IN THE MARYLAND COURT OF
APPEALS
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DALE
WELLS, et al. v. CHEVY
CHASE BANK, F.S.B., et al.
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) ) ) ) ) ) |
No. 46
September Term, 2000 |
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APPEAL FROM THE CIRCUIT
COURT FOR BALTIMORE CITY
(The Honorable Joseph H. H. Kaplan)
AND OPPOSITION TO APPELLEE’S
CROSS APPEAL
F.
Paul Bland, Jr.
Trial
Lawyers for Public Justice
1717
Massachusetts Avenue, Suite 800
Washington,
DC 20036
(202)
797-8600
John
T. Ward
Thomas
J. Minton
Ward,
Kershaw & Minton, P.A.
113
West Monument Street
Baltimore,
MD 21201
(410)
685-6700
Michael
P. Malakoff
Malakoff,
Doyle & Finberg, P.C.
The
Frick Building, Suite 203
Pittsburgh,
PA 15219
(412)
281-8400
Counsel
for Appellants
TABLE
OF CONTENTS
Page
TABLE OF AUTHORITIES............................................................................................................ iii
OPPOSITION TO APPELLEE’S CROSS APPEAL....................................................................... 1
INTRODUCTION AND SUMMARY OF ARGUMENT................................................................ 1
ARGUMENT................................................................................................................................... 2
I. THE FEDERAL ARBITRATION ACT DOES NOT
PREEMPT MARYLAND
LAW ALLOWING IMMEDIATE APPEALS OF ARBITRATION ORDERS.................... 2
A. THE FAA
ONLY PREEMPTS STATE LAWS WHICH PREVENT THE
ENFORCEMENT OF ARBITRATION AGREEMENTS BY TAKING
ARBITRATION OUTSIDE OF GENERAL CONTRACT LAW............................. 3
B. AN OVERWHELMING MAJORITY OF STATE
COURTS HAS HELD
THAT
THE FAA’S APPELLATE JURISDICTION AND OTHER
PROCEDURAL RULES DO NOT PREEMPT STATE LAW.................................. 7
C. CONGRESS
MAY NOT UNDERMINE STATE SOVEREIGNTY BY
DECREEING APPELLATE JURISDICTION AND RULES OF
JUDICIAL PROCEDURE IN STATE COURTS................................................... 11
REPLY IN SUPPORT OF APPELLANTS’ APPEAL................................................................... 18
INTRODUCTION AND SUMMARY OF ARGUMENT.............................................................. 18
ARGUMENT................................................................................................................................. 19
I. PLAINTIFFS
DID NOT AGREE TO ARBITRATE THESE CLAIMS.............................. 19
A. THE
ARBITRATION CLAUSE IS NOT VALID BECAUSE
CHEVY
CHASE DID NOT COMPLY WITH ITS CHANGE OF
TERMS PROVISION............................................................................................ 19
B. THE ARBITRATION CLAUSE IS NOT EFFECTIVE
BECAUSE
IN THE
CONTEXT OF THE CONTRACTUAL LANGUAGE DRAFTED
BY
CHEVY CHASE, IT WAS AN ADDITION AND NOT AN
AMENDMENT...................................................................................................... 24
C. THE ARBITRATION CLAUSE NEVER BECAME
EFFECTIVE
BECAUSE
IT DID NOT EXPLICITLY STATE THAT IT WOULD
APPLY
RETROACTIVELY TO TRANSACTIONS COMPLETED
BEFORE IT WAS PROMULGATED.................................................................... 26
D. PLAINTIFFS NEVER AGREED TO ARBITRATE
THEIR CLAIMS
BECAUSE
CHEVY CHASE DISCLOSED THE ARBITRATION
CLAUSE
IN A MANNER THAT ENSURED THAT PLAINTIFFS
WOULD
NOT VOLUNTARILY, KNOWINGLY OR INTELLIGENTLY
WAIVE THEIR CONSTITUTIONAL RIGHTS..................................................... 29
III. THIS
ARBITRATION CLAUSE IS UNCONSCIONABLE AS APPLIED TO THE
FACTS OF THIS CASE.................................................................................................... 32
A. THE
LOSER PAYS RULE UNCONSCIONABLY RE-WRITES THE
CONSUMER PROTECTION ACT....................................................................... 33
B. THE PROHIBITIVE FEES REQUIRED TO APPEAR
BEFORE AN
ARBITRATOR RENDER THIS ARBITRATION CLAUSE
UNCONSCIONABLE........................................................................................... 38
C. THE FAILURE OF CHEVY CHASE’S ARBITRATION
CLAUSE TO
PERMIT CLASS ACTIONS RENDERS IT UNCONSCIONABLE..................... 42
CONCLUSION............................................................................................................................. 43
TABLE
OF AUTHORITIES
Cases
Alden v. Maine,
119 S. Ct. 2240 (1999) ....................................................................................... 15
Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995) .................................. 3,
5
American Airlines, Inc. v. Wolens, 513 U.S. 219 (1995) .............................................................. 22
Anglin v. Tipps,
842 S.W.2d 266 (Tex. 1992) ................................................................................. 9
Armendariz v. Foundation
Health Psychare Services, Inc.,
2000 Cal.LEXIS 6120 (August 24, 2000) ........................................................ 32,
36, 40, 41
Atkinson v. General Cela. Credit Corp., 855 F.2d 396 (11th Cir. 1989) ...................................... 21
Belmont Constructors, Inc.
v. Lyondell Petrochemical Co., 896
S.W.2d 352
(Tex. App. 1st Dist. 1995) .................................................................................................... 8
Broemer v. Abortion Serv's. of Phoenix, Ltd., 840 P.2d 1013 (Ariz. 1992) .................................. 33
Brown v. Trans World Airlines, 127 F.3d 337 (4th Cir. 1997) ...................................................... 43
Bush v. Paragon Property, Inc., 165 Ore. App. 700, 997 P.2d 882 (2000) .......................... 7, 8, 10
Chaires v. Chevy Chase Bank, FSB, 131 Md. App. 64 (2000) ..................................................... 22
Christiansburg Garment Co. v. EEOC, 434 U.S. 412 (1978) ................................................ 34,
37
Citramanis v. Hallowell, 328 Md. 142 (1992) .............................................................................. 34
Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. 1997) ........................... 39, 40
Collins v. The Prudential Ins. Co., 752 So.2d 825 (La. 2000) ........................................................ 9
Coughlin v. Shimuzu America Co., 991 F. Supp. 1226 (D. Or. 1998) .......................................... 37
Dakota Wesleyan Univ. v. HPG Int'l, Inc., 1997 S.D. 30, 560 N.W.2d 921 (1997)...................... 9
Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219 (1985) ...................................................... 7
Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996) ................................................. 3,
5, 6
Erie R. Co. v. Tompkins, 304 U.S. 64
(1938) .............................................................................. 16
Eure v. Cantrell Properties, 236 Ga. App. 427, 512 S.E.2d 323 (1999) ........................................ 8
Federal Ins. Co. v. Allstate Ins. Co., 275 Md. 460 (1975) ........................................................... 21
Felder v. Casey,
487 U.S. 131 (1988) ................................................................................ 9,
13, 14
Fidelity Fed. Sav. & Loan Assoc. v. de la Cuesta, 458 U.S. 141 (1982) ................................ 21,
22
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) ............................................... 6,
10
General Motors Corp. v. Romein, 503 U.S. 181 (1992) ............................................................... 28
Gilman v. Wheat, First Securities, Inc., 345 Md. 361 (1997) ................................................. 42,
43
Gilmer v. Interstate/ Johnson Lane Corp., 500 U.S. 20 (1991) ................................................... 43
Graham Oil Co. v. ARCO Products Co., 43 F.3d 1244 (9th Cir. 1994) ....................................... 37
Guaranty Trust Co. of New York v. York, 326 U.S. 99 (1945) .................................................... 17
Hallowell v. Citaramanis, 88 Md. App. 591, aff'd, 328 Md. 142 (1992) ..................................... 34
Hendrick v. Brown & Root, Inc., 50 F. Supp.2d 527 (E.D. Va. 1999) .......................................... 27
Hooters of America, Inc.
v. Phillips, 1998 U.S. Dist.
LEXIS 3962 (D.S.C. 1998),
aff'd on other grounds, 173 F.3d 933 (4th Cir. 1999) ....................................................... 31
Horenstein v. Mortgage
Market, Inc., 1999 U.S. Dist. LEXIS
21463
(D. Ore. Jan.11, 1999) ....................................................................................................... 41
Horsey v. Horsey, 329 Md. 392 (1993) ..................................................................................... 2,
10
Howlett v. Rose,
496 U.S. 356 (1990) .............................................................................. 11,
12, 13
Johnson v. Fankell, 520 U.S. 911 (1997) ......................................................................... 11,
12, 13
Lawrence v. Walzer
& Gabrielson, 256 Cal.
Rptr. 6 (1989) ........................................................ 32
Long v. Fidelity Water
Systems, Inc., 2000 U.S. Dist. LEXIS
7827
(N.D. Cal. May 26, 2000) ............................................................................................ 27,
28
Mattingly Lumber Co. v.
Equitable Bldg. & Savings Assoc. of Baltimore City,
176 Md. 403 (1939) .......................................................................................................... 20
Meyer v. State Farm Fire & Casualty Co., 85 Md. App. 83 (1990) ...................................... 30, 31
Milton Co v. Council of
Unit Owners of Bentley Place Condominium,
121 Md. App. 100, aff'd, 354 Md. 264 (1999) .................................................................. 35
Moses H. Cone Memorial Hosp. v. Mercury Construction
Corp., 460 U.S. 1 (1983) .................... 4
Myers v. Terminix Internat'l Co., 697 N.E. 2d 277 (Ohio Ct. Comm. Pleas 1998) ....................... 42
New York v. United States, 505 U.S. 144 (1992) ................................................................... 14,
15
Obstetrics and
Gynecologists Wixted, Flanagan and Robinson v. Pepper,
693 P.2d 1259 (Nev. 1985) ............................................................................................... 32
Patterson ITT Consumer Financial Corp., 18 Cal. Rptr.2d 563 (Cal. App. 1993) ....................... 42
Printz v. United States, 521 U.S. 898 (1997) ......................................................................... 14,
15
Protective Life Ins. v. Lincoln Nat. Life Ins., 873 F.2d 281 (11th Cir 1989) ................................ 38
Regina Construction Corp. v. Envirmech Contracting
Corp., 80 Md. App. 662 (1989) ............. 10
Reisterstown Plaza
Associates v. General Nutrition Center, Inc.,
89 Md. App. 232 (1991) ................................................................................................... 37
Rosenthal v. Great Western
Financial Securities Corp., 14
Cal.4th 394,
926 P.2d 1061 (1996) ......................................................................................................... 9
Sagner v. Glenangus Farms, Inc., 234 Md. 156 (1964) ............................................................... 20
Sandvik AB v. Avent International Corp., 220 F.3d 99 (3d Cir. 2000) .......................................... 6
Siegel v. Prudential Ins.
