Amicus Curiae Brief — Discover Bank v. Szetela

MOTION FILE %)

DEC 3.0200 No. 02-829

IN THE

Supreme Court of the Gnited States

DISCOVER BANK,

Petitioner,

V.

JOHN SZETELA,

Respondent.

On Petition for a Writ of Certiorari to the

California Court of Appeal

Fourth Appellate District

MOTION FOR LEAVE TO FILE BRIEF AMICI

CURIAE AND BRIEF FOR AMERICAN BANKERS

ASSOCIATION, AMERICAN FINANCIAL SERVICES

ASSOCIATION, CONSUMER BANKERS

ASSOCIATION AND CHAMBER OF COMMERCE

OF THE UNITED STATES AS AMICI CURIAE

IN SUPPORT OF PETITION

FOR WRIT OF CERTIORARI

Of Counsel: ALAN S. KAPLINSKY *

MARK J. LEVIN

BALLARD SPAHR ANDREWS &

INGERSOLL, LLP

1735 Market Street, 51st Floor

Philadelphia, PA 19103

(215) 665-8500

Counsel for Amici Curiae

ROBIN S. CONRAD

NATIONAL CHAMBER LITIGATION

CENTER, INC.

1615 H Street, N.W.

Washington, D.C. 20062

(202) 463-5337

JOHN J. GILL

General Counsel * Counsel of Record

AMERICAN BANKERS ASSOCIATION

1120 Connecticut Avenue, N.W.

Washington, D.C. 20036

WILSON-EPES PRINTING Co., INC. — @02) 789-0096 -— WASHINGTON, D. C. 20001

MOTION FOR LEAVE TO FILE BRIEF AMICI

CURIAE ON BEHALF OF AMERICAN BANKERS

ASSOCIATION, AMERICAN FINANCIAL SERVICES

ASSOCIATION, CONSUMER BANKERS

ASSOCIATION AND CHAMBER OF COMMERCE OF

THE UNITED STATES IN SUPPORT OF PETITION

FOR WRIT OF CERTIORARI

To the Honorable, the Chief Justice and the Associate

Justices of the United States Supreme Court:

Pursuant to Rule 37 of the Rules of this Court, the

American Bankers Association (“ABA”), the American

Financial Services Association (“AFSA”), the Consumer

Bankers Association (“CBA”) and the Chamber of

Commerce of the United States (the “Chamber”) respectfully

move this Court for leave to file the accompanying Brief as

amici curiae in support of the position of Petitioner Discover

Bank (“Discover”) in this case. The written consent of

Discover has been filed with the Clerk of Court. Counsel for

Respondent John Szetela has not consented.

The proposed amici have a substantial interest in the

outcome of this case.

The ABA is the principal national trade association of the

banking industry in the United States. It has members located

in each of the fifty states and the District of Columbia and

includes banks of all types and sizes—money center banks,

regional banks and community banks. ABA members hold

approximately 95 percent of the domestic assets of United

States banks.

The AFSA was organized in 1916 and represents more

than 300 companies operating more than 10,000 offices

engaged in the extension of consumer credit throughout the

United States. These companies range from independently

owned consumer finance offices to the nation’s largest

financial services, retail and automobile companies. The

AFSA’s membership includes national and state banks that

operate multi-state consumer credit programs.

The CBA is the recognized voice on retail banking issues

in the nation’s capital. Member institutions are the leaders in

consumer, auto, home equity and education finance,

electronic retail delivery systems, privacy, fair lending, bank

sales of investment products, small business services and

community development. The CBA was founded in 1919 to

provide a progressive voice in the retail banking industry.

CBA members hold more than 900 bank and thrift charters

with total assets of more than $2.9 trillion.

The Chamber is the world’s largest business federation

representing an underlying membership of more that

3,000,000 businesses of every size. Chamber members

operate in every sector of the economy and transact business

throughout the United States, as well as in a large number of

countries around the world. A central function of the

Chamber is to represent the interests of its members in

important matters before the courts, Congress, = the

Executive Branch.

The ABA, the AFSA, the CBA and the Chamber

frequently appear in litigation as amicus curiae where the

issues raised are of widespread importance and concern to

banks, consumers of banking services or the nation’s business

community. See, e.g., Barnett Bank of Marion County, N.A.

v. Nelson, 517 U.S. 25 (1996) (the ABA and the CBA as

amici); Textron Funding Corp. v. Bessette, 532 U.S. 1048

(2001) (the AFSA as amicus); Vermont Agency of Natural

Resources v. United States, 528 U.S. 1044 (1999) (the

Chamber as amicus). Many ABA, AFSA, CBA and Chamber

members regularly include arbitration agreements in their

consumer loan documents and deposit and business contracts.

Many of those agreements expressly state that class-wide

arbitration is not permitted.

The Szetela opinion raises issues of exceptional importance

to banks, consumer financial services companies, credit card

issuers and other businesses throughout the nation which have

entered or are planning to enter into arbitration agreements

governed by the Federal Arbitration Act, 9 U.S.C. §§1 et seq.

(“FAA”). Many of the arbitration agreements used by amici

include express “no-class action” provisions—similar to

Discover’s—because arbitration is designed to be simpler,

faster and cheaper than court proceedings. Agreeing to waive

complex litigation procedures, such as class actions,

obviously effectuates these admirable goals of arbitration.

Amici have relied on the decisions of numerous federal

courts of appeals, federal district courts and state supreme

courts applying the FAA which have enforced no-class action

provisions in arbitration agreements and found them to be not

unconscionable. Discover’s arbitration agreement is

governed by the FAA. Nevertheless, the Szetela court

ignored the FAA and struck the no-class action provision as

unconscionable on the grounds that it discourages individuals

with small claims from enforcing their rights and causes

“litigants to contract away the court’s ability to use a

procedural mechanism [the class action] that benefits the

court system as a whole.” 118 Cal. Rptr. 2d at 868.

