US Supreme Court Briefs

No. 99-1235




IN THE SUPREME COURT OF THE UNITED STATES




GREEN TREE FINANCIAL CORP.- ALABAMA
AND GREEN TREE FINANCIAL CORPORATION, et al.,
Petitioners,

V.


LARKET~A RANDOLPH,
Respondent.


AMICUS CURIAE BRIEF OF
NATIONAL ASSOCIATION OF
CONSUMER ADVOCATES
IN SUPPORT OF RESPONDENT


Filed July 24, 2000





This is a replacement cover page for the above referenced brief filed at the U.S. Supreme Court. Original cover could not be legibly photocopied I
i

TABLE OF CONTENTS
Page
STATEMENT OF INTEREST OF AMICUS 1
SUMMARY OF ARGUMENT 2
ARGUMENT 4

I. GREEN TREE'S ARBITRATION CLAUSE IS
DESIGNED TO SQUELCH DISPUTES, NOT
RESOLVE THEM 4

A. Arbitration Has Not Proved To Be Less
Expensive Than Litigation 10

B. The Severe Limit On Discovery In Arbitra-
tion Favors Business Interests 12

C. Arbitration Has Been Adopted To Preclude
Representative Consumer Actions 13

D. There Is Virtually No Right To Appeal An
Incorrect Arbitrator's Award 19

E. Arbitration Undermines Public Accoun-
tability 21

F. Arbitration Impedes Development of the
Common Law 22

G. Arbitration Allows the Financial Services
Industry to Deregulate Itself 23
H. The Benefits of Arbitration Are Illusory 24

I. Arbitration Also Reflects An Anti-Consumer
Bias
24
ii iii

TABLE OF CONTENTS - Continued
TABLE OF AUTHORITIES
Page
II. IN OPERATION, GREEN TREE'S CLAUSE PERMITS PETITIONER TO OBTAIN POSSESSION
OF THE PROPERTY SUBJECT TO THE DIS-
PUTE BEFORE ARBITRATION IS CONCLUDED
25

III. GREEN TREE'S ARBITRATION CLAUSE IS ILLEGITIMATE BECAUSE IT FAILS TO SPEC-IFY HOW ARBITRATION IS INITIATED AND
IS NOT CONSENSUAL 27
CONCLUSION 30
Page
CASES

Amchem Products, Inc. v. Windsor, 117 5. Ct. 2231
(1997) 14

Badie v. Bank of America, 79 Cal. Rptr. 273 (1998), rehearing denied, Dec. 2, 1998, rev, denied, 1999
Cal. LEXIS 1198 1

Beasley v. Wells Fargo Bank, N.A., 235 Cal. App. 3d 1383 (1991), review denied, No. S0244, 1992 Cal.
LEXIS 1220 (Cal. Mar. 12, 1992) 6, 12
Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585
(1991) 29

D.H. Overmyer Co. v. Frick Co., 405 U.S. 174 (1972) .... 28 Deposit Guaranty National Bank v. Roper, 445 U.S
326 (1980) 13
DiRussa v. Dean Witter Reynolds, 121 F.3d 818 (2d
Cir. 1997) 20
First Options, Inc. v. Kaplan, 514 U.S. 938 (1995) 19
Fuentes v. Shevin, 407 U.S. 67 (1972) 27

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20
(1991) 18

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker,
808 F.2d 930 (2d Cir. 1986) 20

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
Inc., 473 U.S. 614 (1985) 2, 4

Moncharsh v. Heily & Blase, 832 P.2d 899 (Cal. 1992)
(en banc) 20

iv
v
TABLE OF AUTHORITIES - Continued
Page

Moses H. Cone Memorial Hospital v. Mercury Con-
struction Corp., 460 U.S. 1 (1983) 15

Patterson v. ITT Consumer Financial Services Corpo-ration, 14 Cal. App. 4th 1659 (1993), cert. denied,
510 U.S. 1176 (1994) 6

Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985) .... 14 Rodriguez De Quijas v. Shearson/American Express,
490 U.S. 477 (1989) 18

Shearson/American Express v. McMahon, 483 U.S.
1056 (1987) 18
Swarb v. Lennox, 405 U.S. 191 (1972) 28

Volt Information Sciences, Inc. v. Board of Trustees,
489 U.S. 468 (1989) 28
TABLE OF AUTHORITIES - Continued
Page
OTHER AuTHonrnEs

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

Litigation Attracting Consumer Financial Services
Companies, Consumer Financial Services Law
Report, 1102 PLI/Corp. 845 (1999) ... 7, 12, 16, 21, 22

Alan S. Kaplinsky, Anatomy Of An Arbitration
Clause: Drafting and Implementation Issues Which
Should Be Considered By A Consumer Lender, 1113
PLI/Corp. 655 (1999) 4

Alan S. Kaplinsky & Mark J. Levin, Excuse me, but who's the Predator? Banker's side, ABA Bus. L.
Today 24 (May/June 1998) 5, 16, 17
Caroline E. Mayer, Win Some, Lose Rarely? Arbitra-tion Forum's Rulings Called One Sided, The Wash-ington Post, March 1, 2000
25

Weinberg v. Hertz Corp., 499 N.Y.S.2d 693 (N.Y. App. Div. 1986), aff'd, 516 N.Y.S.2d 652 (N.Y.
1987) 14
Wilko v. Swan, 346 U.S. 427 (1953) 18


STA-I-LJTES
9 U.S.C. 7 12
9 U.S.C. 10 19
9 U.S.C. 11 19
Federal Arbitration Act, 9 U.S.C. 1-16 2
Truth in Lending Act, 15 U.S.C. 1601 et seq 13
David S. Schwartz, Enforcing Small Print To Protect
Big Business: Employee And Consumer Rights
Claims In An Age Of Compelled Arbitration, 1997
Wis. L. Rev. 33 13. 19, 23, 24

Deborah R. Hensler, Does ADR Really Save Money? The Jury's Still Out, Nat'l Law J., April 11, 1994 .... 11

Dwight Golann, Consumer Financial Services Litiga-tion: Major Judgments And ADR Response, ABA,
The Business Lawyer, May, 1993 6

Dwight Golann, Consumer Litigation In The Age Of Combat Banking, 45 Bus. Law. 1761 (1990) 5

Edward Brunet, Questioning The Quality Of Alter-native Dispute Resolution, 62 Tul. L. Rev. 1 (1987) 12, 21, 22

vi vii

TABLE OF AUTHORITIES - Continued
Page

Elizabeth Rolph, Erik Moller, Laura Peterson, Escaping The Courthouse, Rand Institute for Civil
Justice 1 (1994) 11, 12, 23