Co. of America, 67 Cal. App. 4th
1270,
79 Cal. Rptr. 726 (Cal. App. 2nd Dist. 1998) ....................................................................... 9
Simmons Co. v. Deutsche Financial Services Corp., 243 Ga. App. 85 (2000) ............................... 8
Sosa v. Paulos,
924 P. 2d 357 (Utah 1996) ................................................................................... 32
Southern California Edison
Co. v. Peabody Western Coal Co., 194
Ariz. 47,
997 P.2d 769 (1999) ..................................................................................................... 9,
10
Southland Corp. v. Keating, 465 U.S. 1 (1984) ................................................................... 3,
5, 12
State v. Cottman Transmissions Systems, Inc., 86 Md. App. 714 (1991) .................................... 34
Tasios v. Reno,
204 F.3d 544 (4th Cir. 2000) ................................................................................ 28
Turner Bros. Trucking Co., 8 S.W.3d 370 (Tex. Civ. App. 1999), writ denied
............................ 32
Video Trax, Inc. v. NationsBank, 33 F. Supp. 2d 1041 (S.D. Fla. 1998) ...................................... 24
Volt Information Sciences,
Inc. v. Bd. of Trustees of the Leland Stanford Jr. Univ.,
489 U.S. 468 (1989) ................................................................................................... passim
Weston Securities Corp. v. Aykanian, 46 Mass.App.Ct. 72, 703 N.E.2d 1185 (1998) ................... 9
Xaphes v. Murphy, 478 A.2d 299 (Me. 1984) ................................................................................ 9
Statutes and Other
Authorities
12 C.F.R. § 560.2 .......................................................................................................................... 21
9 U.S.C. § 1, et seq., ....................................................................................................................... 3
9 U.S.C. § 2 .................................................................................................................................... 5
9 U.S.C. § 3 .................................................................................................................................... 4
9 U.S.C. § 4 ............................................................................................................................. 4,
13
9 U.S.C. § 16(b)(2) ................................................................................................................... 4,
13
28 U.S.C. § 1331 ............................................................................................................................ 4
28 U.S.C. § 1291........................................................................................................................... 13
42 U.S.C. § 1983 .......................................................................................................................... 13
Md. Code Ann., Comm. Law I § 12-912(b)(1) .............................................................................. 23
Md. Code Ann., Comm. Law I § 2-302 ......................................................................................... 33
Md. Code Ann., Cts. & Jud. Proc. § 3-221 (b)............................................................................... 36
Md. Code Ann., Cts. & Jud. Proc. § 12-301 .................................................................................... 2
Alba Conte, Attorney Fee Awards § 4.14 (2d ed.) ........................................................................ 33
Hart, The Relations Between State and Federal Law, 54 Colum. L.
Rev. 489 (1954) ................... 12
Caroline E. Mayer, Win
Some, Lose Rarely? Arbitration Forum’s
Rulings
Called One-Sided, Wash. Post, Mar. 1, 2000..................................................................... 32
OPPOSITION TO APPELLEE’S CROSS APPEAL
INTRODUCTION AND SUMMARY OF ARGUMENT
The law of this State is clear that when a trial court
orders a party to go to arbitration, the party may appeal that order. Chevy Chase argues that the Federal
Arbitration Act (“FAA”) preempts Maryland’s law in this regard, although this
argument is contradicted by the plain language of the statute, which states
that the FAA’s procedural rules apply only in federal court. Section 16(b)(2) of the FAA prohibits
appeals of orders compelling arbitration in cases brought “in any United States
district court” under Section 4. This
argument also runs afoul of the many U.S. Supreme Court decisions delineating
the scope of FAA preemption. Chevy
Chase cites only two state court cases, one of which has been overruled,
supporting its position. On the other
hand, 10 of 11 reported state appellate decisions have held that the FAA does
not preempt state procedural rules.
Chevy Chase has sought to deflect these holdings by arguing that the
facts in some of these cases do not involve state procedural rules (like the
one here) that permit more appeals or other judicial proceedings than would the
FAA, but at least three of these 10 cases precisely fit this fact pattern.
Even if Chevy Chase were correct, however, that the
FAA preempted Maryland law and precluded this Court from exercising its
jurisdiction over this appeal, this portion of the FAA would be unconstitutional
as applied here because it would infringe upon the sovereign powers of this
State. The U.S. Supreme Court has
affirmed repeatedly in recent years that federal commandeering of the branches
of state government violates core constitutional protections of state
sovereignty, and has never required courts, be they state or federal, to apply
another sovereign’s non-outcome determinative rules of procedure in cases
before them.
ARGUMENT
1.
THE FEDERAL
ARBITRATION ACT DOES NOT PREEMPT MARYLAND LAW ALLOWING IMMEDIATE APPEALS OF
ARBITRATION ORDERS
Chevy Chase does not want this Court to decide the
questions of whether these plaintiffs agreed to this arbitration clause, or
whether this arbitration clause is unconscionable. Accordingly, it argues that plaintiffs are not permitted to seek
appellate relief unless and until they first complete arbitration. It cannot have escaped Chevy Chase’s
attention that these plaintiffs testified under oath that they would not pursue
their claims through arbitration, being deterred by the arbitration clause’s
Loser Pays Rule (as defendants’ likely attorneys’ fees will be far higher than
the value of the plaintiffs’ claims) and the prospect of high arbitration
fees. When Chevy Chase says “no appeal
until after arbitration,” it means “no appeal whatsoever.”
Fortunately for Chevy Chase’s cardholders such as
plaintiffs, however, it is well established that a trial court’s order
compelling arbitration is immediately appealable under Maryland law when the
order reaches all claims asserted and effectively puts the parties out of
court. Horsey v. Horsey, 329 Md.
392 (1993). Section 12-301 permits an
appeal from a “final judgment entered in a civil or criminal case by a circuit
court.” Md. Code, Courts and Judicial
Proceedings § 12-301. This Court held
in Horsey that:
A
circuit court’s order to arbitrate the entire dispute before the court does
deprive the plaintiff of the means, in that case before the trial court, of
enforcing the rights claimed. The order
effectively terminates that particular case before the trial court. Thus, the order would clearly seem to be
final and appealable under the above cited cases.
Horsey, 329 Md. at 402.
Chevy Chase does not dispute that the circuit court’s
arbitration order is appealable under Maryland law, but rather asserts that the
Federal Arbitration Act (FAA), 9 U.S.C. § 1, et seq., preempts the
jurisdiction of Maryland’s appellate courts
to review orders compelling arbitration under Section 12-301. This argument is doomed to fail, however,
because the FAA’s appeal provisions in Section 16 apply only in federal court
and because Section 12-301 does not conflict with the purpose of the FAA to
enforce valid contractual agreements to arbitrate. Overwhelming authority supports the conclusion that Congress
through the FAA did not preempt state procedural rules governing
arbitration enforcement, and this Court need not even reach the constitutional
question of whether Congress could have preempted the jurisdiction of
state appellate courts by compelling them to apply federal rules of procedure.
A. THE FAA
ONLY PREEMPTS STATE LAWS WHICH PREVENT THE ENFORCEMENT OF ARBITRATION
AGREEMENTS BY TAKING ARBITRATION OUTSIDE OF GENERAL CONTRACT LAW.
“The FAA contains no express preemption provision, nor
does it reflect a congressional intent to occupy the entire field of
arbitration.” Volt Information
Sciences, Inc. v. Bd. of Trustees of the Leland Stanford Jr. Univ., 489
U.S. 468, 477 (1989). Instead, the FAA
preempts only those state laws that interfere with the purpose of Section 2 to
enforce agreements to arbitrate by singling out arbitration clauses from other
contractual provisions for disfavored treatment. Southland Corp. v. Keating, 465 U.S. 1, 10 (1984); Volt,
489 U.S. at 478; Allied-Bruce Terminix Companies, Inc. v. Dobson, 513
U.S. 265, 272 (1995); Doctor’s Associates, Inc. v. Casarotto, 517 U.S.
681, 687 (1996). Chevy Chase’s attempt
to fit this appeal within the limited scope of FAA preemption by arguing that
Section 12-301 conflicts with the express language, see Br. at 8-9, and
underlying purpose of the federal act, see Br. at 6-7 and 8-9, cannot
withstand scrutiny.
The relevant procedural provisions of the FAA are on
their face only enforceable in federal court.
Section 16(b)(2) prohibits appeals of interlocutory orders “directing
arbitration to proceed under Section 4 of this title,” 9 U.S.C. § 16(b)(2), but
Section 4 applies exclusively in federal court:
A party
aggrieved by the alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration may petition any United States
district court which, save for such agreement, would have jurisdiction under
Title 28, in a civil action or in admiralty of the subject matter of a suit
arising out of the controversy between the parties, for an order directing
that such arbitration proceed in the manner provided for in such agreement.
9
U.S.C. § 4 (emphasis added).[1]
Section 16(b)(1)’s prohibition of appeals of orders
staying litigation under Section 3 of the FAA likewise is limited by the
latter’s application to proceedings brought “in any of the courts of the United
States.” 9 U.S.C. § 3. Despite Chevy Chase’s protestations to the
contrary, Section 12-301 does not conflict with the express terms of Section
16(b) because the latter only sets out rules for appeals of cases in federal
court. Even if one assumes that
Congress could have prescribed procedural rules for state courts to apply in
cases presenting questions of federal law, it did not do so in Section 16 of
the Federal Arbitration Act.
Chevy Chase’s frustration of purpose argument for
federal preemption, relying on the assertion that the FAA embodies a congressional
objective to minimize pre-arbitration judicial proceedings at all costs, is
similarly defective. The FAA’s
preemptive force arises out of Section 2’s declaration that agreements to
arbitrate in written commercial contracts “shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.” 9 U.S.C. §
2 . The U.S. Supreme Court has
interpreted Section 2 to embody the intent of Congress to “foreclose state
legislative attempts to undercut the enforceability of arbitration agreements,”
Southland, 465 U.S. at 16. The
Supreme Court subsequently refined this analysis, holding that, through Section
2, “Congress would not have wanted state and federal courts to reach different outcomes
about the validity of arbitration in similar cases,” Dobson, 513 U.S. at
272 (emphasis added), and that “[c]ourts may not . . . invalidate
arbitration agreements under state laws applicable only to arbitration
provisions,” Doctor’s Associates, 517 U.S. at 687. Section 12-301 of the Maryland Code neither singles out arbitration orders for special treatment nor produces different
outcomes as to the enforceability of arbitration agreements than would the
Federal Arbitration Act.
The U.S. Supreme Court has never held that the FAA’s
procedural provisions carry the preemptive force of Section 2’s rule of
substantive law and has repeatedly cast doubt on suggestions that it could do so.
In Southland, the Court expressly disavowed the charge that its holding
regarding Section 2 would extend to Section 3 and 4 procedures, emphasizing
that federal rules of procedure do not apply in state courts. Southland, 465 U.S. at 16 n.10. Shortly after Congress enacted Section 16’s appeal provisions, the Court upheld
a statute allowing state courts to stay arbitration proceedings pending a
resolution of related litigation where the parties had consented to the
application of the state rule. Volt
Information Sciences, 489 U.S. at 470.
The Court declared in Volt that “[t]here is no federal policy
favoring arbitration under a certain set of procedural rules; the federal
policy is simply to ensure the enforceability, according to their terms, of
private agreements to arbitrate,” emphasizing that “we have never held that §§
3 and 4, which by their terms appear to apply only to proceedings in federal
court . . . are nonetheless applicable in state court.” Id. at 476, 477 n.6; see also,
Doctor’s Associates, 517 U.S. at 688 (“The state rule examined in Volt
determined only the efficient order of proceedings; it did not affect the
enforceability of the arbitration agreement itself”). Chevy Chase never explains how this Court’s interpretation of
Section 12-301 to permit pre-arbitration appeals of arbitration orders also prohibits
contract enforcement. It does not.
Chevy Chase’s argument that Congress enacted and
amended the FAA because it was bent on “preventing parties from frustrating
arbitration through lengthy judicial appeals,” Br. at 6-7, confuses the
existence of a federal policy favoring consensual arbitration, whether in whole
or in part because of its purported expediency, for a policy favoring expedient
procedures regardless of any other interest.