The Szetela court’s reasoning cannot be reconciled with

this Court’s declarations that “the FAA is ‘at bottom a policy

guaranteeing the enforcement of private contractual

arrangements” and that “we look first to whether the parties

agreed to arbitrate a dispute, not to general policy goals, to

determine the scope of the agreement... .” EEOC v. Waffle

House, Inc. 122 S. Ct. 754, 764 (2002) (emphasis added). In

particular, the Szetela opinion impermissibly forces

companies to choose between forced class arbitration or no

arbitration at all and improperly relegates individual

arbitration to second-class status.

By flouting the FAA’s “guarantee,” the Szetela opinion

generates substantial confusion and disrupts the settled

expectations of amici that arbitration agreements will be

enforced strictly in accordance with their terms. The opinion

will both discourage companies from arbitrating, while

encouraging hostility to arbitration of the type that the FAA

was enacted to overcome.

WHEREFORE, the American Bankers Association, the

American Financial Services Association, the Consumer

Bankers Association and the Chamber of Commerce of the

United States respectfully request that the Court grant them

leave to file the accompanying Brief amici curiae.

Respectfully submitted,

Of Counsel: ALAN S. KAPLINSKY *

BORN. CONRAD ae ANDREWS

NATIONAL CHAMBER LITIGATION

& INGERSOLL, LLP

CENTER, 1735 Market Stree

1615 H Street, N.W. ° t

51st Floor

Washington, D.C. 20062

(202) 463-5337

JOHN J. GILL

General Counsel

AMERICAN BANKERS ASSOCIATION * Counsel of Record

1120 Connecticut Avenue, N.W.

Washington, D.C. 20036

Philadelphia, PA 19103

(215) 665-8500

Counsel for Amici Curiae

QUESTION PRESENTED

Whether the California Court of Appeal properly ruled—in

conflict with the Federal Arbitration Act, this Court’s

precedents, and the decisions of all the federal courts of

appeal to have addressed the issue—that parties to an

arbitration agreement can be forced to arbitrate as a class or

not at all, when their arbitration agreement expressly fore-

closes the use of class arbitration.

(i)

TABLE OF CONTENTS

Page

QUESTION PRESENTED............::ssseseseserereeeteenenenenens i

TABLE OF AUTHORITIES ..........::ccessssssseeeeeeeeseteeeeeees iv

STATEMENT OF INTEREST OF AMICI CURIAE .... 2

SUMMARY OF ARGUMENT ........:::sccssseeeretereteseeneess

ARGUMENT. ........cssscccssssccesssseceessrseseserssesencsaeeesnnnsesonenes 4

I. THE SZETELA OPINION UNDERMINES

THE FAA’S GUARANTEE THAT ARBI-

TRATION AGREEMENTS WILL BE

ENFORCED STRICTLY IN ACCORDANCE

WITH THEIR TERMSG. ...........::scessesseseeeseeeeeeeeees 4

A. Under the FAA, Arbitration Agreements

that Contain No-Class Action Provisions

Must Be Enforced as Written and Are Not

Unconscionable..............scccsseesseersessreeeeeees 5

B. The Principle that No-Class Action

Provisions Are Enforceable in Accordance

with Their Terms Is Substantive Federal

Arbitration Law that Preempts Inconsistent

State Procedures ..........sscssssceesseeesseesseeneeesees 9

C. The Szetela Opinion Impermissibly Forces

Companies to Choose between Class

Arbitration or No Arbitration at All............. 9

Il. THE SZETELA OPINION IMPROPERLY

RELEGATES INDIVIDUAL ARBITRA-

TION TO SECOND-CLASS STATUS............. 12

CONCLUSION. .........:sccsscesssesseeersenseesssensesnnsennannsenseenees 16

(iii)

iV

TABLE OF AUTHORITIES

CASES Page

ACORN v. Household International, Inc., 211 F.

Supp. 2d 1160 (N.D. Cal. 2002) ............. cesses 4

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

ED insichticaenenailihicinsicaieliciteaaailensinniiaiioadinie 5, 12, 15

Arriaga v. Cross Country Bank, 163 F. Supp. 2d

Fs Tales SIT D sctenessicrinconinmniiphiseaionatoninnn 7

Bazzle, et al. v. Green Tree Finance Corp., 569

sk OP Ce. BUD iit chnnncibitihnniieninataviin 10

Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097

CEE, Ci Fe inact shaichatdicsnnnshahttalclandinabins 6

Blue Cross of California v. Superior Court, 67

Cal. App. 4th 42 (Ct. App. 1998), cert. denied,

SF Whi: I Ce iilaiidanpvsstinniilasaniiariintoainiaie 10

Caudle v. American Arbitration Association, 230

dee TE ls IE iccnsicicdeiscaptancenicintuneannieiin 8

Champ v. Siegel Trading Co., Inc., 55 F.3d 269

CHa A ichinseicectanctnekcpdetichsineesoasaneuds 5, 6,9, 11

Circuit City Stores, Inc. v. Adams, 121 S. Ct.

I Ge ninrieeenvhecsentationitibennntinieninneinlinenne S15

Comb v. Paypal, Inc., 218 F. Supp. 2d 1165

Ce Mcininchivshindicenaaiinidiensienesieiistiinedaneetans 4

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213

i aoe issibanhenscilenhesipisteisiaicea techsscatleakadiaiatlgulaaiidinaiiabiadiahe 4,15

Deiulemar Compagnia de Navigazione S.p.A. v.

M/V Allegra, i98 F.3d 473 (4th Cir. 1999)........ 6

Dickler v. Shearson Lehman Hutton, Inc., 596

A.2d 860 (Pa. Super. Ct. 199] )...........ccsccsssrooeee 11

Doctor's Associates, Inc. v. Casarotto, 517 U.S.

RE Cr cicieicheniitinieniselsncadidettemnindsiteccisichonn 15

Dominium Austin Partners, LLC v. Emerson, 248

Fe FA CO as BEF eesinencesseipierceenteanivesnieies 6

EEOC v. Waffle House, Inc., 122 S. Ct. 754

Vv

TABLE OF AUTHORITIES—Continued

Gammaro v. Thorp Consumer Discount Co., 828

F. Supp. 673 (D. Minn. 1993), appeal

dismissed, 15 F.3d 93 (8th Cir. 1994)................