Erik Moller, Elizabeth Rolph, and Patricia Ebener, Private Dispute Resolution in the Banking Industry
(1993) 7, 9, 22, 23, 24

Harry T. Edwards, Where Are We Heading With Mandatory Arbitration Of Statutory Claims In Employment? 16 Ga. St. U. L. Rev. 293 (1999).. .23, 24
4 Herbert Newberg, Newberg on Class Actions
21.01 (3d Ed. 1992)

James L. Guill, Edward A. Slavin, Jr., Rush to
Unfairness: The Downside of ADR, 28 Judges' Journal 1 (1989)
TABLE OF AUTHORITIES - Continued
Page
Michael Z. Green, Preempting Justice Through Bind-ing Arbitration of Future Disputes: Mere Adhesion Contracts Or A Trap For The Unwary Consumer? Loyola Consumer Law Reporter, 112 (1993) 6

National Association of Consumer Advocates, Standards and Guidelines for Litigating and Set-tling Consumer Class Actions, 176 F.R.D. 370
(1998) 17

Patricia Sturdevant & Dwight Golann, Face Off Should Binding Arbitration Clauses Be Prohibited In Consumer Contracts? Desp. Resol. Mag., Sum-
mer 1994 5
15
Patricia Sturdevant, Manda tory Arbitration and Access to Justice, Association of Business Trial Lawyers (ABTL) Report, Vol. 3, No. 1 (Novem-ber, 1993)
25
10
Jean R. Sternlight, Panacea or Corporate Tool?: Debunking the Supreme Court's Preference for Binding Arbitration, 74 Wash. U. L.Q. 637 (1996) passim
L. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Emply. Rts. & Empi. Policy Jour-nal 1 (1997)
Restatement (Second) of Contracts 211 comment
b (1979) 29

Robert D. Raven, Private Judging: A Challenge to Public Justice, 74 A.B.A. J. 8 (Sept. 1, 1988) 10
25
Lucy C. Katz, Compulsory Alternative Dispute Reso-lution and Voluntarism: Two-Headed Monster or
Two Sides of the Coin?, 1993 J. Disp. Resol. 1 .. .11, 29

Mark E. Budnitz, Arbitration Of Disputes Between Consumers And Financial Institutions: A Serious Threat To Consumer Protection, Ohio State Jour-ndl On Dispute Resolution, Vol. 10, No. 2, 367
(1995) passim

1

STATEMENT OF INTEREST OF AMICUS'

The National Association of Consumer Advocates ("NACA") is a non-profit organization of private and public sector attorneys, legal services attorneys, and law professors concerned with the protection and representa-tion of consumers. NACA's mission is to promote justice for all consumers. NACA maintains a forum for informa-tion sharing among consumer advocates across the coun-try and serves as a voice in the ongoing struggle to curb unfair and abusive business practices.
NACA long has been concerned about the imposition by businesses of mandatory, pre-dispute arbitration clauses on their customers. The expense and the inherent limitations on discovery, injunctive relief, and appellate review which characterize arbitration materially disad-vantage consumers, particularly for relatively small indi-vidual claims. Consistent with its goal of promoting justice for consumers, NACA has appeared as amicus curiae in a number of cases challenging mandatory pre-dispute arbitration clauses, including Badie v. Bank of America, 79 Cal. Rptr. 273 (1998), rehearing denied Dec. 2, 1998, rev, denied, 1999 Cal. LEXIS 1198, and other cases involving attempts by financial institutions to obtain an advantage over consumers by unilaterally selecting a forum which does not enable consumers to enforce their statutory rights. NACA has also drafted a Position Paper, identifying frequent abuse by institutional interests of

I This brief is filed with the consent of all parties, and letters of consent have been filed with the Clerk. No counsel for any party authored the brief in whole or in part, and no person or entity other than amicus curiae made any monetary contribution to the preparation or submission of the brief.
2 3

mandatory binding arbitration and the consequent denial to consumers of access to the courts and to justice, a copy of which is attached at Appendix (App.) 1.


SUMMARY OF ARGUMENT

Legitimate arbitration, according to the Court's jurisprudence, simply substitutes one fair forum for another. See Mitsubishi Motors Corp. V. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 634 (1985). As recognized by the Court of Appeals below, the present case does not involve legitimate arbitration. It involves instead an attempt by a well-financed and powerful business enterprise, sup-ported by scores of institutional interests, to gain an unfair and deceptive dispute resolution advantage over individual consumers. This type of "arbitration" is not the type of alternative dispute resolution envisioned by Congress when it enacted the Federal Arbitration Act in 1925, 9 U.S.C. 1-16 ("FAA"). Nor is it the type of arbitration the Court has deemed subject to the federal policy favoring enforcement of consensual arbitration clauses.
NACA urges the Court to adopt an objective, federal standard to guide courts, businesses, consumers and arbi-tral providers as the minimum standard required before an arbitration clause may be considered legitimate and therefore subject to the federal policy favoring enforce-ment of consensual arbitration. NACA submits that a legitimate arbitration clause must meet the following three-part test:
1. The clause must not materially shift the eco-nomic costs or risks of dispute resolution onto a party who would not otherwise bear
those costs or risks before a formal judicial forum;
2. The clause must not deprive one party of substantive rights or remedies or permit a party to obtain possession of the personal or real property subject to the dispute outside of the arbitration process; and
3. The clause must identify the manner in which the arbitration proceeding is to be commenced.

NACA submits that each of the many arbitration clauses this Court has confronted under the FAA has met these minimum standards. The clause involved in the present case, however, violates each one of these stan-dards and should be held to be illegitimate under the
FAA.

As we demonstrate below, and as the Court of Appeals correctly held, petitioner's clause dramatically shifts the economic costs and risks of dispute resolution away from the party who drafted the clause and onto the party forced to proceed in arbitration. In addition, peti-tioner's clause permits petitioner to take possession of the property subject to the arbitration dispute by means of a separate judicial or nonjudicial foreclosure proceed-ing wholly outside of the arbitration process and before the arbitration has even concluded. In this way, petitioner may obtain such an overwhelming economic and tactical advantage that the arbitration becomes a meaningless charade. Even more striking is the utter failure of peti-tioner's clause to provide any indication of how the alter-native dispute mechanism is to be commenced. While the FAA may fill some gaps by enabling a federal court to appoint an arbitrator where an arbitration clause is silent

4 5

on the subject, it cannot fill that gap here. Oddly, petitioner's clause specifies that petitioner shall choose the arbitrator, but it totally fails to provide fair notice and an opportunity to be heard. The clause is, in reality, nothing more than a tricky drafting device designed to smother all disputes and squelch even legitimate claims.