In holding that arbitrability determinations are the presumptive province
of courts rather than arbitrators, the Supreme Court explained that
“arbitration is simply a matter of contract between [] parties; it is a way to
resolve those disputes—but only those disputes—that the parties have agreed to
submit to arbitration.” First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995).[2] Seven years after Congress enacted Section
16, the Supreme Court in First Options used the contractual
underpinnings of federal arbitration policy to reject squarely the argument that
the FAA’s purpose is to expedite dispute resolution:
‘The
legislative history of the Act establishes that the purpose behind its passage
was to ensure judicial enforcement of privately made agreements to
arbitrate. We therefore reject the suggestion
that the overriding goal of the Arbitration Act was to promote the expeditious
resolution of claims. The Act . . .
does not mandate the arbitration of all claims, but merely the enforcement . .
. of privately negotiated arbitration agreements.’
Id. at 945, quoting Dean Witter Reynolds, Inc. v.
Byrd, 470 U.S. 213, 219 (1985) (emphasis added). This is precisely the conclusion reached by the Oregon Court of
Appeals in Bush v. Paragon Property, Inc., 165 Ore. App. 700, 997 P.2d
882 (2000) (en banc). Bush held
that a state rule prohibiting immediate appeals of trial court orders denying
motions to compel arbitration was not preempted by the contrary provision of
FAA Section 16(a)(1)(B) because “there is no basis to conclude that our
jurisdictional statute was designed to frustrate Congress’ goals in enacting
the FAA, which were to ‘foreclose state legislative attempts to undercut the
enforceability of arbitration agreements.’”
Id. at 709 n.4, quoting Southland, 465 U.S. at 16. Section 12-301 of the Maryland Code’s Courts
and Judicial Proceedings Article, by treating trial court orders compelling
arbitration as appealable final judgments, furthers the FAA’s purpose to ensure
that parties who are compelled to arbitrate have agreed to do so. Chevy Chase’s argument that Section 12-301
frustrates federal policy by reordering appellate and arbitral proceedings and
therefore should be preempted is contrary to substantial authority and must be
rejected here, as it has been rejected nearly everywhere else it has been
raised.
B. AN
OVERWHELMING MAJORITY OF STATE COURTS HAS HELD THAT THE FAA’S APPELLATE
JURISDICTION AND OTHER PROCEDURAL RULES DO NOT PREEMPT STATE LAW.
In its effort to distinguish the many state court
opinions which hold that the FAA does not preempt state rules of appellate jurisdiction
and judicial procedure, Chevy Chase neglects recent decisions that are directly
or substantially on point with this case.
In Simmons Co. v. Deutsche Financial Services Corp., 243 Ga. App.
85 (2000), the Georgia Court of Appeals entertained the appeal of a trial court
order compelling arbitration of a dispute covered by the FAA, holding that
Section 16 does not preempt Georgia’s procedural rule permitting appeals of
trial court orders compelling arbitration.
Id. at 89. Simmons
overruled the Georgia Court of Appeals’ earlier ruling in Eure v. Cantrell
Properties, 236 Ga. App. 427, 512 S.E.2d 323 (1999), one of only two cases
cited by Chevy Chase as support for its Section 16 preemption argument, finding
that:
[a]
preliminary appeal from an order compelling arbitration does not undermine the
purposes or objectives of the FAA to enforce arbitration agreements. The timing of the right to appeal from an
order compelling arbitration is a procedural matter which may delay but does
not prevent enforcement of a valid arbitration agreement.
Simmons, 243 Ga. App. at 89.
The Oregon Court of Appeals similarly held in Bush
v. Paragon Property, Inc., 165 Ore. App. at 709, that the FAA does not
preempt a state rule which prohibits appeals of orders refusing to compel
arbitration, despite FAA Section 16(a)(1)(B)’s contrary provision allowing
appeals in federal court. See also
Belmont Constructors, Inc. v. Lyondell Petrochemical Co., 896 S.W.2d
352, 355 (Tex. App. 1st Dist. 1995) (applying Texas rules in dispute
governed by FAA to prohibit appeal of right from trial court order denying
motion to compel arbitration). In
addition to holding that there are constitutional limitations on federal
preemption of state court jurisdiction and procedural rules (which we will
discuss below), Bush, 165 Ore. App. at 707-08, Bush emphasized
that Oregon’s rule did not frustrate the FAA’s purposes because it did not
discriminate against arbitration and did not undercut enforcement of
arbitration agreements. Id. at
709 n.4. Each of these cases, like this
Court’s interpretation of Section 12-301, results in additional pre-arbitration
judicial proceedings, but the reordering of appellate and arbitral proceedings
alone does not frustrate the purposes of the FAA.
The frustration of purpose preemption analysis applied
in the state court decisions which Chevy Chase attempts to distinguish, Br. at
7-8, leads in this case to the same conclusion nearly every state court has
reached in applying state procedural rules in FAA cases.[3] These courts begin with the presumption that
states are free to apply their own rules of judicial procedure in cases
litigated in their courts. Collins
v. The Prudential Ins. Co., 752 So.2d 825, 828-29 (La. 2000); Southern California Edison Co. v. Peabody
Western Coal Co., 194 Ariz. 47, 51, 997 P.2d 769 (1999); Rosenthal v.
Great Western Financial Securities Corp., 14 Cal.4th 394, 926 P.2d 1061,
1068 n.6 (1996); Anglin v. Tipps, 842 S.W.2d 266, 272 (Tex. 1992); Xaphes
v. Murphy, 478 A.2d 299, 301 (Me. 1984); Weston Securities Corp. v.
Aykanian, 46 Mass.App.Ct. 72, 703 N.E.2d 1185, 1188-89 (1998); Siegel v.
Prudential Ins. Co. of America, 67 Cal. App. 4th 1270, 79 Cal.
Rptr. 726, 734 (Cal. App. 2nd Dist. 1998). Following U.S. Supreme Court precedent, various courts then
undertake a three-pronged inquiry into whether state rules are: 1) neutral as
between state and federal law claims for arbitration enforcement, 2) hostile
towards arbitration as an alternative to litigation, and 3) likely to be
outcome determinative. Rosenthal,
926 P.2d at 1069-70, quoting Felder v. Casey, 487 U.S. 131, 138
(1988); see also Siegel, 79 Cal. Rptr.2d at 735; Bush, 165
Ore. App. at 708 n.4. Although it may
be that many of these cases involve state rules which substantially replicate
FAA procedures, while Section 12-301 permits an earlier appeal than the FAA
would allow, Chevy Chase fails to establish the relevance of this factual
distinction by demonstrating how these courts’ frustration of purpose analyses
would yield a different result in this case.[4]
Under the same frustration of purpose inquiry applied
in the substantial body of case law holding that substantive federal law does
not preempt state procedural rules, Section 12-301 does not stand as an
obstacle to the enforcement of federal law.
Section 12-301 displays no hostility towards arbitration, but rather is
a generally applicable rule which permits an immediate appeal of any final
judgment by a circuit court, and has been interpreted by this Court to apply to
all circuit court orders that effectively terminate a particular case. Horsey, 329 Md. at 401-02. As a rule that is generally applicable to
all final judgments, Section 12-301 is neutral as between state law claims and
federal claims for enforcement of arbitration agreements.[5] Finally, Section 12-301 is not outcome
determinative on the substantive question of whether a contractual arbitration
clause is enforceable. The FAA creates
no federal right to arbitrate in the absence of a valid contractual
agreement. Thus, an appellate court’s
pre-arbitration reversal of an order compelling arbitration produces exactly
the same outcome as would a post-arbitration reversal. In neither case is there a right to compel
arbitration. Likewise, an appellate affirmance changes the time frame of
arbitration, but does not defeat the federal right to arbitrate. Thus, there is no conflict between
Maryland’s allowance of an immediate appeal from an order compelling
arbitration and the FAA’s purpose to enforce contractual agreements to
arbitrate. Since no provision of the
Federal Arbitration Act either expressly or impliedly requires states to apply
a particular set of procedures in cases involving contracts governed by Section
2 of the Act, Chevy Chase’s federal preemption argument must fail.
C. CONGRESS
MAY NOT UNDERMINE STATE SOVEREIGNTY BY DECREEING APPELLATE JURISDICTION AND
RULES OF JUDICIAL PROCEDURE IN STATE COURTS.
The text and judicial interpretations of the Federal
Arbitration Act demonstrate that the Act does not preempt procedural rules like
Maryland’s Section 12-301. As important,
Congress would not have the power to preempt the appellate jurisdiction of
state courts even if it intended to do so.
Although state courts may be compelled to apply substantive federal law
under the Supremacy Clause, see Howlett v. Rose, 496 U.S. 356, 367
(1990), the Supreme Court has warned that federal preemption affecting state
judicial structures implicates core constitutional protections of state
sovereignty:
When
preemption of state law is at issue, we must respect the ‘principles [that] are
fundamental to a system of federalism in which the state courts share
responsibility for the application and enforcement of federal law.’ Howlett, 496 U.S. at 372-73. This respect is at its apex when we confront
a claim that federal law requires a State to undertake something as fundamental
as restructuring the operation of its courts.
Johnson
v. Fankell, 520 U.S. 911, 922
(1997). Thus, “[t]he general rule,
‘bottomed deeply in belief in the importance of state control of judicial
procedure, is that federal law takes the state courts as it finds them.’” Howlett, 496 U.S. at 372, quoting
Hart, “The Relations Between State and Federal Law,” 54 Colum. L. Rev. 489, 508
(1954); see also Fankell, 520 U.S. at 919; Southland Corp., 465
U.S. at 33 (O’Connor, J. dissenting).
Chevy Chase’s argument that Congress can strip Maryland’s courts of
appellate jurisdiction runs counter to constitutional norms of federalism.
The Supreme Court’s holding in Fankell is
instructive, if not determinative, as to the preemption question presented
here. Fankell holds that a state
rule prohibiting interlocutory appeals of orders denying qualified immunity
defenses asserted by public officials is not preempted despite the availability
of an immediate appeal in federal court.
Fankell, 520 U.S. at 922-23.
In making this determination, the Court identified the problem of
federalism that arises when Congress attempts to determine the appellate
jurisdiction of state courts. Id.
at 919. Since the Court determined that
the non-appealability rule was neutral in its permission of appeals only of
final judgments and that it was not outcome determinative because it would not
affect the ultimate disposition of the case, the state procedure was not
preempted by federal law. Id. at
919 and 921. Section 12-301 of the
Maryland Code shares these precise features: it proclaims a neutral rule
treating alike all final judgments, and it effects only the timing of appeals,
but not their ultimate disposition. The
Maryland appealability rule’s effect on federal rights thus is insufficient to
overcome the presumption against preemption of state rules of judicial
procedure.
Chevy Chase’s attempts to distinguish Fankell
fall flat. First, Chevy Chase asserts that
the appearance of interlocutory appeal provisions within the FAA, rather than
within the rules of judicial procedure as in Fankell, somehow reverses
the preemption analysis. Br. at
10. Although a footnote in Fankell factually distinguishes an earlier case on a
similar ground, the Court also explained that “the right to an immediate appeal
in the federal court system is found in 28 U.S.C. § 1291, which obviously has
no application to state courts.” Fankell,
520 U.S. at 921 n.12. Section 16(b)(2)
of the FAA, the source of the asserted federal right not to have an immediate
appeal of an order directing arbitration, likewise has no application in state
courts because it applies only to orders in Section 4 proceedings and Section 4
on its face applies only in federal courts.
9 U.S.C. §§ 4 and 16(b)(2).
Chevy Chase’s assertion that Section 12-301’s authorization of a
pre-arbitration appeal “determines the outcome of the federal policy in
question,” Br. at 10, ignores both the Supreme Court’s admonition in Volt
Information Sciences that “[t]here is no federal policy favoring
arbitration under a certain set of procedural rules,” 489 U.S. at 476, and Fankell’s
clarification that outcome determinativeness refers only to the “ultimate
disposition of the case.” Fankell,
520 U.S. at 921. Fankell compels
the conclusion that Section 12-301’s authorization of the appeal in this case
is not preempted by the Federal Arbitration Act.