Gilmer v. Interstate/Johnson Lane Corp., 500

ek IE Bicienicbeisenicstisticiessngenkelihuinssnicinieababsuee

Gras v. Associates First Cap. Corp., 2001 WL

1632292 (N.J. Super. Ct. App. Div. Dec. 20,

EEE aicshensaiiteiinanbuthcenanstitaiddlibasuimentnvbiniitnnesanietie tess

Gray v. Conseco, Inc., 2001 U.S. Dist. LEXIS

21696 (C.D. Cal. Sept. 6, 2001).............cccssceeees

Green Tree Financial Corp.-Ala. v. Randolph,

FE A Fe ive atinitintscadissarintinnedacenieresii

Iowa Grain Co. v. Brown, 171 F.3d 504 (7th Cir.

FR stb thenicecindatictialacnnieTisinbanentdigintee

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

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

Keating v. Superior Court, 31 Cal. 3d 584

(1982), rev’d on other grounds, 465 US. 1

Lewis Tree Service, Inc. v. Lucent Technologies,

Inc., No. 99 Civ. A. 0-10657, 2002 WL

31121087 (D. Mass. Sept. 26, 2002) .................

Lloyd v. MBNA America Bank, N.A., No. 01-

RFE CONN ais PL Fg, ED cctnntrscnenshuniacetanninvins

Lomax v. Woodmen of the World Life Ins. Soc.,

No. CIV A. 1:01-CV-2134WBH, 2002 WL

31455600 (N.D. Ga. July 16, 2002).................

Lozano v. AT&T Wireless, 216 F. Supp. 2d 1071

Ee Sea EE icsidinidacseiavb hn tpibcibitiacninacécesiesouseeien

Luna v. Household Finance Corp., No. C02-

1635L, 2002 U.S. Dist. LEXIS 21761 (W.D.

GPE iececitsicncninipavarsdeiaanianesinatoreres

vi-

TABLE OF AUTHORITIES—Continued.

Mastrobuono v. Shearson Lehman Hutton, Inc.,

Rs Fer itn tilaiinittinnciiainiiennie

Mattox v. Decision One Mortgage Co., No. Civ.

A. 0-10657, 2002 WL 31121087 (D. Mass.

Bi A istihicticasiveienichaarenbahtntniindtianitistide

McCarthy v. Providential Corp., No. C94-0627

FMS, 1994 WL 387852 (N.D. Cal. July 19,

1994), appeal dismissed, 122 F.3d 1242 (9th

Cir. 1997), cert. denied, 525 U.S. 921 (1998) ...

McIntyre v. Household Bank, 216 F. Supp. 2d

719 (N.D. Ill. Aug. 19, 2002)............escsceeeeeees

Med Center Cars, Inc. v. Smith, 727 So. 2d 9

FN SE eas SST OTE TS OEE ee DO CTD

Moses H. Cone Mem. Hosp. v. Mecury Const.

CO ,, SEES. 3 CIID ss ivcvcvsnsesiesviavnnsincornisnevts

Pick v. Discover Financial Services, Inc., No.

00-935-SLR, 2001 WL 1180278 (D. Del.

OE. TR, NED tiinncicvivinichauisiabinidelatdbewvnntisamtcobins

Pyburn v. Bill Heard Chevrolet, 63 S.W.3d 351,

SOS CHE, FI. Ds cxoretercintinceinvinbobiaives

Randolph v. Green Tree Financial Corp., 244

F.3d SES CEC, BOGE } ncsevecctiiciivesseccascvnnevnien

Sagal v. First USA Bank, N.A., 69 F. Supp. 2d

627 (D. Del. 1999), aff'd, 254 F.3d 1078 (3d

CO. BOOED aisviccsptinilhtinstinieaneciintacthinvttiatetblinieas

Sanders v. Robinson Humphrey/American Ex-

press, Inc., 634 F. Supp. 1048 (N.D. Ga.

1986), aff'd in part and rev'd in part on

different grounds, 827 F.2d 718 (11th Cir.

1987), cert. denied, 485 U.S. 959 (1988)...........

Shales v. Discover Card Services, Inc., No. 02-

0080, 2002 WL 2022590 (E.D. La. Aug. 30,

GPT) i ciniscessnssicnsiivininitipseniainlapiibiicbivsnatcedlatedasiielaials

Page

Vil

TABLE OF AUTHORITIES—Continued

Page

Shearson/American Express, Inc. v. McMahon,

Fae eT seit ecb sisniinisetngneiickiivticncnnen 12

Smith Barney, Inc. v. Critical Health Systems of

North Carolina, Inc., 212 F.3d 858 (4th Cir.

I iaisauiscciistAsainoualanseceivehatiuntoieineidaunkisie 9

Snowden v. Checkpoint Check Cashing, Inc., 290

F.3d 631 (4th Cir. 2002), cert. denied, 2002

U.S. LEXIS 9264 (Dec. 16, 2000)..................... 7

Southland Corp. v. Keating, 465 U.S. 1 (1984)..... 9

Stein v. Geonerco, Inc., 17 P.3d 1266, 1270

Ps Ses, PUES II ER siccicistnccvvincadsevsvstextsconenesers 7

Thompson v. Illinois Title Loans, Inc., No. 99 C

3952, 2000 WL 45493 (N.D. Ill. Jan. 11,

ii iecihnssctiinkdeienthbtiiiinabe lcd atsiaidiciotlensiainls 7

Vigil v. Sears National Bank, 205 F. Supp. 2d

UE Bly ED etdbcnseitetdandirbiowiineteennnssennonecs 8

Volt Information Sciences, Inc. v. Board of

Trustees of Leland Stanford, Jr. University,

GOP TTB AGG LI ii svicdnstissivssiaseenisienivscscosionsaens 4

Zawikowski v. Beneficial National Bank, No. 98

C 2178, 1999 WL 35304 (N.D. Ill. Jan. 11,

5 CCAIR AT SOR OY OE NTR ROOTES Ce ne TE 7

STATUTES AND RULES

Federal Arbitration Act, 9 U.S.C. §§ 1 et seq........ passim

Pl a eR ccc deschaiteiiectitinverstnarsndeeinasesivecvess 9,11

FE Re Oe A OE IB bev secttnssineniicsinesonscanansace 13

eS io iiccinicatetentecndetiecersisncnntissnataciniss 13

ie Fe AED vateseiconscscinctvarivenseveiseassnsaies 13

OTHER AUTHORITIES

H.R. Rep. No. 97-542 (1982)...........sccssssssssssseseseees 5

Joint Hearings on S.1005 and H.R. 646 before

the Subcomms. of the Comms. on the Judi-

RR, IS, F CIS) cisvcenesserssenscscsessesecceses 5

IN THE

Supreme Court of the Anited States

No. 02-829

DISCOVER BANK,

Petitioner,

V.

