IN THE MARYLAND COURT OF APPEALS

 

 

 

DALE WELLS, et al.

 

v.

 

CHEVY CHASE BANK, F.S.B., et al.

 

 

)

)

)

)

)

)

 

 

 

No.  46

           September Term, 2000

 

 

 

 

 

 

 

APPEAL FROM THE CIRCUIT COURT FOR BALTIMORE CITY

(The Honorable Joseph H. H. Kaplan)

 

APPELLANTS’ REPLY BRIEF IN SUPPORT OF THEIR APPEAL

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.