Congress may only preempt state laws that undermine or
defeat substantive federal rights. In Howlett,
for example, the Supreme Court held that a federal civil rights law, 42 U.S.C.
§ 1983, compelled Florida’s courts to entertain a federal action against a
local government official despite the jurisdictional barrier created by State
sovereign immunity law because the law was not neutral as to federal rights
when Florida courts heard analogous State law claims. Howlett, 496 U.S. at 375.
In Felder v. Casey, 487 U.S. 131 (1988), the Court held that
Wisconsin’s courts could not enforce a State “notice of claim” requirement as a
condition for filing a federal civil rights action against government officials
in State court because the notice requirement burdened federal rights and was
predictably outcome determinative since non-compliance defeated any cause of
action. Id. at 144, 151. The Court concluded in Felder that
the notice of claim requirement was a substantive condition rather than a
procedural rule and declared that “state courts are not simply free to
vindicate the substantive interests underlying a state rule of decision at the
expense of a federal right.” Id.
at 151, 152. Maryland’s recognition in
Section 12-301 of the right to an immediate appeal of an arbitration order
neither differentiates between state and federal rights nor affects the
substantive outcome of cases to which it applies.
The constitutional protection of state sovereignty
that allows states rather than Congress to determine the jurisdiction and procedures
of their own courts has commanded considerable attention in recent Supreme
Court decisions. In New York v.
United States, 505 U.S. 144 (1992), the Court held that the “take title”
provision of the federal Low-Level Radioactive Waste Policy Act requiring
states to take ownership of, or else to regulate, radioactive waste within
their borders, fell outside of the constitutional limitations on federal
authority. Id. at 177. The New York Court emphasized the
dual sovereignty of federal and state government that the Constitution
preserves:
States
are not mere political subdivisions of the United States. State governments are neither regional
offices nor administrative agencies of the Federal Government. The positions occupied by state officials appear
nowhere on the Federal Government’s most detailed organizational chart. The Constitution instead ‘leaves to the
several States a residuary and inviolable sovereignty,’ reserved explicitly to
the States by the Tenth Amendment.
Id. at 188, quoting Federalist No. 39. Thus, although Congress indisputably had the
power to regulate radioactive waste directly under the Commerce Clause, it did
not have the power to command state legislative or regulatory bodies to do the
same. Id. at 178. Likewise, in Printz v. United States,
521 U.S. 898 (1997), the Court held that Congress could not require state or
local law enforcement officers to administer a federal regulatory program
concerning firearms purchases because such commandeering violated the
constitutional system of dual sovereignty.”
Id. at 935. Printz
emphasized that “[i]t is an essential attribute of the States’ retained
sovereignty that they remain independent and autonomous within their proper
sphere of authority.” Id. at
928. Chevy Chase’s argument that
Congress extinguished the appellate jurisdiction of Maryland courts in this
case through Section 16(b) of the FAA (and, taken to its conclusion, that
Congress compels state courts to
exercise appellate jurisdiction under Section 16(a)) ignores constitutional
protections of state sovereignty that prohibit federal commandeering of state
government.
Although the Supremacy Clause does allow Congress to
preempt state laws that conflict with federal law and may require state courts
to enforce federal law, Congress may not dictate the jurisdictional and
procedural rules that state courts apply when hearing cases whose substantive
outcome is determined by federal law.
In New York, the Court recognized the duty of state courts to
enforce federal law, but highlighted the difference between state judicial
enforcement of federal regulation of individuals and federal control of state
regulatory processes. New York v.
U.S., 505 U.S. 178.
The Supreme Court explicated the limits of federal
power over state courts in Alden v. Maine, 119 S. Ct. 2240 (1999), where
it held that Congress cannot require state courts to hear suits by individuals
against the states themselves when no such suit may be brought in federal
court. Id. at 2266. Alden repeatedly identifies the
sovereign rights of states as the underpinning for its holding:
When the
Federal Government asserts authority over a State’s most fundamental political
processes, it strikes at the heart of political accountability so essential to
our liberty and republican form of government.
. . .
. A State is entitled to order the
processes of its own governance. . . .
If Congress could displace a State’s allocation of governmental power
and responsibility, the judicial branch of the State, whose legitimacy derives
from fidelity to the law, would be compelled to assume a role not only foreign
to its experience but beyond its competence as defined by the very constitution
from which its existence derives.
Id. at
2265. Alden rejected the plaintiff’s
invocation of the Supremacy Clause, noting that federal courts themselves have
no jurisdiction over suits by individuals against states and concluding that
“[t]here can be no serious contention . . . that the Supremacy Clause imposes
greater obligations on state-court judges than on the Judiciary of the United
States itself.” Id. at
2266. Chevy Chase’s preemption argument
would violate this precept by requiring Maryland courts to follow the dictates
of Congress in exercising appellate jurisdiction and in applying rules of
procedure to their own adjudications even though federal courts have never
exercised appellate jurisdiction or applied rules of judicial procedure at the
command of state legislatures.
The difference between applicable substantive law and
a forum’s jurisdictional and procedural rules has been central to the
delineation of the respective authority of federal and state courts under the
constitutional system of dual sovereignty.
In the foundational case of Erie R. Co. v. Tompkins, 304 U.S. 64
(1938), where the Supreme Court held that state substantive law provides the
rule of decision in diversity cases, preservation of state sovereignty was a
core consideration:
[t]he
constitution of the United States . . . recognizes and preserves the autonomy
and independence of the states—independence in their legislative and judicial
departments. Supervision over either
the legislative or the judicial action of the states is in no case permissible
except as to matters by the constitution specifically authorized or delegated
to the United States. Any interference
with either, except as thus permitted, is an invasion of the authority of the
state, and, to that extent, a denial of its independence.
Id. at 78-79; see also Alden, 119 S. Ct.
at 2266. The Erie doctrine
nonetheless allows federal courts to apply federal rules of procedure and
jurisdiction in diversity cases. See Guaranty
Trust Co. of New York v. York, 326 U.S. 99, 106-109 (1945). Since Alden prohibits Congress from
imposing greater burdens on state courts under the Supremacy Clause than are
imposed upon federal courts, and since under the Erie doctrine federal
courts always apply forum rules of procedure and appellate jurisdiction, Chevy
Chase’s preemption argument must fail as a constitutional matter of state
sovereignty. Just as the Maryland
legislature may not supercede Section 1291 to compel or preclude the exercise
of jurisdiction by federal courts of appeal in diversity cases, Congress may
not preempt Section 12-301 by precluding the exercise of appellate jurisdiction
by Maryland’s courts.
This Court need not reach the complex constitutional
questions raised by federal preemption of the appellate jurisdiction of state
courts, however, because the Federal Arbitration Act does not on its face or in
judicial explications of its underlying purposes and policy goals purport to
preempt state laws which do not undercut the enforceability of arbitration
agreements.
REPLY IN SUPPORT OF APPELLANTS’ APPEAL
INTRODUCTION AND SUMMARY OF ARGUMENT
Chevy Chase wrote a contract it now wishes that it
hadn’t. The contract promised
unequivocally that Chevy Chase would not amend the contract without giving the
notice prescribed in Subtitle 9 specifically and any other applicable federal
law. Chevy Chase failed to do so. Now Chevy Chase wants this Court to re-write
that contract to say that the “applicable federal law” clause deletes the more
specific reference to Subtitle 9. Chevy
Chase incorrectly says that this is required because a federal regulation
saying that banks must have flexibility to structure their notices prevents
banks from promising to give notice that is more generous than the minimum
required by federal law.
The contract that Chevy Chase drafted also drew a
distinction between amendments to the contract (which were generally allowed)
and additions to the contract (only a specified few of which were
allowed). To impose its new arbitration
clause on its customers, Chevy Chase had to “add” it, but arbitration was not
one of the permitted types of additions.
So Chevy Chase again asks this Court to re-write its contract so that
the word “amend” includes the right to add any provision. Under this proposed re-write of the
contract, the sentence permitting Chevy Chase to make certain limited additions
would be entirely surplusage because it is already a power authorized by the
prior sentence dealing with the types of amendments permitted.
Chevy Chase falsely argues that plaintiffs’
conscionability arguments are rooted in a general hatred of arbitration. There is no dispute that arbitration is
legal, however, and that there is a policy favoring the enforcement of agreements
to arbitrate. But this case is not
about “most” arbitration clauses, or arbitration in the abstract. Most
arbitration clauses are not proven to have been sent out in a manner that
successfully deflected their recipients’ attention. Most arbitration clauses do not contain Loser Pays Clauses and
most do not rewrite consumer protection statutes in a way that would bar
consumers from invoking them. Most
arbitration clauses do not require consumers desiring to appear before the
arbitrator in person to pay fees that are likely to be greater than the amount
of money they are claiming. Most
arbitration clauses have not been proven to deny most if not all consumers any
realistic or effective method of relief.
Chevy Chase is surely correct that most arbitration clauses are
enforceable. Courts have been like
umpires in evaluating arbitration clauses, calling most of them strikes (i.e.
legal), but finding that some of them (literally dozens in the last few years) were
balls (i.e. unconscionable or illegal).
Chevy Chase wants this Court to think it has no role in policing when an
arbitration clause goes too far.
“That’s a question of federal law,” they say, “that’s a question for the
arbitrator to decide,” “arbitration is always cheaper,” etc. Nonsense.
The undisputed factual record here establishes that this is a uniquely
unfair arbitration clause that would bar every plaintiff from any effective
remedy and, on that record, this Court should declare this clause unconscionable.
ARGUMENT
1.
PLAINTIFFS DID NOT
AGREE TO ARBITRATE THESE CLAIMS.
A. THE
ARBITRATION CLAUSE IS NOT VALID BECAUSE CHEVY CHASE DID NOT COMPLY WITH ITS
CHANGE OF TERMS PROVISION.
Chevy Chase drafted a contract wherein it promised
that it would only amend the credit agreement in compliance with “Subtitle 9 of
Title 12 of the Commercial Law Article of the Maryland Annotated Code
[“Subtitle 9"] and applicable federal law.” E. 35. As we will
establish, Chevy Chase failed to comply with the provisions of Subtitle 9. Accordingly, Chevy Chase now wishes that it
had not made this promise, so it claims that federal preemption requires this
Court to re-write the contract to effectively delete the reference to Subtitle
9 and instead say only that it would amend the agreement in compliance with
applicable federal law.
First, Chevy Chase’s proposed reading of the contract
is counter to its plain terms. Chevy
Chase promised to comply with Subtitle 9 and applicable federal
laws. By using “and” rather than “or,”
Chevy Chase plainly intended to include, not exclude, Subtitle 9. Chevy Chase’s reading thus would strikeout
all of the language about Subtitle 9.
In effect, Chevy Chase drafted a contract saying it would follow A and
B, and now it wants this Court to rewrite that contract to say that it
would only follow B. This Court held
such an approach to be unacceptable in Sagner v. Glenangus Farms, Inc.,
234 Md. 156, 167 (1964):
A
recognized rule of construction in ascertaining the true meaning of a contract
is that the contract must be construed in its entirety, and, if reasonably
possible, effect must be given to each clause so that a court will not find an
interpretation which casts out or disregards a meaningful part of the language
of the writing unless no other course can be sensibly and reasonably followed.
In addition, the rules of contract interpretation
prohibit the rewriting of a contract of adhesion in favor of the drafter. See Mattingly Lumber Co. v. Equitable
Bldg. & Savings Assoc. of Baltimore City, 176 Md. 403, 409
(1939) (“[I]t is a rule common to the construction of all written instruments
that it is to be taken, in cases of doubtful meaning, against the draftsman.”)