JOHN SZETELA, .

Respondent.

On Petition for a Writ of Certiorari fo the

California Court of Appeal

Fourth Appellate District

BRIEF FOR AMERICAN BANKERS ASSOCIATION,

AMERICAN FINANCIAL SERVICES ASSOCIATION,

CONSUMER BANKERS ASSOCIATION AND

CHAMBER OF COMMERCE OF THE UNITED

STATES AS AMICI CURIAE IN SUPPORT OF

PETITION FOR WRIT OF CERTIORARI

This amici curiae brief' is submitted in support of the

petitioner, Discover Bank (“Discover”).

' Pursuant to Supreme Court Rule 37.6, amici state that the brief was

prepared in, its entirety by amici curiae and their counsel. No monetary

contribution toward the preparation or submission of this brief was made

by any person other than amici curiae, their members and their counsel.

Petitioner Discover Bank is a member of the amici curiae directly or

through its affiliates. -

ts : - = a i

STATEMENT OF INTEREST OF AMICI CURIAE

The American Bankers Association (“ABA”) is_ the

principal national trade association of the banking industry in

the United States. It has members located in each of the fifty

states and the District of Columbia and includes banks of all

types and sizes—money center banks, regional banks and

community banks. ABA members hold approximately 95

percent of the domestic assets of United States banks.

The American Financial Services Association (“AFSA”)

was organized in 1916 and represents more-than 300

companies operating more than 10,000 offices engaged in the

extension of consumer credit throughout the United States.

These companies range from independently owned consumer

finance offices to the nation’s largest financial services, retail

and automobile companies. The AFSA’s membership

~ includes national and state banks that operate multi-state

consumer credit programs.

The Consumer Bankers Association (“CBA”) is_ the

recognized voice on retail banking issues in the nation’s

capital. Member institutions are the leaders in consumer,

auto, home equity and education finance, electronic retail

delivery systems, privacy, fair lending, bank sales of

investment products, small business services and community

development. The CBA was founded in 1919 to provide a

progressive voice in the retail banking industry. CBA

members hold more than 900 bank and thrift charters with

total assets of more than $2.9 trillion.

The Chamber of Commerce of the United States (the

“Chamber”) is the world’s largest business federation

representing an underlying membership of more that

3,000,000 businesses of every size. Chamber members

operate in every sector of the economy and transact business

throughout the United States, as well as in a large number of

countries around the world. A central function of the

‘ ’ in cond e -

2

— COU

3

Chamber is to- represent the interests of its members in

important matters before the courts, Congress, and the

Executive Branch.

The ABA, the AFSA, the CBA and the Chamber

frequently appear in litigation as amicus curiae where the

issues raised are of widespread importance and concern to

banks, consumers of banking services or the nation’s business

community. Many ABA, AFSA, CBA and Chamber members

regularly include arbitration agreements in their consumer

loan documents and deposit and business contracts. Many of -

those agreements expressly state that class-wide arbitration is

not permitted.

SUMMARY OF ARGUMENT

The Szetela opinion raises issues of exceptional importance

to banks, consumer financial services companies, credit card

issuers and other businesses throughout the nation which have

entered or are planning to enter into arbitration agreements

governed by the Federal Arbitration Act, 9 U.S.C. §§1 et seq.

(“FAA”). Many of the arbitration agreements used by amici

include express “no-class action” provisions—similar to

Discover’s—because arbitration is designed to be simpler,

faster and cheaper than court proceedings. Agreeing to waive

complex litigation procedures, such as class actions,

obviously effectuates these admirable goals of arbitration.

Amici have relied on the decisions of numerous federal

courts of appeals, federal district courts and state supreme

courts applying the FAA which have enforced no-class action

provisions in arbitration agreements and found them to be not

unconscionable. Discover’s arbitration agreement is

governed by the FAA. Nevertheless, the Szetela court

ignored the FAA and struck the no-class action provision as

unconscionable on the grounds that it discourages individuals

with small claims from enforcing their rights and causes

“litigants to contract away the court’s ability to use a

4

procedural mechanism [the class action] that benefits the

court system as a whole.” 118 Cal. Rptr. 2d at 868.

The Szetela court’s reasoning cannot be reconciled with

this Court’s declarations that “the FAA is ‘at bottom a policy

guaranteeing the enforcement of private contractual

arrangements”” and that “we look first to whether the parties

agreed to arbitrate a dispute, not to general policy goals, to

determine the scope of the agreement... .” EEOC v. Waffle

House, Inc. 122 S. Ct. 754, 764 (2002) (emphasis added). By

flouting the FAA’s “guarantee,” the Szetela court’s opinion

generates substantial confusion and disrupts the settled

expectations of amici that arbitration agreements will be

enforced strictly in accordance with their terms. The opinion

will both discourage companies from arbitrating, while

encouraging hostility to arbitration of the type that the FAA

was enacted to overcome.”

ARGUMENT

I. THE SZETELA OPINION UNDERMINES THE

FAA’S GUARANTEE THAT ARBITRATION

AGREEMENTS WILL BE ENFORCED STRICT-

LY IN ACCORDANCE WITH THEIR TERMS.

Arbitration under the FAA is a matter of consent, not

coercion. Mastrobuono v. Shearson Lehman Hutton, Inc.,

514 U.S. 52, 57 (1995). The FAA’s “principal purpose” is to

“ensur[e] that private arbitration agreements are enforced

according to their terms.” Volt Info. Sciences, Inc. v. Board

of Trustees of Leland Stanford, Jr. Univ., 489 U.S. 468, 478

_ (1989). See also Dean Witter Reynolds, Inc. v. Byrd, 470

U.S. 213, 221 (1985) (“the preeminent concern of Congress

? See, e.g., Luna v. Household Fin. Corp., No. C02-1635L, 2002 U.S.