ARGUMENT

I. GREEN TREE'S ARBITRATION CLAUSE IS DESIGNED TO SQUELCH DISPUTES, NOT RESOLVE THEM.

As conceived and implemented by the consumer financial services industry, arbitration of consumer dis-putes does not simply involve an alternative forum, as this Court envisioned in Mitsubishi. Instead, arbitration of disputes between consumers and financial institutions is intended to, and does in operation, significantly disad-vantage consumers. One of the primary proponents of arbitration, Alan S. Kaplinsky, counsel for amici American Bankers Association, American Financial Services Asso-ciation, Consumer Bankers Association, and National Home Equity Mortgage Association, candidly admits that:
Arbitration materially changes the dispute reso-lution rules that consumers and borrowers are accustomed to: there is no right to a jury trial, pre-hearing discovery is limited, class actions are eliminated and appeals are severely circum-scribed.

Alan S. Kaplinsky, Anatomy Of An Arbitration Clause:
Drafting and Implementation Issues Which Should Be
Considered By A Consumer Lender, 1113 PLI/Corp. 655, 657
(1999).

Adoption of arbitration in the consumer financial services context has been portrayed as a defense against consumers. "Consumers have been ganging up on banks. But now the institutions have found a way to defend themselves." Alan S. Kaplinsky & Mark J. Levin, Excuse me, but who's the Predator? Banker's side, ABA Bus. L. Today 24 (May/June 1998) ("Predator"). This defense shifts the costs on to consumers, eliminates the con-sumers' right to a jury trial, and results in markedly reduced liability for business. See, e.g., Patricia Sturde-vant & Dwight Golann, Face Off: Should Binding Arbitra-tion Clauses Be Prohibited In Consumer Contracts? Desp. Resol. Mag., Summer 1994, at 5 (App. 5); Jean R. Stern-light, Panacea or Corporate Tool?: Debunking the Supreme Court's Preference for Binding Arbitration, 74 Wash. U. L.Q. 637, 684 (1996) ("Panacea").

Arbitration was first adopted in the consumer finan-cial services arena by ITT Consumer Financial Services Corporation in 1989. ITT had been sued for packing unwanted insurance into consumer loans by govern-mental and private attorneys in fourteen different juris-dictions and had lost or settled most of those cases for substantial sums of money. ITT admitted that it had com-mitted many improper practices in a consent judgment with the Arizona Attorney General, settled a case by the California Attorney General for more than $50 million, and was facing claims in another case in Minnesota for an additional $48 million. Dwight Golann, Consumer Litiga-tion In The Age Of Combat Banking, 45 Bus. Law. 1761, 1762-67 (1990).

6 7

In response, ITT inserted an arbitration clause into its standardized form small loan contracts, and hired Equi-law, Inc., the parent corporation of the National Arbitra-tion Forum ("NAF"), to provide a mechanism for resolving claims by consumer borrowers across the coun-try.2
A few years later, in 1992, Bank of America became the first major financial institution to insert arbitration clauses into its accounts with retail customers. Michael Z. Green, Preempting Justice Through Binding Arbitration of Future Disputes: Mere Adhesion Contracts Or A Trap For The Unwary Consumer? Loyola Consumer Law Reporter, 112, 115 (1993). The bank adopted arbitration as a response to a series of major judgments and settlements adverse to California banks, including a $5.2 million jury verdict for excessive late and overlimit fees on credit card accounts which was upheld on appeal,3 and a $55 million settle-ment by several major banks of a price fixing case chal-lenging the interest rates on credit cards. Dwight Golann, Consu nier Financial Services Litigation: Major Judgments And ADR Response, ABA, The Business Lawyer, May, 1993. The bank publicly admitted it had chosen arbitra-tion to avoid unpredictably high damage awards by juries. Press release dated June 2, 1992 (App. 14).
A contemporaneous study on the introduction of private, binding arbitration in the banking industry by The Rand Institute for Civil Justice confirmed that private

2 ITT's arbitration clause was held to be unconscionable in Patterson z~ iTT Consumer Financial Services Corporation, 14 Cal. App. 4th 1659 (1993), cert. denied, 510 U.S. 1176 (1994).

~ Beasley v. Wells Fargo Bank, N.A.. 235 Cal. App. 3d 1383, 1407 (1991), review denied, No. 50244, 1992 Cal. LEXIS 1220 (Cal. Mar. 12, 1992).
arbitration mechanisms were adopted to reduce the institutions' exposure to liability by limiting the risk of puni-tive damages and large jury verdicts, and thereby reducing the incentives for plaintiffs' attorneys to take cases. See Erik Moller, Elizabeth Rolph, and Patricia Ebener, Private Dispute Resolution in the Banking Industry 6-8, 12-13, 32 (1993) ("The Rand Study"). Lenders have acknowledged elsewhere that the motivating factors trig-gering the inclusion of arbitration requirements for con-sumer disputes was the fear of exposure to lender liability lawsuits and punitive damage verdicts. Lloyd N. Shields, The Role of Mandatory Arbitration for Financial Institutions, Arb. J., Dec. 1991, at 49.

The facts therefore fully support the observation of one eminent commentator that the adoption of arbitration clauses was "a carefully planned strategy by influential members of the financial services industry to resolve lender liability and other claims made by consumers as a group." Mark E. Budnitz, Arbitration Of Disputes Between Consumers And Financial Institutions: A Serious Threat To Consumer Protection, Ohio State Journal On Dispute Resolution, Vol. 10, No. 2, 367, 369 (1995). Indeed, as industry counsel have admitted, consumer financial services companies have implemented arbitration programs to gain an economic and litigation advantage over consumers. Alan
S. Kaplinsky & Mark J. Levin, Alternative To Litigation Attracting Consumer Financial Services Companies, Consumer Financial Services Law Report, 1102 PLI/Corp. 845, 847 (1999). Thus, the simple but unpleasant fact is that arbitration is marketed as a way to avoid the costs and risks of the court system.