Chevy Chase also asks this Court to disregard the
specific reference to Subtitle 9 in favor of a general reference to “applicable
federal law,” ignoring the rule of contract interpretation that “Where two
clauses or parts of a written agreement are apparently in conflict, and one is
general in character and the other is specific, the specific stipulation will
take precedence over the general, and control it.” Federal Ins. Co. v. Allstate Ins. Co., 275 Md. 460, 472
(1975).[6]
Finally, Chevy Chase’s proposed re-writing of its
contract is not required by principles of federal preemption. This case is not about the power of the
State of Maryland to regulate Chevy Chase’s business. Plaintiffs do not argue that, as a matter of positive state law,
Subtitle 9 mandates more extensive notice requirements for Chevy Chase than do
the Office of Thrift Supervision (“OTS”) regulations. The OTS regulations state that “OTS intends to give federal
savings associations maximum flexibility to exercise their lending powers in
accordance with a uniform federal scheme of regulation.” 12 C.F.R. § 560.2. The State of Maryland could not, by law or regulation, interfere
with that uniform federal scheme and require Chevy Chase to give its customers
a different notice of proposed contract amendments. Chevy Chase, a long time federally chartered lender, knew this
was true, but it chose to draft a contract that promised that it would do more
than the OTS regulations required.
Although the OTS regulations seek to give a federal
savings association some leeway to maintain a “flexible lending practice,”
Chevy Chase now asks this Court to hold that these regulations effectively
prevented Chevy Chase from exercising that flexibility to promise that it would
provide more generous notice than the minimum notice required by the OTS
regulations. The U.S. Supreme Court has
held, however, that a party may choose to follow otherwise-preempted state law
in a contract without running afoul of federal preemption principles:
We do not read the [Airline Deregulation Act]’s
preemption clause, however, to shelter airlines from suits alleging no
violation of state-imposed obligations, but seeking recovery solely for the
airline’s alleged breach of its own, self-imposed undertakings. As persuasively argued by the United States,
terms and conditions airlines offer and passengers accept are privately ordered
obligations “and thus do not amount to a State’s ‘enact[ment] or enforce[ment]
[of] any law, rule, regulation, standard, or other provision having the force
and effect of law’ within the meaning of [§] 1305(a)(1). Cf. Cipollone v. Ligget Group, Inc., 505
U.S. 504, 526 (1992) (plurality opinion) (“[A] common law remedy for a
contractual commitment voluntarily undertaken should not be regarded as a
‘requirement . . . imposed under State law’ within the meaning of [Federal
Cigarette Labeling and Advertising Act] § 5(b).”). A remedy confined to a contract’s terms simply holds parties to
their agreements. . . .
American Airlines, Inc. v. Wolens, 513 U.S. 219, 228-229 (1995) (footnote
omitted). These words could have been
written just as well about this case.
Chevy Chase’s reliance on Chaires v. Chevy Chase
Bank, FSB, 131 Md. App. 64 (2000) cannot justify disregarding the Supreme
Court’s interpretation of federal law in Wolens. In any case, the Court of Special Appeals
framed the question in Chaires as being whether the bank had “waived
federal protection.” Here, Chevy Chase
has not waived any “federal protection” – the purpose of the OTS rules was to
give Chevy Chase the flexibility to choose how it would give notice, and Chevy
Chase exercised that flexibility by specifically promising to give the type of
notice set forth in Subtitle 9. The Chaires
opinion says that consumers may not “elect state law over federal law for all
aspects of the loan contract,” but here it was Chevy Chase that elected to use
the flexibility given it by federal law to contract to follow a specific
Maryland statute with respect to one aspect of its credit card agreement.
Chevy Chase’s citation to Fidelity Fed. Sav. &
Loan Assoc. v. De la Cuesta, 458 U.S.141 (1982) is also misplaced. In that case the plaintiff argued that
California law operated automatically to limit the flexibility of a federally
chartered lender. The bank’s own
contract language was not an issue. The
Supreme Court held that “[S]tate law is nullified to the extent that it
actually conflicts with federal law.
Such a conflict arises when ‘compliance with federal and State
regulations is a physical impossibility.’”
458 U.S. at 152. There is
certainly no physical impossibility here – federal regulations provided that
states could not regulate Chevy Chase in a way that denied it flexibility, but
did not bar Chevy Chase from exercising that flexibility to agree to provide
better notices for its customers than the minimum notice required by federal
law.
It is clear that Chevy Chase’s notice of contract
amendments for the arbitration clause (among other amendments) did not comply
with Subtitle 9, despite its promise to do so.
Subtitle 9 requires that a two-step notice (with a right to reject) be
provided with respect to any change that “has the effect of increasing the
interest, finance charges, or other fees and charges to be paid by the
borrower.” Md. Code Ann., Comm. Law I §
12-912(b)(1). As set forth below, Chevy
Chase’s arbitration clause does increase fees and charges that borrowers may be
required to pay. Chevy Chase says that
the high arbitration fees are not the sort of fee to which Subtitle 9 refers,
hoping that this Court will greatly narrow § 912(b)(1)’s general reference to
“fees and charges to be paid by the borrower” to only “lending fees and
charges” (a category of its own invention).
It is true that the arbitration fees are contingent, and will not
necessarily be visited upon all cardholders, but so are many other fees and charges
(such as late fees) that are plainly within Chevy Chase’s interpretation of the
scope of Subtitle 9. The obvious
purpose of Subtitle 9 is to protect consumers from being unwittingly exposed to
large new charges of a sort that might seriously harm their interests, without
clear notice and an opportunity to reject the charges. The potentially huge arbitration fees
discussed here – which could easily exceed the other new charges included in
the Virginia Document – are exactly the sort of new charges addressed by
Subtitle 9.
It is also clear that § 12-911 barred the Loser Pays
Rule embodied in Chevy Chase’s arbitration clause.[7] Chevy Chase says that this section deals
with a different type of attorneys’ fee than those imposed by the arbitration
clause, but misses the point of that section.
Section 12-911 says that the only type of attorneys’ fees that a lender
may charge is the type set forth there.
By setting out one type of fee that is permitted, § 12-911 plainly
excludes other unlisted types of fees such as the attorneys’ fees in Chevy
Chase’s Loser Pays Rule.[8]
B. THE
ARBITRATION CLAUSE IS NOT EFFECTIVE BECAUSE IN THE CONTEXT OF THE CONTRACTUAL
LANGUAGE DRAFTED BY CHEVY CHASE, IT WAS AN ADDITION AND NOT AN AMENDMENT.
If one were to define the word “amend” in a vacuum,
one might well conclude that adding a term to a contract was an amendment to
it. This case is not about a vacuum,
however, it is about the specific contract language drafted by Chevy Chase (and
thus to be construed against it) in this adhesive contract. Here is what Chevy Chase’s contract said:
[Chevy Chase may] amend the terms of this
agreement. Also [Chevy Chase] may . . .
add new credit services, discontinue any credit services or replace [the] card
with another card.
E. 35. This
contract language plainly treats the word “amend” different than it treats the
word “add.” Under its own language,
Chevy Chase can amend any provision of the contract, but it can only “add”
certain types of provisions (which do not include arbitration clauses).
The problem for Chevy Chase is that arbitration was
not on the list of terms it could add.
So Chevy Chase now wants this Court to read the sentence about amending
terms in such a way that would render superfluous the sentence about adding
credit services. Chevy Chase argues
that the word “amend” must include all additions. If that is correct, then the sentence allowing the amendment of
any term would also allow the addition of any term (including credit
services). This interpretation thus
renders the provision about adding credit terms as unnecessary and superfluous.
Chevy Chase tries to salvage its position by claiming
that credit services may only be added, not amended. Brief at 14, n. 6. This
argument is plainly wrong, as credit services may be easily amended by altering
their price, the time period of their availability, or any number of other
characteristics. In addition, this
argument fails to explain why the sentence about adding credit services is in
the contract at all – even if credit services could only be added, Chevy
Chase’s position remains that the word “amend” includes the concept of adding
new terms. Thus, if read as Chevy Chase
urges, the first sentence still renders the second sentence unnecessary.
Chevy Chase claims that the cases cited by plaintiffs
should be ignored because they are rooted in a hostility to arbitration. Brief at 15. Neither case has ever been criticized or rejected by any court in
a published opinion, however, and both are good law. Chevy Chase, by contrast, relies upon several cases (most of
which are unpublished opinions of one or two pages from state trial courts)
that do not provide enough information to permit this Court to compare the
relevant contractual language. Brief at
15. As shown above, the Maryland
Agreement used the word “amend” in a different way than it used the word
“add.” Chevy Chase has produced a few
cases interpreting the word “amend” as it would like, but none of these cases
provides enough information to determine if the word “amend” fell in a passage
immediately preceding the word “add” in the juxtaposition present here.
C. THE ARBITRATION CLAUSE NEVER BECAME EFFECTIVE BECAUSE IT DID
NOT EXPLICITLY STATE THAT IT WOULD APPLY RETROACTIVELY TO TRANSACTIONS
COMPLETED BEFORE IT WAS PROMULGATED.
In our Opening Brief, we established that the arbitration
clause could not be applied retroactively to transactions occurring before it
was promulgated without explicitly informing customers that their claims
relating to these pre-existing transactions would be affected. Chevy Chase’s responses to this argument
fail to address the true sense in which their interpretation would give the
arbitration clause retroactive effect.
Chevy Chase wrongly claims that plaintiffs’ argument
depends upon a finding that the Maryland Agreement and the Virginia Document
are “separate contracts,” and that plaintiffs have changed their position in
this litigation on the subject of how the contract was amended. Brief at 16-18. As shown above, plaintiffs have consistently argued that the
Virginia Document was an ineffective and legally invalid attempt to amend the
Maryland Contract.[9] Plaintiffs’ argument has never depended on a
finding that there were separate contracts, but rather is based on the claimed
and undisclosed retroactive application of the arbitration clause to
transactions that predated its existence.
Chevy Chase is attempting to apply the clause to resolve a dispute over
interest rates governing transactions that were completed before the clause was
promulgated.
In this setting, the rationale and concerns underlying
the rulings against undisclosed retroactivity set forth in each of the cases
cited in plaintiffs’ opening brief apply with full force. In Hendrick v. Brown & Root, Inc.,
50 F. Supp.2d 527 (E.D. Va. 1999), for example, the district court’s findings
that the presumption in favor of arbitration has no application where
contractual language does not evince an agreement to arbitrate pre-existing
disputes, and that the waiver of a vested right to a judicial resolution can never
be inferred from silence, id. at 535, in no way hinged on the existence
of separate contracts as opposed to a stealth retroactive amendment of one
contract between the parties. A federal
court reached this same conclusion regarding retroactive enforcement where an
arbitration clause was added pursuant to a contractual right to “change . . .
terms and conditions of this agreement,” finding that “assuming [plaintiff] is
deemed to have agreed to the arbitration provision, defendants’ [sic] offer no
justification for holding that he agreed to arbitrate acts that occurred before
the effective date of that agreement.” Long
v. Fidelity Water Systems, Inc., 2000 U.S. Dist. LEXIS 7827, *3, 9-10 (N.D.
Cal. May 26, 2000). Whether an
arbitration clause is purported to apply to a transaction that arose previously
under a separate contract with no arbitration clause or under a
pre-amendment version of the same contract without an arbitration clause, the
drafter of the clause must make such retroactive application explicit in the
clause itself.
