners are based entirely on variations in

state contract law, and not on conflicting interpretations of the

FAA itself. In Munoz v. Green Tree Financial Corp., 542

S.E.2d 360 (S.C. 2001), the court held that state contract law

remains applicable under the FAA and that a one-sided

consumer arbitration clause was enforceable because South

Carolina law does not invalidate contracts based on a lack of

mutuality of remedy. Jd. at 364 and 365. Likewise, Ex Parte

McNaughten, 728 So.2d 592 (Ala. 1998), enforced a one-sided

employment arbitration clause in a case involving the FAA

based on its finding that Alabama law’s doctrine of mutuality

of remedies only applied to the substantive remedies available

to parties and not to procedures for obtaining such remedies.

Id. at 598 (citing General Securities Corp. v. Welton, 135 So.

329, 335 (1931)). Similarly, In re Firstmerit Bank, 52 S.W.3d

749 (Tex. 2001) applied the Texas statutory standard of

unconscionability in holding that a mobile home finance

agreement’s one-sided arbitration clause was enforceable. Jd.

at 757-58. Although the Texas Supreme Court found that

several cases from federal courts on the question presented were

persuasive, id. at 757 n. 35, the court did not hold that the

standard of unconscionability it applied was a rule of federal

law, let alone that federal law preempted Texas contract law.’

3 The same is true of Wilson Electrical Contractors, Inc. v.

Minnotte Contracting Corp., 878 F.2d 167 (6* Cir. 1989), which simply

held that this Court’s precedent did not require severance of an arbitration

22

These cases do not conflict with the decision below on any

question of federal law because all hold that the FAA applies

general principles of state contract law to arbitration

agreements.

The decision below is also consistent with the. Third

Circuit’s ruling in Harris v. Green Tree Financial Corp., 183

F.3d 173 (3d Cir. 1999). Although Harris declared broadly that

“substantive federal law stands for the proposition that parties

to an arbitration agreement need not equally bind each other

with respect to an arbitration agreement,” id. at 180, the court

did not hold that this principle would preempt state contract law

rules requiring mutuality. Instead, Harris looked to state

contract law as support for this holding and found that

Pennsylvania did not require parties to an agreement to take on

equivalent obligations in order to establish the mutuality of

obligation. /d. at 181. This reference to state law was perfectly

consistent with the court’s holding that “federal courts may

apply state law pursuant to Section two of the FAA,” so that

“generally applicable contract defenses may be applied to

invalidate arbitration agreements without contravening the

FAA.” Id. at 179. In short, Petitioners fail to establish that

there is any conflicting authority on whether the FAA preempts

state contract law principles concerning unconscionability

and/or the mutuality of obligations.

The decision below measuring Petitioners’ non-

negotiable and one-sided arbitration clause against West

Virginia’s general statutory standards of unconscionability is

clause from the rest of a contract for purposes of determining the adequacy

of consideration, id. at 169, and did not hold that the FAA preempts state

contract law that would be the source of any consideration requirement in the

first place.

23

therefore perfectly consistent not only with the cases cited in the

petition for certiorari, but also with this Court’s repeated

interpretations of the FAA.

IV. The Lower Court’s Ruling Is Supported by Three

Independent Reasons, and if Any of Those Reasons

Is Supported by Law then It Would Suffice to

Justify the Result.

As the opinion below makes clear, the West Virginia

Supreme Court found that the defendants’ arbitration clause

was substantively unconscionable for three independent and

sufficient reasons. E.g. Pet. App. 31a, n.12 (lack of even-

handedness in one-way nature of the clause was an “additional

and independently adequate” ground for the court’s holding).

The Court also noted that under generally applicable West

Virginia law, it would not re-write a contract of adhesion with

the goal of stripping out individual unconscionable provisions

so that the entire clause would be enforceable. Pet. App. 38-40.

Accordingly, this Court should not grant certiorari in this case

if the decision of the Court below was correct, or not in conflict

with some other authority, with respect to any one of the three

separate provisions of the contract that the court below held to

be unconscionable.

The decision of the Court below not to rewrite the

clause is an entirely legitimate exercise of generally applicable

state law. Petitioners’ request to the West Virginia Supreme

Court that it re-write or sever any of these three provisions

would merely be a unilateral offer to amend, that need not be

accepted. See Pet. App. 39, citing Flyer Printing Co. v. Hill,

805 So. 2d 829 (Fla. Ct. App. 2001) (corporation may not mend

an unenforceable arbitration clause by offering during litigation

to pay all costs, because this was “a unilateral offer to amend

24

the agreement,” and, “we are not authorized to remake the

parties’ contract.”). See also Popovich v. McDonald’s, 189 F.

Supp. 2d 772, 779 (N.D. Ill. 2002) (“McDonald’s offer, which

is inconsistent with the parties’ contract, amounts to an offer for

a new contract. Popovich is under no obligation to accept

McDonald’s offer, and the court is in no position to impose it.

As a matter of elementary contract law, McDonald’s cannot

unilaterally modify the existing agreement.”)

In addition, as the Court below recognized, Pet. App.

AO, it is improper for courts to interject themselves into bargains

and re-write adhesion contracts to fix illegal or unconscionable

provisions. This decision is not surprising or unusual. See

Restatement (Second) of Contracts § 184 cmt. b (“a court will

not aid a party who has taken advantage of his dominant

bargaining power to extract from the other party a promise that

is clearly so broad as to offend public policy by redrafting the

agreement so as to make a part of the promise enforceable.”’)

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

F. Paul Bland, Jr.

(Counsel of Record)

Michael J. Quirk

Trial Lawyers for Public Justice , P.C.

1717 Massachusetts Ave., NW, Suite 800

Washington, D.C. 20036

202/797-8600

25

David Grubb

The Grubb Law Group

1324 Virginia Street, East

Charleston, WV 25301

(304) 345-3356

John W. Barrett

Barrett Law Firm, P.L.L.C.

227 Capitol Street, Suite 400

Charleston, WV 25301

(304) 414-3000

Brian A. Glasser

Bailey & Glasser, L.L.P

227 Capitol Street

Charleston, WV 25301

(304) 345-6555

Counsel for Respondent

Date: November 11, 2002

26