8 9

Some providers of arbitration services even offer preferential treatment as an inducement to financial institutions to utilize their services. For example, at Appendix 27 is a letter dated October 20, 1997 from Edward Ander-son of NAF ("The Anderson Letter")4 stating that: "major American companies are moving all of their contracts to an arbitration basis as fast as possible. There is no reason for your clients to be exposed to the costs and risks of the jury system." The Anderson Letter emphasizes that:
"Every award is limited to the amount claimed!" (emphasis in original). A "Legal Memorandum" from "Forum Counsel" on the subject of "Arbitration & Class Actions in Financing" is attached to the Anderson Letter (App. 28). The memorandum advises that: "In the court system, financing transactions are always at risk for Class Action treatment. . . . " It further states that: "Most often, the claims of class action plaintiffs' lawyers are based on printed or computer-generated documents or standard procedure manuals, which leave little room to argue against 'commonality' and 'typicality.'" The memoran-dum then boasts that rules drafted in the manner of the NAF's will preclude class actions, even if the plaintiffs'




~ Documents taken from the 1994 Bankruptcy Petition of NAF's corporate parent, Equilaw, Inc., (App. At 33), indicate that Mr. Anderson was then a director, officer, and major shareholder of Equilaw. A deposition of Mr. Anderson taken in 1994 indicates that prior to coming to NAF, he was Assistant General Counsel to ITT Consumer Financial Services Corporation, (Anderson Deposition Excerpt, App. at 38), and that he learned of NAF when ITT was searching for an ADR provider (App. at 39).
claims are "common" and "typical." Thus, NAF has effectively marketed its arbitration service not as an alterna-tive forum, but as a defensive measure to squelch consumer disputes.
It is clear therefore that the purpose and intent of mandatory arbitration clauses in financial institutions' standardized form contracts is to limit institutional lia-bility and change the rules by which disputes are resolved to the detriment of their customers. The uni-lateral imposition of arbitration for such purposes pro-vides an altered, rather than an alternative forum, and finds no support in sound public policy or in the FAA or its legislative history.5
Arbitration clauses undoubtedly deter consumers from challenging business practices which legislatures have specified are unlawful, deceptive, or unfair. The 1993 Rand Study found that after Bank of America uni-laterally adopted mandatory arbitration, substantially fewer consumers brought claims against the bank. Moller et al., Private Dispute Resolution in the Banking Industry, at
21-23.
Arbitration in consumer cases does not provide an alternate forum; it sets up a more favorable private forum for institutions. Robert Raven, when he was President of the American Bar Association, warned that "certain forms of private judging dispense with many of the most cher-ished and carefully developed features of our public sys-tem: open proceedings, written decisions, appellate

5 The Brief Amicus Curiae filed by Public Citizen sets forth the legislative history of the FAA and demonstrates that the Act was intended only to validate consensual agreements between business entities to arbitrate their differences without altering the substantive rights of either party.

10 11

review, and the evolution of the common law." Robert D. Raven, Private Judging: A Challenge to Public Justice, 74
A.B.A. J. 8 (Sept. 1, 1988). President Raven further observed: "the potential dangers of providing one system of justice for the affluent, and another for everyone else, should stimulate us all to improve our system of public justice. This 200-year-old system with vital safeguards cannot simply be replaced by private judging." Id. Those cherished features of public adjudication are not present in arbitration.

A. Arbitration Has Not Proved To Be Less Expen-sive Than Litigation.

The claim by Green Tree's amici that arbitration is beneficial to consumers because it is less expensive (Br. Amici Curiae of American Bankers, et al., at 4, 14-15) reflects an initial expectation, or myth, that is devoid of support in reality. Because providers of arbitration ser-vices such as the American Arbitration Association impose filing fees which far exceed the fees charged by courts, and in addition charge administrative, processing, and hearing fees, and because the parties must pay for the time of the arbitrator, while judges and courts are publicly funded, arbitration is inordinately expensive, and may be far more costly than litigation. Patricia Stur-devant, Mandatory Arbitration and Access To Justice, Asso-ciation of Business Trial Lawyers (ABTL) Report, Vol. 3, No. 1, 12 (November, 1993).
Few studies have been conducted to determine the costs of arbitration and even those have produced mixed results. Scholars from the Rand Institute for Civil Justice have explored the question in the greatest detail. The Institute's Deborah R. Hensler concludes that the answer
to the question whether ADR programs actually reduce costs for litigants is still largely unknown. Deborah R. Hensler, Does ADR Really Save Money? The Jury's Still Out, Nat'l Law J., April 11, 1994, at C2 (App. 40). Another study of private alternative dispute resolution in Los Angeles indicates that fees charged in arbitration "usu-ally greatly exceed those levied by the courts." Elizabeth Rolph, Erik Moller, Laura Peterson, Escaping The Court-house, Rand Institute for Civil Justice 1, 44 (1994). The study notes that "the fees charged for private ADR ser-vices can be large" and then summarizes fee structures for the major private ADR firms. Those firms charge hearing fees for the arbitrator in the range of $550 a day to $450 a hour for each party, and also charge administra-tive fees, transcript fees, reporters' costs, travel expenses, and conference room costs. Id. at 40-43.

Thus, it simply has not been demonstrated that arbitration is cheaper than litigation. See Sternlight, Panacea, supra, at 678-79. Nor has it been shown that arbitration is faster than litigation. Another commentator notes that there is little strong data supporting the theory that ADR saves significant time and money for participants in the system. Lucy C. Katz, Compulsory Alternative Dispute Resolution and Voluntarism: Two-Headed Monster or Two Sides of the Coin?, 1993 J. Disp. Resol. 1, 46 ("Two-Headed Monster"). The myth that arbitration is cheaper is not sup-ported by any real basis in fact, and the Eleventh Circuit's concern about the steep costs of arbitration here were well founded.

12

B. The Severe Limit On Discovery In Arbitration

Favors Business Interests.
The limits on discovery in arbitration often make it impossible for consumers to prove the business engaged in unlawful activity. The FAA provides for only a very limited type of discovery by permitting arbitrators to order that witnesses may bring documents to the hearing. 9 U.S.C. 7 (1982). Most arbitration providers similarly limit discovery to what an arbitrator, in his discretion, may order. Commentators agree that arbitration substan-tially reduces the amount of permissible discovery. Bud-nitz, supra, at 271; Edward Brunet, Questioning The Quality Of Alternative Dispute Resolution, 62 Tul. L. Rev. 1, 13 (1987); Kaplinsky & Levin, Alternative, supra, at 847. But just and fair results of any dispute resolution process require mechanisms that ensure full disclosure of the facts. Disputes simply cannot be decided properly with-out information and evidence. Brunet, supra, at 34.
The unavailability of discovery in arbitration gener-ally favors corporate interests, to the individual's detri-ment. Absent discovery, individuals frequently will be unable to succeed on their claims, because the corpora-tion customarily will have exclusive possession of the information and documents necessary to prove the claims. Budnitz, supra, at 283-84. Arbitrators frequently confine their review to documents relating solely to the affected individual, and do not examine underlying poli-cies or evidence of business practices which would be necessary to award broader relief. For example, it would have been impossible for plaintiffs to prevail on their challenge to excessive late and overlimit fees in Beasley v. Wells Fargo Bank, supra, without discovery into the bases on which the bank decided to impose those charges and
13

the cost data which it claimed supported the propriety of the charges. In short, the unavailability of discovery skews the system in favor of corporate defendants. David S. Schwartz, Enforcing Small Print To Protect Big Business:
Employee And Consumer Rights Claims In An Age Of Compelled Arbitration, 1997 Wis. L. Rev. 33, 61 ("Small Print").