Retroactive application of Chevy Chase’s arbitration
clause to disputes concerning the plaintiffs’ pre-amendment debt would deprive
the plaintiffs of any opportunity to conduct their affairs so to avoid the
arbitration clause’s extinguishing effect on their judicial remedies. Chevy Chase’s contention that its
arbitration clause is not being used retroactively here because “[e]ven if the
focus were on the acts giving rise to the dispute” (which it is according to every court
to address the issue), “the Arbitration Clause became effective simultaneously
with the amendments challenged by appellants,” Brief at 18, is no answer to the
fundamental unfairness that undisclosed retroactive rule making works against
parties. In an analogous context, the
Supreme Court has explained that “[r]etroactive legislation presents problems
of unfairness that are more serious than those posed by prospective legislation
because it can deprive citizens of legitimate expectations and upset settled
transactions.” General Motors Corp.
v. Romein, 503 U.S. 181, 191 (1992); see also Tasios v. Reno,
204 F.3d 544, 549 (4th Cir. 2000) (“[f]airness dictates that people
have an opportunity to know what the law is and conform their conduct accordingly”). By failing to state explicitly that the
arbitration clause was retroactive, Chevy Chase provided its cardholders with
no such opportunity. Instead, Chevy
Chase waited until after plaintiffs incurred debt under the contract’s
original terms and then unilaterally amended the contract by “simultaneously”
raising their interest rates and requiring arbitration of any legal dispute
pertaining to plaintiffs’ prior debt.
Through all of Chevy Chase’s sophistry about retroactivity and when the
plaintiffs filed suit or when it hiked its interest rates, the bank never
explains how the plaintiffs who were not plainly told that the arbitration
clause was retroactive could have conducted their affairs to avoid having to
arbitrate their legal claims regarding the rate hike.
Finally, Chevy Chase claims that this argument was not
made before the trial court. This
assertion is puzzling at best, as plaintiffs repeatedly argued that Chevy Chase
had illegally tried to amend the terms of the Virginia Document and to apply
those amendments to transactions that were completed before it was
promulgated. E. 57 (Maryland Agreement
“contained no arbitration clause”); E. 72 (arbitration clause among new terms
imposed without giving cardholders right to refuse application to “outstanding
unpaid indebtedness”); E. 243 (contract changes and increased fees are being
applied “retrospectively to pre-existing balances”); E. 244 (plaintiffs had “no
inkling that [arbitration clause] was coming,” did not agree until unilateral
changes to contract).
Even if Chevy Chase were correct that this issue had
not been raised at the trial court, Rule 8-131 provides an exception for issues
that will “avoid the expense and delay of another appeal.” Since there are probably many thousand class
members (more than 130 contacted counsel after a single local radio show, E.
109-110), refusing to decide the retroactivity issue now because it was
supposedly raised too generally will only lead to the delay and expense of
another set of cardholders filing identical suits and raising the point.
D. PLAINTIFFS NEVER AGREED TO ARBITRATE THEIR CLAIMS BECAUSE
CHEVY CHASE DISCLOSED THE ARBITRATION CLAUSE IN A MANNER THAT ENSURED THAT
PLAINTIFFS WOULD NOT VOLUNTARILY, KNOWINGLY OR INTELLIGENTLY WAIVE THEIR
CONSTITUTIONAL RIGHTS.
As our Opening Brief established, the undisputed sworn
fact and expert testimony here shows that (a) none of the named plaintiffs knew
anything about an arbitration clause; (b) none of a sample of 136 putative
class members reported having received an arbitration clause; and (c) the only
expert to address the issue gave his opinion that the arbitration clause was
sent out in a manner that ensured that few cardholders would ever notice
it. We then cited to the generally
applicable contract rule that constitutional rights (such as the right to trial
by jury) may not be waived unless this waiver is voluntary, knowing, and
intelligent. Opening Brief at 26. We further noted that several courts have
held that arbitration clauses are only enforceable when there is clear evidence
of an intention to be bound.
Chevy Chase disputes none of these points, but argues
that waivers of the right to trial by jury may be unknowing, involuntary,
and unintelligent. Chevy Chase
relies on Meyer v. State Farm Fire & Casualty Co., 85 Md. App. 83
(1990), a case that did not involve an arbitration clause governing all aspects
of a dispute, but instead involved an appraisal process to resolve disputes
relating to the amount of a loss.[10] This Court should not follow the language
cited in Meyer for three reasons.
First, the arbitration discussion in Meyer starts with the
premise that there is a policy in favor of arbitration, when the actual policy
– as established above – is not in
favor of arbitration per se, but instead is in favor of the enforcement of
arbitration agreements.
Second, the argument that the FAA bars state courts
from applying the voluntary, knowing and intelligent standard to arbitration
agreements is simply wrong. As shown
above, the FAA only preempts state laws that single out arbitration clauses for
discriminatory treatment, it does not preempt generally applicable state law
contract doctrines. The doctrine that
waivers of constitutional rights must be voluntary, knowing and intelligent is
not a discrimination against arbitration clauses, but is merely a generally
applicable rule of law that treats arbitration clauses the same as other
contractual provisions of their type.
Far from seeking an “even handed” rule of law, Chevy Chase asks this
Court to discriminate in favor of arbitration.
Under Chevy Chase’s suggested rule of law, the right to jury trial would
be the only constitutional right that did not require a voluntary, knowing and
intelligent waiver.
Finally, Meyer’s suggestion that the
application of the general rule relating to voluntary, knowing and intelligent
waivers would “significantly circumscribe” the viability of arbitration, 85 Md.
App. at 91, is not right. In most settings
where businesses seek to require their employees and customers to agree to
arbitration clauses as a condition of doing business, they obtain an actual
signature by the individual. This is
true in the employment setting, for example, and when arbitration clauses are
imposed in loan documents, car sales papers, and various other methods. Even in the credit card setting, plaintiffs’
undisputed expert testimony made clear that the arbitration clause could have
been effectively communicated to cardholders in a host of ways. Instead of using any of the effective
methods available, Chevy Chase – with all of its sophistication as to
communications – selected a method that ensured that cardholders would not
notice the arbitration clause. Nothing
in the FAA requires such an approach be permitted, and a number of courts –
many in decisions post-dating Meyers – have rejected that approach.[11] The dicta in Meyer should not be
taken to override these considered holdings.
III. THIS ARBITRATION CLAUSE IS UNCONSCIONABLE AS APPLIED TO THE
FACTS OF THIS CASE.
Chevy Chase wrongly asserts that plaintiffs base their
arguments upon a general hostility to arbitration. Plaintiffs agree that arbitration agreements in general are
conscionable, and that the question of conscionability turns on the specific
facts of a case.[12] Plaintiffs note, however, that Chevy Chase’s
discussion of the standard for unconscionability makes no mention of the
question of surprise, which the law makes clear should be heavily considered in
evaluating claims of unconscionability.
Md. Code Ann., Comm. Law I § 2-302.
As we established above, the plaintiffs here were all surprised by the
arbitration clause, and this Court should bear that fact in mind.
A. THE LOSER PAYS RULE UNCONSCIONABLY RE-WRITES THE CONSUMER
PROTECTION ACT.
Going far beyond the rules of the American Arbitration
Association (“AAA”), Chevy Chase’s arbitration clause says that any consumer
plaintiff who does not prevail on a claim (whether he or she brought the case
in good faith or not) “shall” pay Chevy Chase’s attorneys’ fees. There is no ceiling provided on the amount
of these fees. While the arbitration
will take place in the claimant’s home town, if Chevy Chase chooses counsel who
must travel to that town, the consumer claimant might be stuck with a hefty
bill for that counsel’s travel time and expenses. Fee shifting statutes generally seek to avoid this problem by
requiring the use of local counsel. See
Alba Conte, Attorney Fee Awards § 4.14 (2d ed.) An individual with a claim amounting to a
few hundred dollars could easily face attorneys’ fees of thousands or tens of
thousands of dollars. The arbitration
clause does not disclose the hourly
rates of Chevy Chase’s attorneys, so plaintiffs could not even evaluate
their possible exposure.
In our Opening Brief at 28-32, we established two
important and uncontroversial rules of law: (a) that it is unconscionable for
an arbitration clause to undermine a statute; and (b) that the
Consumer Protection Act embodies a one-way attorneys’
fee provision whereby prevailing consumer plaintiffs recover fees but
prevailing business defendants do not.
We then argued that by requiring plaintiffs to pay Chevy Chase’s
attorneys’ fees if they lose, Chevy Chase was effectively re-writing the
Consumer Protection Act’s one-way attorneys’ fee provision into a new, two-way
attorneys’ fee provision.
Chevy Chase argues that its attempted re-write of the
Consumer Protection Act is an improvement upon the Legislature’s original
version, because it is an effort to have the Act treat individual consumers and
corporations equally. This misses the
point that the Consumer Protection Act “is intended to protect consumers
by the establishment of minimum standards.”
State v. Cottman Transmissions Systems, Inc., 86 Md. App. 714
(1991) (emphasis added).[13] This is, after all, the Consumer
Protection Act, not the Bank Protection Act.
The Act was inspired by the Legislature’s understanding that there was
an imbalance of power between businesses (such as Chevy Chase) and consumers
such as the plaintiffs:
Piloted by its recognition that the doctrine of caveat
emptor had outlived its social utility, the Maryland General Assembly enacted
the Consumer Protection Act (CPA) to equalize the balance of power
between consumers and providers of consumer goods and services.
Hallowell v. Citaramanis, 88 Md. App. 591, aff’d, 328 Md. 142 (1992)
(emphasis added). See also
Citramanis v. Hallowell, 328 Md. 142, 150 (1992):
[T]he General Assembly enacted the CPA as a
comprehensive consumer protection act to provide protection against unfair or
deceptive practices in consumer transactions. § 13-102 (b). . . . [T]he General Assembly sought to implement
strong protective and preventive measures to assist the public in obtaining
relief from unlawful consumer practices and to maintain the health and welfare
of the citizens of the State.
In enacting the Consumer Protection Act, the
Legislature recognized that the situation between consumers and businesses was
not even, and sought to redress that imbalance. By re-writing that rule to an “even handed” one, Chevy Chase is
undermining the Act’s purpose. Many
“even-handed” rules are unconscionable, when they presume equality between
sophisticated multi-billion dollar businesses and individual consumers. As Anatole France famously stated in 1894,
“the law, in its majestic equality, forbids the rich as well as the poor to
sleep under bridges.” Chevy Chase’s
notion of “even handedness” is similarly lacking. For Chevy Chase to pay a prevailing consumer’s attorneys’ fees –
as the Consumer Protection Act provides – is a cost of doing business. For a consumer with a claim of $300 to face
the risk of thousands or tens of thousands of dollars in attorneys’ fees is a
prohibitive threat. Chevy Chase and the
Circuit Court may be correct that the Loser Pays Rule would discourage
“frivolous” cases, but this is only because it would discourage all
cases, meritorious or not.
This Court should make plain that corporations may not
re-write the Consumer Protection Act to make it more favorable to
themselves. In Milton Co v. Council
of Unit Owners of Bentley Place Condominium, 121 Md. App. 100, aff’d,
354 Md. 264 (1999), the defendant claimed that a contract provision should have
reduced the fees that were otherwise awardable under the Consumer Protection
Act. The court held that “[s]uch a
limitation is inconsistent with the General Assembly’s goal of protecting the
public from unlawful consumer practices. . . .
A party may not repeal an important provision in the Consumer Protection
Act by placing into the contract a counsel fee limitation clause.” 121 Md. App. at 122. See also Armendariz, 2000 Cal.
LEXIS 6120 at * 34 (“[t]he principle that an arbitration agreement may not
limit statutorily imposed remedies such as punitive damages and attorney fees
appears to be undisputed”). This Court
should extend this holding to the facts of this case, and make plain that a
company may neither “repeal” nor re-write in its favor the Consumer Protection
Act.
Chevy Chase cites several authorities to defend Loser
Pays Rule. First it turns to Md. Code
Ann., Cts. & Jud. Proc. § 3-221 (b), which provides that arbitrators may
not award attorney’s fees unless the contract provides otherwise. Chevy Chase’s argument that this language
permits the use of Loser Pays Rules in arbitration contracts mis-construes §
3-221 (b), however, reading into it a substantive component that would override
a host of other statutes.