Dist. LEXIS 21761 (W.D. Wash. Nov. 4, 2002); Comb v. Paypal, Inc.,

218 F. Supp. 2d 1165-(N.D. Cal. 2001); ACORN v Household Int'l, Inc.,

211 F.Supp. 2d 1160 (N.D. Cal. 2002) (ali denying motions to compel

arbitration and all citing Szetela).

5

in passing the [FAA] was to enforce private agreements into

which parties had entered, and that concern requires that we

rigorously enforce agreements to arbitrate”). This Court

further instructed in Waffle House:

“(I]t is the language of the contract that defines the scope

of disputes subject to arbitration . . . . [N]othing in the

statute [the FAA] authorizes a court to compel

arbitration of any issues, or by any parties, that are not

already covered in the agreement.” 122 S.Ct. at 762

(emphasis added).

A. Under the FAA, Arbitration Agreements

that Contain No-Class Action Provisions Must

Be Enforced as Written and Are Not

Unconscionable.

A party considering arbitration is making a decision

whether the benefits of arbitration outweigh its limitations.

Arbitration is a “less expensive alternative to litigation,”

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 280

(1995), in part because of its very informality. “[A]rbitration

~ saves time, saves trouble, saves money.” Joint Hearings on

S. 1005 and H.R. 646 before the Subcomms. of the Comms.

on the Judiciary, 68th Cong. 7 (1924).? Converting an

agreement to arbitrate individual disputes into a class

arbitration, however, radically alters this calculus. For a court

“to read such a term into the parties’ agreement disruptis] the

negotiated risk/benefit allocation and direct[s] the parties to

proceed with a different sort of arbitration.” Champ v. Siegel

Trading Co., Inc., 55 F.3d 269, 275 (7th Cir. 1995) (internal

quotations and brackets omitted).

> As Congress found in 1982, “[t]he advantages of arbitration are

many: it is usually cheaper and faster than litigation; it can have simpler

procedural and evidentiary rules; it normally minimizes hostility and is

less disruptive of ongoing . . . dealings among the parties.” H.R. Rep No.

97-542, at 3 (1982); see also Circuit City Stores, Inc. v. Adams, 121 S. Ct.

1302, 1307, 1313 (2001).

6

Accordingly, and consistent with the fundamental principle

that nothing in the FAA “authorizes a court to compel

arbitration of any issues, or by any parties, that are not

already covered in the agreement,” Waffle House, supra, the

vast majority of federal and state courts that have considered

the issue have held that under the FAA, an express agreement

to not permit class-wide arbitration must be strictly enforced

in accordance with its terms. Even if the clause is merely

silent on the issue, class-wide arbitration cannot be ordered.‘

‘ See, e. g., Dominium Austin Partners, LLC v. Emerson, 248 F.3d 720,

728 (8th Cir. 2001) (where “the partnership agreements make no

provision for arbitration as a class, the district court did not err by

compelling appellants to submit their claims to arbitration as

individuals”); Johnson v. West Suburban Bank, 225 F.3d 366, 377 n.4 (3d

Cir. 2000), cert. denied, 531 U.S. 1145 (2001) (“it appears impossible [to

pursue class arbitration] unless the arbitration agreement contemplates

such a procedure”); Randolph v. Green-Tree Financial Corp., 244 F.3d

814, 817-818 (11th Cir. 2001) (a “contractual provision to arbitrate TILA

[Truth in Lending Act] claims is enforceable even if it precludes a

plaintiff from utilizing class action procedures”); Deiulemar Compagnia

de Navigazione S.p.A. v. M/V Allegra, 198 F.3d 473 (4th Cir. 1999)

(where the parties’ agreement did not provide for class arbitration, “the

FAA has already provided the type of procedure to be followed in this

case, namely, nonclass arbitration”); Champ v. Siegel Trading Co., Inc.,

supra, 55 F.3d at 271 (“absent a provision in the parties’ arbitration

agreement providing for class treatment of disputes, a district court has no

- authority to certify class arbitration”); Jowa Grain Co. v. Brown, 171 F.3d

504, 509 (7th Cir. 1999) (“[b]Jecause arbitration is based fundamentally on

an agreement between the parties, [a Rule 23 class action] is normally

unavailable in arbitration”); Sagal v. First USA Bank, N.A., 69 F. Supp. 2d

627 (D. Del. 1999), aff'd, 254 F.3d 1078 (3d Cir. 2001) (compelling

arbitration of plaintiff's TILA claims even though she was precluded from _

representing a class); Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097,

1108-09 (C.D. Cal. 2002) (court carinot order arbitration to proceed on

class-wide basis unless arbitration agreement expressly authorizes it);

Gray v. Conseco, Inc., 2001 U.S. Dist. LEXIS 21696 (C.D. Cal. Sept. 6,

2001) (even where arbitration clause is merely silent on the issue, court

cannot order class-wide arbitration ); McCarthy v. Providential Corp., No.

C 94-0627 FMS, 1994 WL 387852 (N.D. Cal. July 19, 1994), appeal -

7

Moreover, recognizing that a class action is a mere procedure

that can be waived, the federal and state courts

overwhelmingly hold that a no-class action provision in an

arbitration agreement is not unconscionable under the FAA.°

dismissed, 122 F.3d 1242 (9th Cir. 1997), cert. denied, 525 U.S. 921

(1998) (same); Gammaro v. Thorp Consumer Discount Co., 828 F. Supp.

673, 674 (D. Minn. 1993), appeal dismissed, 15 F.3d 93 (8th Cir. 1994)

(same); Gras v. Associates First Cap. Corp., 2001 WL 1632292 (N.J.