C. Arbitration Has Been Adopted To Preclude Representative Consumer Actions.

Consumers who must resolve their disputes through arbitration often lose the right to bring representative actions; as a result, in cases involving small claims they are denied any effective remedy against unlawful busi-ness conduct. Statutes such as the Truth in Lending Act, 15 U.S.C. 1601 et seq., rely on private enforcement through representative actions, and the congressional design for private enforcement would be frustrated by compelled arbitration. But mandatory arbitration clauses are now being relied on by industry to argue that con-sumers must individually arbitrate each claim and are deprived of any right they might have to pursue consoli-dated claims, group or collective actions, or class actions unless the arbitration clause includes an agreement allowing such procedures. This argument, of course, ignores the reality that an arbitration clause unilaterally drafted by the financial institution to limit its liability will never include a provision permitting such actions.
It also disregards the Court's precedents. In Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 338 n.9 (1980), the Court stated:
A significant benefit to claimants who choose to litigate their individual claims in a class-action context is the prospect of reducing their costs of

14 15
litigation, particularly attorney's fees, by allocating such costs among all members of the class who benefit from any recovery. Typically, the attorney's fees of a named plaintiff proceed-ing without reliance on Rule 23 could exceed the value of the individual judgment in favor of any one plaintiff. Here the damages claimed by the two named plaintiffs totaled $1,006.00. Such plaintiffs would be unlikely to obtain legal redress at an acceptable cost, unless counsel were motivated by the fee-spreading incentive and proceeded on a contingent-fee basis. This, of course, is a central concept of Rule 23.
The Court reiterated in Amchem Products, Inc. v. Windsor, 117 5. Ct. 2231, 2246 (1997), that absent class actions, individuals whose damages are small will have no realis-tic prospect of obtaining relief:

The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. A class action solves this prob-lem by aggregating the relatively paltry poten-tial recoveries into something worth someone's (usually an attorney's) labor.
The observation that there is no incentive for individuals with only small potential recoveries to pursue their claims applies forcefully to this case and others like it. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 809 (1985) ("Class actions . . . may permit the plaintiffs to pool mlaims which would be uneconomical to litigate individu-ally. . . . IMlost of the plaintiffs would have no realistic day in court if a class action were not available."); Wein-berg v. Hertz Corp., 499 N.Y.S.2d 693. 696 (N.Y. App. Div. 1986), aff'd, 516 N.Y.S.2d 652 (N.Y. 1987) ("lIlt is notable that in determining whether a class action is superior to
other viable methods, it is clear that most of the individ-uals having claims averaging less than $31 would have no realistic day in court if a class action were not avail-able."); 4 Herbert Newberg, Newberg on Class Actions 21.01 at 21-3 (3d ed. 1992) ("There are compelling reasons for bringing consumer protection class actions. A class-based effort is more effective than an individual consumer in getting a defendant to modify its conduct. Most individual consumers have claims which are too small to warrant representation by an attorney.")

Therefore, arbitration is not simply an alternative forum, but no forum at all for the overwhelming majority of consumers with small monetary claims. Unless they are able to aggregate those claims and litigate them in a class action, consumers will have no effective means of redress. In the consumer context, where small amounts are often at stake, in the absence of class litigation, unlawful and deceptive conduct which deprives large numbers of people of small amounts of money in viola-tion of statutory proscriptions will be allowed to continue with no meaningful deterrent.6

6 This is not piecemeal litigation, which the Court indicates may be necessary to give effect to an arbitration agreement in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 20 (1983). There, the consequence was simply that the hospital's dispute with the construction company might be decided in arbitration, while the hospital's claim for indemnity for any liability it had to the construction company against the architect, with whom it had no arbitration agreement, would be resolved in court: "an arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement." Id. Here, the consequence will be that consumers are deprived of any remedy whatever because their individual claims are too

16 17

Lenders like Green Tree have adopted arbitration clauses as a way of giving themselves an economic and tactical advantage by significantly reducing the likeli-hood of representative litigation. Alan S. Kaplinsky is quite clear in recommending to his institutional clients that they adopt arbitration clauses as a way of defending themselves against class action lawsuits. "Arbitration is a powerful deterrent to class action lawsuits against lenders Kaplinsky & Levin, Predator, supra, at 24. Elsewhere, the same authors have asserted that courts cannot compel class arbitration if parties have not agreed to it. Kaplinsky & Levin, Alternative, supra, at 848.
These authors contend that: "[AIll of the dangers inherent in an individual consumer lawsuit the threats of costly and drawn-out litigation, runaway juries, gar-gantuan punitive damages awards and adverse publicity
are magnified exponentially when a class of .
consumers is certified." They further assert: "Stripped of the threat of a class action, plaintiffs' lawyers have much less incentive to sue." Kaplinsky & Levin, Predator, supra, A 26.
They predict a future free from the threat of con-sumer challenges to the industry:
It is anticipated that virtually all major banks and lending institutions will implement con-sumer arbitration procedures within the next five years. Lenders that have not yet imple-mented arbitration programs should promptly consider doing so, since each day that passes brings with it the risk of additional multi-million-dollar class action lawsuits that might


small for them to have any realistic probability of obtaining relief.
have been avoided had arbitration procedures
been in place.

Id. at 28.

The intent to change the rules to favor business inter-est at the expense of consumers by eliminating the pri-mary remedies against abusive practices that deprive small sums of money from a large number of individuals could hardly be clearer. In another communication from NAF, Curtis D. Brown, its Vice President and General Counsel, states to a prospective industry client that "A number of courts around the country have held that a properly-drafted arbitration clause in credit applications and agreements eliminates class actions and ensures that credit-related lawsuits will be directed to arbitration, not a jury trial." (App. 50) (emphasis in original).

The preclusion of representative actions would result in consumers with relatively small claims being denied any effective remedy against unlawful business conduct. Frequently, many consumers are harmed by the same wrongful practice, yet individual actions are usually impracticable because the individual recovery would be insufficient to justify the expense of bringing a separate lawsuit. Without representative actions, wrongdoing businesses would be able to profit from their misconduct, violate statutory rules with impunity, and retain their ill-gotten gains. Representative actions by consumers aggre-gate their interests, enable them to take on economically powerful institutions, make wrongful conduct less prof-itable by obtaining disgorgement of ill-gotten gains, and have a salutary deterrent effect. See National Association of Consumer Advocates, Standards and Guidelines for Liti-gating and Settling Consumer Class Actions, 176 F.R.D. 370, 377-78 (1998).