At the time the Legislature enacted § 3-221(b),
binding mandatory arbitration was principally employed in the commercial
setting, in disputes between businesses.
In those settings, it is very common for statutes regulating such
dealings to permit prevailing defendants to receive their attorneys’ fees. It is a grave mistake to extend the standard
commercial rule to the setting of an individual suing a business. As we set out in our Opening Brief, nearly
every consumer protection or civil rights statute has a one-way attorneys’ fee
provision: a prevailing individual plaintiff recovers her or his attorneys’
fees, a prevailing corporate defendant does not.
Plaintiffs suggest that § 3-221 (b) was never intended
to (and by its terms does not) override these substantive attorneys’ fees
statutes. The proper reading of § 3-221
(b) would only apply it to authorize the recovery of attorneys’ fees in
settings where it is otherwise allowable for a contract to award attorneys’
fees. Where, as here, a Loser Pays Rule
re-writes the Consumer Protection Act (and does so in a way that discourages
individuals from attempting to enforce their rights under the Act), it is not
authorized by the procedural provision of § 3-221 (b).
Chevy Chase also relies upon the inapposite case of Reisterstown
Plaza Associates v. General Nutrition Center, Inc., 89 Md. App. 232 (1991),
that (a) involves a commercial real estate dispute between a large, well-heeled
landlord and a huge multi-national business, where there will be little
question of unconscionability or overreaching; and (b) involves no statutory
claims, much less Consumer Protection Act claims.
Finally, Chevy Chase cites Coughlin v. Shimuzu
America Co., 991 F. Supp. 1226 (D. Or. 1998), which held that a provision
requiring an arbitrator to award attorneys’ to a prevailing party does not
violate the Fair Labor Standards Act.
Its remarkably brief discussion does not even address the Loser Pays
issue, however, 991 F. Supp. at 1231, and does not discuss Christiansburg
Garment. There is also no mention
of a factual record (like the one here) demonstrating that the Loser Pays Rule
would deter individuals from pursuing their claims against Shimuzu. This Court is obviously not bound to
interpret the law of unconscionability in Maryland (which prohibits exculpatory
clauses) in accordance with this Oregon federal trial court’s unexplained
holding.
If this Court holds that the Loser Pays provision is
unconscionable or contrary to the Consumer Protection Act, it should invalidate
the entire arbitration clause. The “primary
purpose” of the FAA is to ensure “that private agreements to arbitrate are
enforced according to their terms.”
Volt Info. Sciences, Inc. v. Board of Trustees of Leland Stanford,
Jr., Univ., 489 U.S. 468, 479 (1979) (emph. added). Accordingly, if an agreement to arbitrate
cannot be enforced according to its terms, this court should refuse to enforce
it. Where a corporation drafts an
unenforceable contract of adhesion, it is not the responsibility of a court to
supply the legal acumen to re-write the contract to find a legal way for the
drafter to enjoy the otherwise-unobtainable results it sought. See Restatement (2d) of Contracts §
184, comment b (“a court will not aid a party who has taken advantage of his
dominant bargaining power to extract from the other party a promise that is
clearly so broad as to offend public policy by redrafting the agreement so as
to make a part of the promise enforceable”); Graham Oil Co. v. ARCO Products
Co., 43 F.3d 1244, 1249 (9th Cir. 1994) (court’s “decision to strike
the entire clause rests in part upon the fact that the offensive provisions
clearly represent an attempt by Arco to achieve through arbitration what
Congress has expressly forbidden”).[14]
B. THE
PROHIBITIVE FEES REQUIRED TO APPEAR BEFORE AN ARBITRATOR RENDER THIS
ARBITRATION CLAUSE UNCONSCIONABLE.
When plaintiffs contacted the AAA and inquired about
the minimum costs and fees required to arbitrate this dispute, they were
pointed to documents and given information indicating that arbitration would
cost at least $950 per plaintiff. E.
115-116. Chevy Chase claims that this
figure is exaggerated, and that the true minimum cost per person is only
$500. Brief at 33. Chevy Chase’s $500 estimate assumes that
each plaintiff will receive an “expedited hearing,” Brief at 33, which refers
to a procedure that is entirely within the individual discretion of AAA
arbitrators. E. 124. There is certainly the possibility that an
individual AAA arbitrator may choose to exercise this discretion to sharply
limit their own fees in a case, but individual cardholders have no guarantee of
this fact. Chevy Chase also assumes
that arbitration will be completed in one day, and in the arbitrator’s
office. Brief at 33.
Even if Chevy Chase’s rosy scenario comes true for an
individual plaintiff, and she or he is only required to pay a minimum
arbitration fee of $500, that fee is far too high for these plaintiffs in this
case, and for most members of the putative class. As we set forth in our
Opening Brief at 33, individual plaintiffs likely have claims of several
hundred dollars. Plaintiffs submit that
few economically rational cardholders with claims in this range will submit
those claims to an arbitration process that requires them to effectively wager
a minimum of $500 in arbitration fees on the hope that they will
win. All three of the named plaintiffs
have testified that they would not pursue their claims if they were required to
pay such fees. E. 162, 165, 168. Chevy Chase has not disputed this testimony.
In evaluating the issue of arbitral fees, we urge this
Court to look at the rationale of the landmark precedent from which most of the
case law governing the costs of arbitration grows – Cole v. Burns International Security Services, 105 F.3d
1465 (D.C. 1997). Cole boils
down to two main points: (1) an arbitration clause will only be enforced if it
offers claimants just as good a remedy as they would have received if they had
gone to court; and (2) if the fees for arbitration would deter people from
pursuing a remedy for wrongs done to them, then arbitration is not as good a
remedy as court, and it cannot be compelled.
In our opening brief, we cited many cases that follow
this reasoning (and usually cite to Cole). As Chevy Chase points out, however, some other courts have held
that the costs of arbitration were not excessive in other cases. In some cases, the facts at issue were
readily distinguished from Cole (and also this case). As we shall demonstrate below, however, some
of these courts basically ignored the rationale of Cole and paid no
attention to whether a given arbitration clause would deter individuals from
pursuing their legal claims. This Court
should hold that the common law of unconscionability in Maryland requires that
arbitration clauses may not impose costs on an individual that exceed what they
would be required to pay in court.[15] Cole held that “it is unacceptable to
require Cole [a plaintiff bringing civil rights claims] to pay arbitrators’
fees, because such fees are unlike anything that he would have to pay to pursue
his statutory claims in court.” 105
F.3d at 1485. The California Supreme
Court just reached the same conclusion in Armendariz, 2000 Cal. LEXIS
6120 at * 52-53.
Chevy Chase argues that since AAA might choose
not to require consumers to pay arbitration fees, and since consumers might
recover their fees if they prevail, the fees involved here are therefore not
excessive. Chevy Chase is correct that
some courts (principally the Alabama Supreme Court and some federal district
courts in New York) have accepted this argument. These cases ignore Cole’s reasoning, and gut the life from
that precedent.
It is true that AAA’s rules create the possibility
that arbitration fees may be waived, but this possibility will not eliminate
the deterrent effect of arbitral fees.
The AAA rule leaves the waiver of fees entirely in the discretion of the
arbitrator. There are no
guarantees. Most plaintiffs would be
reluctant to take the risk of paying fees that approach or exceed the
value of their claim. In any case, it
is very unlikely that AAA will waive fees very often. AAA may ostensibly be a non-profit organization, but its actual
arbitrators perform their work for pay.
It is a business for most of these women and men, and there is no reason
to suspect that they would waive the fees for many (far less most or all) of
the several hundred thousand persons who are likely members of this putative
class.
The possibility of a subsequent recovery of
arbitrators’ fees is also unlikely to eliminate the deterrent effect on
claimants of the risk of large fees.
The question of timing is crucial: if a plaintiff cannot currently
afford to pay $500, they cannot arbitrate.
As one court has held:
As in Cole, the court is not persuaded by the
fact that plaintiffs may be able to recover the Arbitrator’s fees as part of an
award. That possibility is small consolation
when plaintiffs are prevented from participating in the hearing if unable to
pay the fees in the first place.
Horenstein v. Mortgage Market, Inc., 1999 U.S. Dist. LEXIS 21463 * 9-10 (D. Ore. Jan.11,
1999). The Courts that have held that
this “small consolation” resolves this issue in favor of arbitration are simply
ignoring the logic of Cole and its extensive progeny.
In Armendariz, similarly, the employer argued
that imposing high arbitration fees on individuals was legal because of the
possibility that these fees might be eliminated in subsequent proceedings. The California Supreme Court held that the
speculative future prospect of the possible cancellation of fees would not
remove the deterrent effect of such fees:
[I]f it is possible that the employee will be charged
substantial forum costs, it is an insufficient judicial response to hold that
he or she may be able to cancel these costs at the end of the process through
judicial review. Such a system still
poses a significant risk that employees will have to right against workplace
discrimination, and therefore chills the exercise of that right.
2000 Cal. LEXIS 6120, * 52. This holding applies here: the chance of some future recovery of
arbitration fees would still leave “a significant risk” that Chevy Chase’s
cardholders would face large fees, and this risk would chill many cardholders
from exercising their legal rights.
Chevy Chase correctly notes that many of the cases
invalidating arbitration clauses on the grounds that they impose excessive
costs involve federal statutory claims.
The point of the cases, however, is basically that excessive fees turn
arbitration from “just another forum” into a method of eliminating all
liability. Exculpatory clauses are
unconscionable in Maryland with respect to contract cases as well as federal
statutory cases. Opening Brief at
36-37. Maryland does not allow parties
to enter a contract saying “Party A agrees that it will have no effective
remedy if Party B breaches this contract.”
In addition, several of the fees cases we cited involved state statutory
claims like those asserted by plaintiffs here.
See Patterson ITT Consumer Financial Corp., 18 Cal. Rptr.2d 563
(Cal. App. 1993); Myers v. Terminix Internat’l Co., 697 N.E. 2d 277 (Ohio
Ct. Comm. Pleas 1998).
C. THE
FAILURE OF CHEVY CHASE’S ARBITRATION CLAUSE TO PERMIT CLASS ACTIONS RENDERS IT
UNCONSCIONABLE.
As we established in our Opening Brief, the record
contains undisputed testimony from three experts that if plaintiffs are
required to go forward on an individual basis, few if any will be able to find
representation. This testimony
establishes that even if plaintiffs’ allegations and legal arguments on the
merits are correct, they will have no realistic prospect of ever recovering a
remedy in individual arbitration. Chevy
Chase has never disagreed with this assessment, and thus apparently concedes
that, as a matter of reality, the arbitration agreement here is a sham for
these plaintiffs. There is a lot of
pretty talk about “even handedness” and “fair procedures,” but everyone knows
and accepts that if arbitration is compelled here, few if any plaintiffs will
recover even $1 even if all their claims are true.
Chevy Chase argues these facts don’t matter. In addition to citing Gilman v. Wheat,
First Securities, Inc., 345 Md. 361 (1997), discussed in our opening brief,
Chevy Chase points to a series of federal decisions holding that arbitration
clauses failing to provide for class actions do not violate federal statutes.[16] Chevy Chase argues that if a failure to
provide for class actions does not violate a federal statute, it must not be
unconscionable under Maryland law. This
is a non sequitur. A number of courts
have held that federal statutes will not be held to bar arbitration under the
FAA except in very rare circumstances.
See, e.g., Gilmer, 500 U.S. at 26; Brown v. Trans World
Airlines, 127 F.3d 337, 340 (4th Cir. 1997) (“agreements to
arbitrate should be enforced unless the plaintiff demonstrates that Congress
intended to preclude the waiver of a judicial forum for claims under a
particular statute, either expressly or because of inherent incompatibility
between the statute’s goals and the arbitral forum”). As described above, Maryland’s law of conscionability relating to
exculpatory clauses involves a completely different question. There is no factual dispute here that Chevy
Chase’s clause effectively amounts to such clause. In light of these factual concessions, this case is far more like
the state unconscionability cases cited in our Opening Brief at 40-41 than it
is like the federal statutory cases relied upon by Chevy Chase.