Super. Ct. App. Div. Dec. 20, 2001) (enforcing “no class action”

provision in arbitration agreement); Pyburn v. Bill Heard Chevrolet, 63

S.W.3d 351, 365 (Tenn. Ct. App. 2001) (FAA preempts state law favoring

class); Stein v. Geonerco, Inc., 17 P.3d 1266, 1270 (Wash. Ct. App. 2001) -

(refusing to compel class arbitration where parties’ agreement was silent);

Med Center Cars, Inc. v. Smith, 727 So. 2d 9, 20 (Ala. 1998) (“to require

class-wide arbitration would alter the agreements of the parties, whose

arbitration agreements do not provide for class-wide arbitration”).

* See, e.g., Lloyd v. MBNA America Bank, N.A., No. 01-1752, slip op.

at 3 (3d Cir. Jan. 7, 2002) (because right to a class action is “merely

procedural” and may be waived, “an arbitration clause barring classwide

relief for claims brought under the TILA is not unconscionable”);

Snowden v. Checkpoint Check Cashing, Inc., 290 F.3d 631, 638-639 (4th

Cir. 2002) (finding no-class action provision to be not unconscionable),

cert. denied, 2002 U.S. LEXIS 9264 (Dec. 16, 2002); Pick v. Discover

Fin. Servs., Inc., No. 00-935-SLR, 2001 WL 1180278, at *5 (D. Del.

Sept. 28, 2001) (“it is generally accepted that arbitration clauses are not

unconscionable because they preclude class actions”); Arriaga v. Cross

Country Bank, 163 F. Supp. 2d 1189, 1195 (S.D. Cal. 2001) (no-class

action provision is not unconscionable and must be enforced); Thompson

v. Illinois Title Loans, Inc., No. 99 C 3952, 2000 WL 45493, at *4 (N.D.

Ill. Jan. 11, 2000) (“[t}he class action is a procedural device that ...

claimants may waive by agreeing to arbitrate their claims”); Zawikowski

v. Beneficial Nat’l Bank, No. 98 C 2178, 1999 WL 35304 (N.D. Ill. Jan.

11, 1999) (court rejected argument that inclusion in a consumer loan

agreement of a clause prohibiting class actions was void as a matter of

public policy, holding that “[njothing prevents the Plaintiffs from

contracting away their right to a class action”); Sanders v. Robinson

Humphrey/American Express, Inc., 634 F. Supp. 1048, 1065 (N.D. Ga.

1986), aff'd in part and rev'd in part on different grounds, 827 F.2d 718

(11th Cir. 1987), cert. denied, 485 U.S. 959 (1988) (class action rule is a

mere “procedural device” that is subject to preemption by the FAA);

Amici have relied on this legion of well-reasoned authorities

in deciding to utilize consumer arbitration agreements which

call for individual, rather than class, resolution of disputes.

Until Szetela, they have been confident that such agreements

would be enforced according to their terms, ensuring that the

attributes of arbitration—speed, efficiency and economy—

would be realized.

Caudle v- American Arbitration Ass'n, 230 F.3d 920 (7th Cir. 2000) (“[a]

procedural device aggregating multiple persons’ claims in litigation does

not entitle anyone to be in litigation; a contract promising to arbitrate the

dispute removes the person from those eligible to represent a class of

litigants”); Lomax v. Woodmen of the World Life Ins. Soc., No.

CIV.A.1:01-CV-2134WBH, 2002 WL 31455600, *3 (N.D. Ga. July 16,

2002) (“[gjenerally, prohibiting class-wide arbitration does not render an

otherwise valid arbitration clause unconscionable”); Lozano v. AT&T

Wireless, 216 F. Supp. 2d 1071, 1076 (C.D. Cal. 2002) (FAA forbids

federal court from ordering class arbitration where parties’ arbitration

agreement is silent on matter); Vigil v. Sears Nat. Bank, 205 F. Supp. 2d

566, 573 (E.D. La. 2002) (rejecting argument that arbitration clause was

unconscionable because it prohibited class actions); Lewis Tree Service,

Inc. v. Lucent Technologies, Inc., No. 99 Civ. 8556, 2002 WL 31619029

(S.D.N.Y. Nov. 20, 2002) (“[flederal courts have ... consistently enforced

arbitration provisions in the context of class action lawsuits when federal

statutory claims have been at issue”); Mattox v. Decision One Mortgage

Co., No. Civ. A. 0-10657, 2002 WL 31121087 (D. Mass. Sept. 26, 2002)

(arbitration clause enforceable even in absence of class action); Mc/ntyre

v. Household Bank, 216 F. Supp. 2d 719, 724 (N.D. Ill. Aug. 19, 2002)

(right to class action may be “waived in order to enforce arbitration”);

Shales v. Discover Card Services, Inc., No. 02-0080, 2002 WL 2022590,

at *2 (E.D. La. Aug. 30, 2002) (“Shales raised the issue of the validity of

the class action restriction contained in the agreement. Although he cites

to a California state court decision that struck such a restriction under

California law [Szetela], the court notes that such restrictions are routinely

enforced in this jurisdiction.”).

9

B. The Principle that No-Class Action Provisions

Are Enforceable in Accordance with Their

Terms Is Substantive Federal Arbitration Law

that Preempts Inconsistent State Procedures.

Although class actions are procedural in nature,° the

principle that no-class action clauses are enforceable in

accordance with their terms is substantive federal arbitration

law that preempts inconsistent state procedures. In Champ v.

Siegel Trading Co., supra, the Seventh Circuit held that

where the parties’ arbitration clause does not expressly

authorize class actions in arbitration, the “FAA [itself] has

already provided the type of procedure to be followed . . .,

namely, non-class-action arbitration.” 55 F.3d at 276

(emphasis added). See also Smith Barney, Inc. v. Critical

Health Systems of North Carolina, Inc., 212 F.3d 858, 860

(4th Cir. 2000) (“Federal law governs the construction of

contract language concerning arbitrability .... ‘Once a

dispute is covered by the [FAA], federal law applies to all

questions of interpretation [and] construction . . .””) (citations

omitted). The FAA creates “federal substantive law” that is

“applicable in state as well as federal courts.” Southland

Corp. v. Keating, 465 U.S. 1, 15-16 (1984). Therefore, the

Szetela court lacked authority to strike the no-class action

provision from the arbitration agreement simply because it

preferred the class action procedure over individual

arbitration.