18 19

Consumer cases differ significantly from matters involving securities and age discrimination, where administrative agency involvement can be relied on to ensure the sufficiency of the arbitration procedures to adequate enforcement of statutory protections. In Shear-son/A men can Express v. McMahon, 483 U.S. 1056 (1987), the Court noted the importance of the oversight authority of the Securities and Exchange Commission and found arbitration procedures which had been approved by the Commission adequate to protect statutory rights. Here, in stark contrast, the arbitration provider and procedures are unknown, so their adequacy to protect statutory ~ights is wholly speculative.
Similarly, in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Court found reason to believe that statutory rights would be safeguarded even if individuals could not bring class actions because the EEOC could bring actions on behalf of classes of persons. Here, by contrast, there is no requirement for first filing charges with an agency comparable to the EEOC which could then bring actions for damages and equitable relief on behalf of a class. Hence, there is no meaningful check against abusive and predatory arbitration processes imposed on consumers.

The Court has recognized the important distinction between consumer and commercial contracts in Rodriguez De Quijas v. Shearson/American Express, 490 U.S. 477, 484 (1989), overruling Wilko v. Swan, 346 U.S. 427 (1953), which held that claims arising under the Securities Act of 1933 were not subject to arbitration, saying: "We now conclude that Wilko was incorrectly decided and is inconsistent with the prevailing uniform construction of other federal statutes governing arbitration agreements in the
setting of business transactions." (Emphasis added). The Court thus specifically limited its holding to arbitration in the commercial context.

Thus, for the consumer dispute involved here, there will be no effective brake against illegitimate and abusive arbitration clauses absent intervention by the Court.


D. There Is Virtually No Right To Appeal An Incorrect Arbitrator's Award.

The FAA establishes only very limited bases for appealing an arbitral award in 9 U.S.C. 10, and for a court to vacate, modify, or correct an award in 9 U.S.C. 11. An arbitrator's award may only be reversed on a showing that it was obtained by corruption, fraud, or prejudicial misconduct. Combining that standard with the fact that arbitrators generally need not rule according to the law, and need not give reasons for the decision, the effect is that any right to appeal is essentially eliminated, and decisions will not be reversed even if they are wrongly decided.

As this Court has noted, a court will set an arbitra-tor's decision aside only in very unusual circumstances. First Options, Inc. v. Kaplan, 514 U.S. 938, 942 (1995). In fact, courts virtually never reverse arbitral decisions. Sternlight, Panacea, supra, 18 n.9; Schwartz, Small Print, supra, at 3. This raises serious questions about the fair-ness of arbitration, because parties lose the important ability to remedy mistakes of fact or law, which does not exist when an erroneous trial court decision is appealed. Even in the limited circumstances in which a court can overturn an arbitrator's decision, because arbitrators need not explain the bases for their decisions or make a

20 21

complete record of the proceedings, aggrieved individ-uals are often ill-equipped to satisfy their burden of proof on appeal. See, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986).~
Petitioners' contention that post-arbitration review would be sufficient to remedy any refusal to award a prevailing plaintiff costs and attorney's fees (Brief of Petitioners at 41) is belied by the case law. For example, the Second Circuit refused to find that an arbitrator's failure to award attorneys fees in an age discrimination case met the manifest disregard of the law standard. In DiRussa v. Dean Witter Reynolds, 121 F.3d 818 (2d Cir. 1997), the court held that although a prevailing plaintiff's entitlement to attorney's fees under the ADEA was well-defined, explicit, and clearly applicable, the manifest dis-regard standard was not met because there was no per-suasive evidence that the arbitrator had understood that an award of attorney's fees was mandatory and yet had intentionally refused to comply with the law. It would be virtually impossible to satisfy such a stringent test, so there is no assurance whatever that post-arbitration review would result in awards of attorney's fees to pre-vailing plaintiffs, as the statute mandates.






~ A decision by California's highest court indicates the degree of deference accorded an arbitral decision. In Moncharsh v. 1-leily & Blase, 832 P.2d 899, 900 (Cal. 1992) (en banc), an arbitrator's decision was found not generally reviewable, even if it was incorrectly decided as a matter of fact, or erroneously decided on the law.
E. Arbitration Undermines Public Accountability.

Another reason financial institutions attempt to compel arbitration is to escape the publicity which accom-panies litigation. Budnitz, supra, at 271, 285. The defense bar has admitted that arbitration reduces the risk of adverse publicity. Kaplinsky & Levin, Alternative, supra, at 847. Arbitration is essentially conducted in private. Brunet, supra, at 13. Both the proceedings and the deci-sions are required to remain confidential. Id.

Businesses favor this privacy, preferring customer disputes to remain free from the disinfecting rays of public scrutiny. Businesses naturally fear that publicity may reduce customers' trust, alert regulators to unfair practices or spotlight illegal conduct. Budnitz, supra, at
285.
The publicity accompanying litigation, in contrast, enhances accountability and furthers the public interest in ensuring the laws are enforced. The publicity following a verdict of fraud or deceptive practices lets consumers and regulators know about illegal practices. Budnitz, supra, at 313. The inability of consumers to learn about the experiences of other people closes off access to an important source of this useful information, and allows companies to control information. "The lack of publicity may be particularly detrimental in the context of con-sumer claims because one set of consumers will not be able to learn from the misfortunes of others." Sternlight, Panacea, supra, at 695 & n.326. Confidentiality undermines the governmental enforcement and regulatory apparatus designed to protect the consumer and ensure a fair marketplace. Budnitz, supra, at 327.

22 23

Requiring that disputes be resolved by arbitration, from which governmental entities are excluded, also cre-ates a disincentive for consumers to complain to agencies. That deprives agencies of the data they need to identify patterns and practices of unlawful behavior and limits their ability to take appropriate enforcement and regula-tory action. Budnitz, supra, at 312-313. The lack of public-ity also reduces the likelihood that other companies will modify their practices, as often occurs after a publicized court decision or jury award.

F. Arbitration Impedes Development of the Com-mon Law.

Resolving disputes privately also impedes the continued development of a body of consumer protection law. Budnitz, supra, at 312. Industry counsel readily acknowl-edge that because arbitrations are confidential and arbi-trators are not required to issue a written opinion. development of the common law is stifled. Kaplinsky & Levin, Alternative, supra, at 848. Stunting the development of this common law clearly harms consumers. See Brunet, supra, at 19-20.