CONCLUSION
The decision of the Circuit Court should be reversed.
Respectfully submitted,
_____________________________
F. Paul Bland, Jr.
TRIAL LAWYERS FOR PUBLIC JUSTICE, P.C.
1717 Massachusetts Avenue, N.W.
Suite 800
Washington, D.C. 20036
(202) 797-8600
(202) 232-7203 (Facsimile)
_____________________________
John T. Ward
Ward, Kershaw & Minton
113 West Monument Street
Baltimore, MD 21201
(410) 685-6700
(410) 685-6704 (Facsimile)
_____________________________
Michael P. Malakoff
Malakoff, Doyle & Finberg, P.C.
The Frick Building, Suite 203
Pittsburgh, PA 15219
(412) 281-8400
(412) 281-3262 (Facsimile)
STATEMENT RELATING TO FONT
This brief was prepared in the Times New Roman font,
sized 12 point, double spaced.
CERTIFICATE
OF SERVICE
I, Paul Bland, hereby certify that I have had served
by first class mail two copies of Appellants’ Reply Brief in Support of Their Appeal
and Opposition to Appellee’s Cross Appeal upon David J. Cynamon, Shaw Pittman,
2300 N Street, N.W., Washington, D.C. 20037, counsel for the defendants on
October 5, 2000.
_____________________________
F. Paul Bland, Jr.
[1] The Federal
Arbitration Act does not itself create any independent federal-question
jurisdiction under 28 U.S.C. § 1331. Moses
H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 25 n.32
(1983).
[2] This, in
part, is why courts must decide whether an agreement to arbitrate exists before
compelling arbitration. Chevy Chase
acknowledges that this Court has held that a court must decide that a party has
agreed to arbitrate before compelling arbitration, but claims that the FAA
requires a different rule. Chevy Chase’s
argument is flatly wrong, and has been rejected by numerous courts. In Sandvik AB v. Avent International Corp.,
220 F.3d 99 (3d Cir. 2000), for example, the court held that under “the FAA a
court must decide whether an agreement to arbitrate exists before it may order
arbitration. . . .” 220 F.3d at
107. The Sandvik court further
held that “before arbitration could be ordered, the district court had to be
certain that there was an agreement to arbitrate. . . .” Id. at 106.
[3] The only
direct authority Chevy Chase produces for its preemption argument that has not
been overruled is the 3-2 opinion of the South Dakota Supreme Court in Dakota
Wesleyan Univ. v. HPG Int’l, Inc., 1997 S.D. 30, 560 N.W.2d 921
(1997). The Court in Dakota Wesleyan
applied FAA Section 16 to refuse an appeal from an order compelling
arbitration without any reference to relevant state law after making the
unqualified assertion that “the Federal Arbitration Act preempts state
law.” Id. at 922. The two dissenting justices would have heard
the appeal because there was no appeal of an arbitration order before them, but
only a challenge to a venue determination which the party seeking to compel
arbitration sought to overturn.
[4] Chevy Chase’s
assertion that some of these cases are “more pro-arbitration than the
FAA,” Br. at 8 (emphasis in original), is also of questionable relevance in
light of repeated judicial clarifications that the FAA is not pro-arbitration,
but rather is pro-contract enforcement.
See, e.g., First Options, 514 U.S. at 943; Southern
Calif. Edison, 194 Ariz. at 51 (“Although it is commonly said that the law
favors arbitration, it is more accurate to say that the law favors arbitration
of disputes that the parties have agreed to arbitrate.”)
[5] Maryland’s
rules of procedure also allow parties an immediate appeal from a circuit court
order denying a motion to compel arbitration. See Regina Construction Corp. v. Envirmech Contracting
Corp., 80 Md. App. 662, 672 (1989).
[6] This point
also distinguishes several of the cases relied upon by Chevy Chase in its
brief. In Fidelity Fed. Sav. &
Loan Assoc. v. de la Cuesta, 458 U.S. 141 (1982), for example, the
contractual governing law provision referred only to unspecified “laws” such as
where the property was located, and the Court refused to require adherence to
these undesignated laws. In Atkinson
v. General Cela. Credit Corp., 855 F.2d 396 (11th Cir. 1989),
similarly, the contract only referred to unspecified “Georgia” laws.
[7]It is important to note that many rules relating to
fees and charges such as those governed by the provisions of Subtitle 9 are not
preempted. E.g., Video Trax, Inc. v.
NationsBank, 33 F. Supp. 2d 1041 (S.D. Fla. 1998). Chevy Chase describes this category of
non-preempted regulations as those not involving lending, Brief at 4, 14, so §
12-911 would qualify.
[8] Chevy Chase
unfairly claims that our point that the new arbitration fees violated Subtitle
9 is a “new” argument by plaintiffs.
Brief at 22-23. In fact,
plaintiffs argued extensively at the trial court that Chevy Chase had not
followed its promise to comply with Subtitle 9, E. 68-73, 242-245 in
promulgating the arbitration clause, and also argued extensively that the
attorneys’ fee provision in the arbitration clause was contrary to Maryland
law, and rendered the clause unenforceable.
E. 59, 100-101, 248-249.
Plaintiffs argument has become somewhat more refined on appeal, but it
is not new. Chevy Chase can hardly
argue that it was surprised to learn on the appeal (60 days before it would
file its brief) that plaintiffs would argue that the arbitration clause was not
enforceable because it was illegal.
[9] Since Chevy
Chase did not amend the contract in accordance with its change of forms provision,
the provisions of the Virginia Document (including the arbitration clause) were
never validly enacted, and have no contractual force. In the lower court, plaintiffs anticipated that Chevy Chase might
argue that even if the higher charges of the Virginia Document were illegal as
applied to plaintiffs’ credit card balances prior to the mailing of the
Virginia Document, that the Virginia Document was a modification or novation
that excused Chevy Chase’s application of the new fees and higher rates to new
purchases. Accordingly, we argued in
some detail that the Virginia Document did not meet the requirements of
Maryland law for a modification or novation.
E. 73-79. Chevy Chase has not
contested this law or this argument at the trial court or before this Court,
and it is clear that there has not been a legally effective modification or
novation.
[10] The fact that
Meyer did not involve arbitration clearly renders the courts statements
about arbitration dicta, despite Chevy Chase’s claims to the contrary. Brief at 24. Appellants do apologize for mis-stating in our Opening Brief that
the relevant language appeared in a footnote.
[11] See, e.g.,
Hooters of America, Inc. v. Phillips, 1998 U.S. Dist. LEXIS 3962,
*83 (D.S.C. 1998), aff’d on other grounds, 173 F.3d 933 (4th
Cir. 1999) (“Here, enforcement of the [arbitration agreement] effects a drastic
change to several of Phillips’ substantive statutory rights, and therefore,
assuming Phillips could waive such rights, at a minimum Hooters had the burden
of proving [the employee’s] knowing and voluntary agreement to each of those
terms.”); Broemer v. Abortion Serv’s. of Phoenix, Ltd., 840 P.2d 1013,
1017 (Ariz. 1992) (arbitration clause was not enforced where “there was no
conspicuous or explicit waiver of the fundamental right to a jury trial or any
evidence that such rights were knowingly, voluntarily and intelligently
waived.”); Lawrence v. Walzer & Gabrielson, 256 Cal. Rptr. 6, 9
(1989) (“The law ought not to decree a
forfeiture of such a valuable right where the [client] has not been made aware
of the existence of an arbitration provision or its implications. Absent notification and at least some
explanation, the [client] cannot be said to have exercised a ‘real choice’ in
selecting arbitration over litigation.”); Obstetrics and Gynecologists
Wixted, Flanagan and Robinson v. Pepper, 693 P.2d 1259, 1261 (Nev. 1985)
(arbitration clause not enforced where the plaintiff had not given “informed
consent to the agreement and . . . no meeting of the minds occurred.”); Turner
Bros. Trucking Co., 8 S.W.3d 370 (Tex. Civ. App. 1999), writ denied
(“This evidence fully supports the trial court’s conclusion that Tommy did not
knowingly consent to the contract to compel arbitration of his personal injury
claim.”); Sosa v. Paulos, 924 P. 2d 357, 363 (Utah 1996) (“we cannot
conclude that the . . . the parties had a real and voluntary meeting of the
minds. . . .”)
[12]Chevy Chase argues that arbitrators tend to be more
favorable to consumers than the judicial system. Brief at 11. While
plaintiffs do not contend that this case should turn upon general policy
arguments as to the merits of arbitration, Chevy Chase’s policy claim cannot be
permitted to stand. Chevy Chase cites
data from the employment context, which is not helpful in the consumer
context. There is a significant body of
research establishing that arbitrators tend to favor “repeat players” who come
before them again and again. See,
e.g., Armendariz v. Foundation Health Psychare Services, Inc., 2000 Cal.
LEXIS 6120 (August 24, 2000) at * 53.
The repeat player phenomenon is not significant in the workplace
situation, because both the union and the employer are repeat players. In the consumer setting, however, the
situation is very different. For the
most part, data about arbitration for consumers is hard to find because of the
secrecy that surrounds arbitration.
Chevy Chase’s Arbitration Clause also includes a secrecy provision. E 38.
Some data has become public in the credit card context, however. Out of nearly 20,000 arbitration actions
brought to conclusion between First USA (a defendant here) and consumers, for
example, First USA prevailed in all but 87 of the cases (a win rate of
99.6%). Caroline E. Mayer, Win Some,
Lose Rarely? Arbitration Forum’s Rulings
Called One-Sided, Wash. Post, Mar. 1, 2000. Plaintiffs here sought discovery into Chevy Chase’s success rate
in arbitration, to see if it also enjoys a success rate in the stratosphere, E.
59, 189-193, and not permitted to take such discovery. Chevy Chase should not be permitted to turn
the absence of this data into an argument that arbitration is likely to favor
credit card consumers, however.
[13] In an
analogous context, the U.S. Supreme Court noted that when a statutory fee is
awarded under a remedial statute, it is usually awarded against a
violator of statutory law. Christiansburg
Garment Co. v. EEOC, 434 U.S. 412, 418 (1978). Chevy Chase’s Loser Pays Rule would treat unsuccessful consumer
plaintiffs as if they themselves were guilty of violating the Consumer
Protection Act merely by not prevailing on their claims.
[14]See also Protective Life Ins. v. Lincoln Nat. Life
Ins., 873 F.2d 281, 282 (11th
Cir 1989) (where arbitration agreement made no provision for the consolidation
of arbitration proceedings, the court concluded “that [a district court] may
not read them in” because Section 4 of the FAA limits the power of a court to
enforce an agreement “in accordance with its terms”).
[15]There is nothing unreasonable or contrary to good
industry practice about this position.
In September of this year, for example, American Express cardholders
around the country received a notice on “Changes to Account Agreements” stating
that “the Arbitration Provision is being amended to . . . ensure that the
filing, administrative and/or hearing fees payable by you to pursue a Claim
against us in an arbitration proceeding do not exceed the amount that you would
pay if the Claim was pursued in federal or state court.”
[16] In
particular, Chevy Chase relies heavily upon its reading of Gilmer v.
Interstate/ Johnson Lane Corp., 500 U.S. 20 (1991). Brief at 39. What Chevy Chase ignores is that the class actions provided for
in the Age Discrimination in Employment Act are limited to opt-in class actions
(as opposed to normal class actions of the sort involved here), reflecting
Congress’s recognition that employment cases are likely to be economically
significant matters where each individual has a large personal stake in
separately litigating the matter. In
this case, by contrast, the undisputed record shows that individuals will not
be able to separately litigate the matter.