C. The Szetela Opinion Impermissibly Forces

Companies to Choose between Class Arbi-

tration or No Arbitration at All.

By striking the no-class action provision, the Szetela court

jettisoned the risk/benefit analysis that the parties engaged in

prior to agreeing to arbitrate in the first instance. This

® See, e.g., Fed. R. Civ. P. 23.

10

intrusion into the private contracting process is of great

concern to amici, many of whose members have implemented

or are planning to implement arbitration programs in reliance

upon the heretofore settled premise that arbitration

agreements governed by the FAA will be enforced as written.

If courts are permitted to materially alter private arbitration

agreements governed by. the FAA in order to effectuate state

procedures, parties will be greatly discouraged from

arbitrating their disputes, since there will be no predictability

or assurance that the parties’ contractual terms will be

respected, notwithstanding the FAA’s “guarantee” that such

terms must be enforced as written.

Indeed, striking a no-class action provision imposes a

Hobson’s Choice—face the prospect of class-wide

arbitration’ or abandon arbitration altogether. The effect of

refusing to enforce a no-class action provision is to sweep

complex extra-contractual issues (class action criteria),

strangers to the contract (hundreds, thousands or even

millions of absent putative class members) and constitutional

considerations (due process protections) into what was

supposed to be a fast and economical individual arbitration.

” In some states, such as California and South Carolina, a clause that is

silent on the issue of cless-wide arbitration is susceptible to an argument

that class-wide arbitration should be permitted. See, e.g., Keating v.

Superior Court, 31 Cal. 3d 584 (1982), rev'd in part on other grounds,

465 U.S. 1 (1984); Blue Cross of California v. Superior Court, 67 Cal.

App. 4" 42 (Ct. App. 1998), cert. denied, 527 U.S. 1003 (1999); Bazzle, et

al. v. Green Tree Fin. Corp., 569 S.E.2d 349 (S.C. 2002), pet. for cert.

filed (Oct. 23, 2002). Amici strongly endorse Petitioner’s argument that

review should be granted to resolve the growing conflict between these

and certain other state court decisions which impose class action

procedures on arbitration agreements that are either silent as to such

procedures or that expressly preclude them, and federal court decisions

which uniformly hold that courts may not impose class arbitration unless

the parties’ arbitration agreement expressly provides for that procedure

and that arbitration agreements containing express no-class action

provisions are enforceable. See Pet. for Cert. at 13-20.

11

This is the exact opposite of the fundamental principle that

“nothing in the statute [the FAA] authorizes a court to compel

arbitration of any issues, or by any parties, that are not

already covered in the agreement.” Waffle House, supra.

Even the few courts that compel forced class arbitration

concede that “[w]ithout doubt a judicially ordered classwide

arbitration would entail a greater degree of judicial

involvement than is normally associated with arbitration.”

Keating v. Superior Court, supra, 31 Cal. 3d at 613; see also

Dickler v. Shearson Lehman Hutton, Inc., 596 A.2d 860, 866

(Pa. Super. Ct. 1991) (“{c]lass-wide arbitration is a different

animal than individual arbitration”). In particular, class-wide

arbitration has to draw upon the array of procedural

mechanisms and inquiries that Fed. R. Civ. P. 23 (or its state

law equivalent) specifies in order to satisfy constitutional due

process standards. The management of large class actions is

a time-consuming, costly and complex process, even when

managed by experienced trial judges, much less by arbitrators

who typically lack the case-management skills and

experience that trial judges develop from handling class

actions. In sharp contrast, arbitration under the FAA is a

procedure that is supposed. to avoid the delay, cost and

complexity of even single-party litigation in the federal or

State courts.

Faced with the prospect of participating in a class-wide

arbitration that is radically different from the procedure

agreed to, and is not really arbitration at all, most companies

would almost surely decide to abandon arbitration altogether

(which is what Discover did in this case). See Champ v.

Siegel Trading Co., Inc., supra, 55 F.3d at 275 (“‘to substitute

our own notion of fairness in place of the explicit terms of

[the parties’ arbitration] agreement would deprive them of the

benefit of their bargain just as surely as if we refused to

enforce their decision to arbitrate”) (citations omitted).

Thus, refusing to enforce a no-class action provision agreed

12

to by the—parties is tantamount to a refusal to compel

arbitration altogether—a result that nullifies the federal

policies embodied in the FAA and turns the statute on its

head.

Il. THE SZETELA OPINION IMPROPERLY

RELEGATES INDIVIDUAL ARBITRATION TO

SECOND-CLASS STATUS

Amici are also deeply troubled by the Szetela-court’s bias

against arbitration as a method of dispute resolution. The

court characterized the no-class action provision as a “get out

of jail free” card for Discuver that created “virtual immunity”

for the company. 118 Cal. Rptr. 2d at 867. It also concluded

that individual arbitration is of “no benefit whatsoever” to

consumers with small claims. Jd. at 868. Arbitration was

also denied because the Szetela court perceived it to be less

“efficient” than class actions brought in court. Jd. Such anti-

arbitration animus, in this day and age, is as shocking as it is

legally incorrect. Review is necessary to restore the

confidence of the business community in arbitration as an

equal—not less favored—means of dispute resolution.

“[{T]he basic purpose of the Federal Arbitration Act is to

overcome courts’ refusals to enforce agreements to arbitrate.”

Allied-Bruce Terminix, 513 U.S. at 270. In passing the FAA,

Congress sought to place “arbitration agreements upon the

same footing as other contracts.” | Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220, 225-26 (1987).

This Court has also made it clear that by agreeing to arbitrate,

“a party does not forgo . . . substantive rights” but “only

submits to their resolution in an arbitral, rather than a judicial, —

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

20, 26 (1991); accord, Green Tree Fin. Corp.-Aia. v.

Randolph, 531 U.S. 79, 90 (2000) (even claims arising under

a statute designed to further important social policies may be

arbitrated because ‘so long as the prospective litigant

effectively may vindicate [his or her] statutory cause of action

13

in the arbitral forum,’ the statute serves its functions”).