The Rand Study expresses grave concern about arbitration's lack of public standards:
Since the results of private arbitration are not usually matters of public record, they cannot be used in these fashions, to establish standards of conduct for the future or to bring attention to unwanted behavior. This brings into serious question the legal system's ability to effect changes in the common law and in statutory interpretation when private ADR is widespread.
Moller et al., sz~pra. at xiii.
The Rand Study also notes the adverse public consequences of private dispute resolution. It describes the danger that arbitration will silence cases involving poten-tially damaging precedents or information, and that cases that would once have been part of the common law through litigation will be lost to the system, thus failing to provide a guide for future behavior. Id. at 10 and 32. In a later study, scholars from the Rand Institute for Civil Justice further explain that the most significant threat to the evolution of case law is posed by the prospect that whole classes of disputes might be removed from the public sector. Rolph, et al., Escaping the Courthouse, supra, at 62. That threat, unfortunately, is being realized in the consumer financial services arena.

G. Arbitration Allows the Financial Services Industry to Deregulate Itself.

The use of arbitration clauses gives large firms power to displace the judiciary from its role in enforcing statu-tory rights. Schwartz, supra, at 37. By selecting mandatory binding arbitration, institutions avoid applicable prece-dent or resort to regulatory agencies, and limit their liability, so that the arbitration clauses function as a kind of corporate self-deregulation. Forcing disputes involving statutory claims into arbitration delegates to arbitrators the role of industry regulator. Budnitz, supra, at 320. "The real problem comes when parties who are otherwise pro-tected by an important public law are compelled to use an ADR procedure in lieu of coming to court and then have no meaningful review in court." Harry T. Edwards, Where Are We Heading With Mandatory Arbitration Of Stat-utory Claims In Employment? 16 Ga. St. U. L. Rev. 293, 295

24 25

(1999). Judge Edwards emphasizes that a public enforce-ment mechanism is required to protect statutory rights. Id. at 297.

H. The Benefits of Arbitration Are Illusory.

Not only is there no proof that arbitration is cheaper, but there also is no support for the claim that it is better for individuals. Arbitration awards for consumers gener-ally are smaller. Schwartz, supra, at 9. This is confirmed by the Rand Study, which found that awards in arbitra-tion decisions were typically less than those in jury ver-dicts. Moller et al., supra, at 11.
The claim of Amici American Bankers, et al. that consumers will be successful in arbitration because one commentator found that employees do well (Brief at 19-20), is thus contravened by the limited existing data, and unpersuasive, in light of their own admission that "there are no major studies analyzing arbitration in the consumer context." Id. at 17.

I. Arbitration Also Reflects An Anti-Consumer Bias.

Arbitrators are often biased in favor of large corpo-rate "repeat player" clients. Arbitrators face powerful economic incentives that can affect their neutrality. If an arbitrator rules against a corporate client too often, the company can easily take its business to another arbitrator. Sternlight, Panacea, supra, at 684-85; Schwartz, supra, at 60-61. "Considering the parties' frequency of need for an arbitrator, the arbitrator's necessary qualifications for being selected, and the payment plan, the odds are against the individual plaintiff versus the manufacturers, health providers, and corporate landlords who will likely
be parties to dispute resolution time and again." James L. Guill, Edward A. Slavin, Jr., Rush to Unfairness: The Downside of ADR, 28 Judges' Journal 1, 8, 11(1989). A study of this phenomenon in the employment context concludes that employees recover a lower proportion of their claims in repeat player cases than in non-repeat player cases. L. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Emply. Rts. & Empl. Policy Journal 1 (1997).
Another example of arbitrations conducted by NAF for First USA is illustrative. In almost 20,000 cases, the vast majority of them brought by the company, NAF arbitrators ruled for First USA 99.6% of the time. Caroline E. Mayer, Win Some, Lose Rarely? Arbitration Forum's Rul-ings Called One Sided, The Washington Post, March 1, 2000 (App. 52). Such an overwhelming disparity in results raises serious questions about the fairness of the process.
In short, Green Tree's arbitration clause is illegitimate because petitioner has adopted it not to obtain an alternative forum, but to obtain an unfair advantage over its consumers.

II. IN OPERATION, GREEN TREE'S CLAUSE PERMITS PETITIONER TO OBTAIN POSSESSION OF
THE PROPERTY SUBJECT TO THE DISPUTE
BEFORE ARBITRATION IS CONCLUDED.

Not only does petitioner's clause materially shift the economic costs and risks of dispute resolution onto respondent, but it also allows petitioner to take posses-sion of the property subject to the dispute outside of the arbitration process. In particular, Green Tree's clause provides:
Notwithstanding anything hereunto the con-trary, we retain the option to use judicial or non-judicial relief to enforce a mortgage, deed of

26 27
trust, or other security agreement relating to the real property secured in a transaction underly-ing this arbitration agreement, or to enforce the monetary obligation secured by the real prop-erty, or to foreclose on the real property. Such judicial relief would take the form of a lawsuit. The institution and maintenance of an action for judicial relief in a court to foreclose any collat-eral, to obtain a money judgment or to enforce the mortgage or deed of trust, shall not consti-tute a waiver of the right of any party to compel arbitration regarding any other dispute or rem-edy subject to arbitration in this contract, including the filing of a counterclaim in a suit brought by us pursuant to this provision.
(J.A. 36). By its plain terms, this clause allows Green Tree to split all disputes with its customers and to obtain judicial or non-judicial foreclosure and even a money judgment prior to or even in spite of a contrary ruling by an arbitrator. Green Tree therefore retains the significant threat of repossession and claim preclusion outside of the arbitration process. Since Green Tree itself controls how the arbitration process is commenced, including the costs involved, it can time that process to maximize its litiga-tion leverage (including claim and issue preclusion) by proceeding with repossession while relegating even con-sumer counterclaims to arbitration. Thus, while petitioner and its amici trumpet the supposed merits and efficiency of arbitration, they have, in fact, stacked the litigation deck in their favor by reserving for themselves alone the right to proceed in a judicial forum.
The illegitimacy of such a provision is apparent in the fact that a consumer is left powerless under the contrac-tual language. Any plea to an arbitrator to enjoin Green Tree from proceeding with a foreclosure or money judg-ment claim would certainly be met with the argument that
the arbitrator lacked such power. Indeed, the same clause expressly reserves the judicial option to Green Tree, thus precluding arbitral review or intervention.

This unique contrivance certainly distinguishes the present clause from all the other arbitration clauses the Court has previously considered under the FAA. In con-trast with those cases, the clause here is clearly intended to tilt the dispute resolution landscape in petitioner's favor. It is not intended to provide an alternative forum. It is intended to lock consumers away in a private, unspecified process, the initiation and costs of which are totally controlled by Green Tree. Neither Congress nor the Court ever intended the FAA to permit such a result.

III. GREEN TREE'S ARBITRATION CLAUSE IS ILLEGITIMATE BECAUSE IT FAILS TO SPECIFY
HOW ARBITRATION IS INITIATED AND IS
NOT CONSENSUAL.

Petitioner's clause lacks an essential element neces-sary for legitimacy under the FAA notice of how the dispute resolution mechanism is initiated. Under the clause, Green Tree selects the arbitrator. But there is abso-lutely no notice of how that selection process is initiated. Does the consumer simply write to Green Tree? Does the consumer call? Does the consumer refuse to pay his or her bill?
In Fuentes v. Shevin, 407 U.S. 67 (1972), the Court emphasized that "a waiver of constitutional rights in any context must, at the very least, be clear." Id. at 95. In this regard, notice and an opportunity to be heard have been the hallmarks of the Court's due process analysis. The Fuentes Court emphasized that form contractual provi-sions in consumer transactions purporting to waive these

28
29
basic due process rights would not be enforced if evi-denced only by a consumer's signature on the contract. See id.; see also Swarb v. Lennox, 405 U.S. 191 (1972); cf. D.H. Overmyer Co. v. Frick Co., 405 U.S. 174 (1972).
In this case, the impact of petitioner's tilted arbitration clause is no less drastic to consumers than were the confiscatory confession of judgment clauses struck down in Fuentes and Swarb. As in those cases, Green Tree's cus-tomers here confront the very real likelihood of losing their property without any effective notice or opportunity to be heard to prevent that eventuality. Although there is the sham appearance of such an opportunity, the alterna-tive arbitration forum and process is so controlled by Green Tree and the remedies are so restricted that the arbitration is really a modern-day confession of judgment.
Applying fictional concepts of consent to adhesion-ary contracts between financial institutions and con-sumers distorts the law of contract and the traditional use of the arbitration mechanism beyond recognition. Arbi-tration is a creature of contract, premised on the ability of parties of equal bargaining power to choose what method of resolving disputes will best serve their mutual needs. This Court has frequently acknowledged that arbitration is premised on consent. Volt Information Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 479 (1989) (arbitration is a matter of consent, not coercion).

Meaningful consent simply does not exist in the pre-sent case. Unlike the parties to most contracts between business entities, individuals contracting for goods and services generally do not have equal bargaining power. In most instances, a marked imbalance in knowledge and power characterizes such contracts. Adhesionary con-tracts are not freely negotiated, but are offered on a take-it-or-leave-it basis. They are imposed by a powerful party
on a relatively powerless party who has no ability to negotiate. Budnitz, supra, at 328. Indeed, the essence of form contracts is that they can rarely if ever be negotiated by the consumer. Sternlight, Panacea, supra, at 676-77.
The Restatement (Second) of Contracts notes that "[al party who makes regular use of a standardized form of agreement does not ordinarily expect his customers to understand or even to read the standard terms." Restate-ment (Second) of Contracts 211 comment b (1979). When the party with superior sophistication, knowledge, and financial resources inserts a mandatory arbitration clause into a form contract, individuals usually are unaware of and cannot reasonably be said to have con-sented to these terms. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 599 (1991) ("the common law .
subjects terms in contracts of adhesion to scrutiny for reasonableness"). Rather, the reality is, as Professor Sternlight points out,8 consumers do not understand either the terms or their import.

Unilateral imposition of mandatory, binding arbitra-tion in adhesionary contracts has none of the indicia of choice, consent, or bargaining. Instead, it is well recog-nized that: "[w]ith the growth of ADR has come a strong element of compulsion and coercion." Katz, Two-Headed Monster, supra, at 1.~ The compulsion and coercion here

8 Sternlight, Panacea, supra. at 688-693, and studies cited at n.290, 289, and 300.
~ The compulsion and coercion which are inherent in the mandatory imposition of alternative dispute resolution mechanisms has led the European Commission to file comments opposing alternatives which preclude consumers' recourse to the courts in e-commerce disputes. (App. 59).

30 App. 1

has deprived respondent of basic due process and ren-ders petitioner's clause illegitimate under the FAA.
NATIONAL ASSOCIATION OF CONSUMER ADVOCATES
1717 Massachusetts Avenue, Suite 704
CONCLUSION

The FAA does not legitimate one-sided agreements which attempt to give the institutional party an unfair advantage over its consumer customers. So long as mandatory, pre-dispute clauses are used to change the rules by which disputes are resolved, and limit industry lia-bility, their use will not accomplish the ostensible goals of inexpensive, prompt and fair dispute resolution. Where, as here, business interests seek to gain an unfair advan-tage, preclude class and representative actions, constrict the availability of statutory remedies, limit or eliminate any challenge to their deceptive business practices, and increase costs to consumers, their abusive arbitration clauses should be deemed unenforceable.
Respectfully submitted,

PATRICIA STLJRDEVANT

(Counsel of Record)
National Association of Consumer
Advocates
1717 Massachusetts Avenue, N.W.,
Suite 704
Washington, D.C. 20036
(202) 332-2500

MICHAEl. D. DONOVAN

DONOVAN MILLER, LLC

1608 Walnut Street, Suite 1400
Philadelphia, PA 19103
(215) 732-6020
Washington, D.C. 20036

Telephone (202) 332-2500

Fascimile (202) 332-4152

POSITION PAPER: REASONS TO OPPOSE
PRE-DISPUTE ARBITRATION CLAUSES IN CONSUMER CONTRACTS

I. Overview.

Recent years have witnessed an assault on the rights of consumers to access to the courts, and to trial by judge and jury. Banks, credit card companies and other financial institutions are jeopardizing consumers' rights to the pro-tections afforded them by statutory and case law through the use of mandatory, binding arbitration clauses. These clauses are drafted by the financial institutions and uni-laterally inserted in adhesionary contracts with con-sumers, without negotiation or consent. Arbitration as a method of resolving disputes is a creature of contract premised on the ability of parties of equal bargaining power to choose what method of resolving disputes will best serve their mutual needs. Free choice is the founda-tion of all alternative dispute mechanisms, including arbi-tration, and the reason such clauses are enforceable is because they reflect the bargain between the parties. Unilateral imposition of binding arbitration raises trouble-some issues for consumer advocates because of the
July 24, 2000

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