Although these principles were fully applicable in the present

case,® they were completely ignored by the Szetela court.

The Szetela court also refused to enforce the parties’

arbitration agreement, as written, because it concluded that

individual arbitration is a less “efficient” method of resolving

disputes than class actions in court. The court stated:

“(T]he clause violates public policy . . . . One of the

policy reasons for class actions is to promote judicial

economy and streamline the litigaticn process in

appropriate cases. To allow litigants to contract away

the court’s ability to use a procedural mechanism that

benefits the court system as a whole is no more

appropriate than contracting away the right to bring

motions in limine, seek directed verdicts, or use other

* In the present case, it was undisputed that all of Szetela’s substantive

claims against Discover would be preserved in arbitration. Discover’s

arbitration agreement expressly provides that the arbitrator “shall follow

applicable substantive law .. . .” Moreover, class actions are hardly the

only mechanism for enforcing Szetela’s rights. For example: (a) under the

Discover arbitration agreement, individuals with small claims can

arbitrate or they can pursue their claims in small claims court; (b) the

Delaware Consumer Fraud Act, under which Szetela asserted claims

against Discover, establishes a comprehensive scheme of enforcement by

the Delaware Attorney General. See 5 Del. Code §§2514 et seq.; (c)

pursuant to 5 Del. Code §143, the Delaware State Bank Commissioner is

empowered to require Delaware banks to take affirmative action to correct

violations of Delaware banking statutes and regulations and to impose

civil penalties if the violations are not corrected; and (d) the FDIC is

authorized to seek remedies (including cease and desist orders, restitution,

suspension or removal of affiliated parties from office and civil monetary

penalties) for any violations of state or federal law by state banks such as

Discover. 12 U.S.C. §1818 (b)-(i). See Johnson v. West Suburban Bank,

supra (the availability of administrative enforcement of TILA by the

FDIC and other agencies supported enforcement of the bank’s arbitration

clause, even though class actions were not available in arbitration).

14

procedural devices that allow the courts to operate in an

efficient manner.” 118 Cal. Rptr. 2d at 868.

This is a stinging indictment of arbitration and an

encomium on the benefits of court litigation. But it is 77

years too late. Following the passage of the FAA in 1925, the

only public policy that is relevant once parties have entered

into an arbitration agreement governed by the FAA is the

federal public policy making the arbitration agreement

enforceable in accordance with its terms. The Szetela opinion

is a throwback to the days when arbitration agreements were

not enforced for the very reason that they were “arbitration

agreements” which removed the parties from the judicial

system. But the days when it was permissible to discriminate

against arbitration in favor of court litigation are long over, as

this Court recounted in Gilmer v. Interstate/Johnson Lane

Corp., supra:

“Gilmer also raises a host of challenges to the adequacy

of arbitration procedures. Initially, we note that in our

recent arbitration cases we have already rejected most of

these arguments as insufficient to preclude arbitration

; .. . Such generalized attacks on arbitration ‘res[t] on

suspicion of arbitration as a method of weakening the

protections afforded in the substantive law to would-be

complainants,’ and as such, they are ‘far out of step with

our current strong endorsement of the federal statutes

favoring this method of resolving disputes.”” 500 U.S.

at 30 (citation omitted).

Accord, Green Tree Fin. Corp.-Ala. v. Randolph, supra, 531

U.S. at 89-90. Significantly, in Gilmer, one of plaintiff's

objections to arbitration was that class actions were not

available. This Court dismissed that objection, holding that

““even if the arbitration could not go forward as a class action

or class relief could not be granted by the arbitrator . . . that

. . . does not mean that individual attempts at conciliation

were intended to be barred.”” 500 U.S. at 32 (citation

omitted).

15

Moreover, the Szetela court had it backwards. While the

Szetela court concluded that arbitration must yield to court

procedures that promote efficiency, this Court has made it

abundantly clear that the FAA “requires piecemeal resolution

when necessary to give effect to an arbitration agreement.

Moses H. Cone Mem. Hosp. v. Mercury Const. Corp., 460

U.S. 1, 20 (1983) (emphasis in original). Accord, Dean

Witter Reynolds v. Byrd, 470 U.S. 213, 220 (1985) (courts are

required to enforce the bargain of the parties to arbitrate even

where the result would be the possibly inefficient

maintenance of separate proceedings in-different forums).

Amici firmly believe, and this Court has often observed,

that arbitration is a process that benefits individuals.” As

indicated in Gilmer, this is so even if the arbitration proceeds

on an individual, rather than a class action, basis. Review is

warranted so that arbitration regains its rightful place—not

below litigation, but on the “same footing.” Doctor's

Associates, Inc. v. Casarotto, 517 U.S. 681, 687 (1996).

° Circuit City Stores, Inc. v. Adams, supra (compelling arbitration in

dispute between employee and employer); Green Tree Financial Corp.-

Ala. v. Randolph, supra (compelling arbitration of named plaintiff's

claims in dispute between lender and borrower who had brought putative

class action); Allied-Bruce Terminix, supra (compelling arbitration in

dispute between homeowner and service company and observing that

arbitration is “helpful to individuals ... complaining about a product, who

need a less expensive alternative to litigation”), Indeed, “Congress, when

enacting [the FAA] had the needs of consumers, as well as others, in

mind.” Allied-Bruce Terminix, 513 U.S. at 280 (citation omitted).

ee ne een ener neste

io en

16

CONCLUSION

For the foregoing reasons, amici respectfully urge this.

Court to grant the Petition for Certiorari. —

Respectfully submitted,

Of Counsel: ALAN S. KAPLINSKY *

ROBIN S. CONRAD MARK J. LEVIN

NATIONAL CHAMBER LITIGATION BALLARD SPAHR ANDREWS &

CENTER, INC. INGERSOLL, LLP

1615 H Street, N.W. 1735 Market Street, 51st Floor

Philadelphia, PA 19103

(215) 665-8500

Counsel for Amici Curiae

Washington, D.C. 20062

(202) 463-5337

JOHN J. GILL

General Counsel * Counsel of Record

AMERICAN BANKERS ASSOCIATION

1120 Connecticut Avenue, N.W.

Washington, D.C. 20036 —