April 25, 2002
The Honorable Ronald George, Chief Justice
and the Honorable Associate Justices of the
California Supreme Court
303 Second Street
South Tower, 8th Floor
San Francisco, California 94107
Re: Mercuro v. Superior Court (Countrywide Securities)
Supreme Court Case No. S105424
Court of Appeal, Second Appellate District, Division Seven
Court of Appeal Case No. B153355
Opposition to Request For Depublication
To the Honorable Chief Justice and the Associate Justices:
The National Arbitration Forum (“NAF”) has asked this Court to order depublication of the California Court of Appeal’s opinion in Mercuro v. Superior Court. We are writing to ask that this request be denied. The Court of Appeal’s decision in Mercuro addresses an issue – the enforceability of mandatory, pre-dispute arbitration clauses before repeat player arbitrators selected by corporate defendants – that is currently pending before several courts throughout the nation. Those courts should be permitted to know about – and consider – the Court of Appeal’s decision.
As set forth in further detail below, depublication should be denied for two reasons. First, there is no serious dispute that the Mercuro decision meets the publication criteria of California Rule 976(a). Among other things, this case plainly involves “a legal issue of continuing public interest” -- i.e., the enforce ability of agreements that impose employer-selected arbitration forums upon employees. This brings the decision squarely within the terms of Rule 976(a) (3) and(4), which properly seeks to ensure that important and precedent-setting legal decisions are published for all the world to see. For that reason, the request for depublication should be denied.
Nor should the request for depublication be granted on the basis of the NAF’s complaint that the Court of Appeal’s opinion supposedly mis-described NAF’s procedures by suggesting that NAF selects arbitrators when in fact, each party has one (1) strike. In fact, the Court of Appeals’ description is plainly correct: corporations – not
employees – draft contracts that specify the NAF as the arbitration service provider; when a case is filed, the NAF selects a small number of potential arbitrators from its limited roster in a given area, one of whom will decide the case. NAF does not dispute that the arbitrator ultimately selected is likely to repeatedly hear cases from the same defendants, putting individual plaintiffs who are not repeat players at a disadvantage. The fact that NAF permits each plaintiff and defendant to make one strike from the very short list of NAF selected arbitrators presented to the parties hardly undermines the factual discussion underlying the Court of Appeals’ decision.
In any case, the Court of Appeals’ decision faithfully applies this Court’s instructions in Armendariz v. Foundation Health Psychare Serv.s, Inc., (2000) 24 Cal. 4th 83, 99 Cal. Rptr.2d 745, as to the law of unconscionability, and also reflects this Court’s observations in the Armendariz case as to the issue of repeat player bias. Moreover, as this amicus letter will set forth in some detail, discovery documents produced in several other pieces of litigation and filed in various courts as evidence establish that NAF’s behavior provides concrete illustrations of the dynamic that underlies the repeat player bias issue identified by this Court.
Interest of Amicus Curiae
Trial Lawyers for Public Justice (“TLPJ”) is a national public interest law firm that specializes in precedent-setting and socially significant civil litigation and is dedicated to pursuing justice for the victims of corporate and governmental abuses. Litigating throughout the federal and state courts, TLPJ prosecutes cases designed to advance consumers' and victims' rights, environmental protection and safety, civil rights and civil liberties, occupational health and employees' rights, the preservation and improvement of the civil justice system, and the protection of the poor and the powerless.
A number of years ago, TLPJ began its Mandatory Arbitration Abuse Prevention Project. In connection with this Project, TLPJ has litigated a number of landmark cases. E.g., Wells v. Chevy Chase Bank (2001) 363 Md. 232, 768 A.2d 620 (plaintiff credit card holders did not agree to submit their claims to binding arbitration; the state’s procedural law of appealability was not preempted by the Federal Arbitration Act); Ting v. AT&T (N.D. Cal. 2002) 182 F.Supp.2d 902 (after trial in certified class action, declaring AT&T’s arbitration clause to be unconscionable and unenforceable for 7 million California residents because the clause illegally limits the damages consumers can receive, prohibits class actions, imposes prohibitive arbitration costs, and incorporates excessive secrecy). TLPJ has also previously filed amicus briefs with this Court in connection with cases such as Broughton v. Cigna Healthplans (1999) 21 Cal. 4th 1066, 90 Cal. Rptr.2d 334, 988 P.2d 67; and Cruz v. Pacificare Health Systems, Inc., No. S101003. TLPJ has also co-published a manual with the National Consumer Law Center entitled Consumer Arbitration Agreements: Enforceability and Other Issues.
In this case, TLPJ is concerned about mandatory arbitration systems that are structured in
such a way as to undermine arbitration’s promise of a neutral decision maker. TLPJ is alert to
the issue of repeat player bias that this Court described in Armendariz. TLPJ believes that the
conduct of NAF in particular exhibits the worst aspects of the repeat player phenomenon.
We wish to disclose that TLPJ represents a number of individuals in other actions who are challenging arbitration clauses designating NAF on the grounds that NAF is not a neutral decisionmaker. In our capacity as an amicus curiae, and in the mode of a “Brandeis Brief,” we will describe and discuss a number of specific documents produced from NAF’s files and filed with courts in other litigation. These documents provide useful context for this Court to evaluate some of the claims made in NAF’s request for depublication, and provide concrete illustrations of the ramifications of the repeat player syndrome addressed by this Court in Armendariz and by the Court of Appeals in Mercuro. The documents themselves are not attached to this letter, however, in compliance with this Court’s rules limiting such letters to ten pages. We would be delighted to supply them if the Court is interested in seeing them, however.
ARGUMENT
I. MERCURO FALLS SQUARELY WITHIN THE PUBLICATION CRITERIA OF CALIFORNIA RULE OF COURT 976(A).
The first problem with the NAF’s depublication request is that it ignores the rule governing publication of legal decisions in this state. California Rule of Court 976(a) sets the standards for publication of opinions by the lower courts. The Court of Appeals certified that the decision in Mercuro satisfies these standards. NAF does not claim otherwise. That fact, alone, should preclude depublication.
Rule 976(a) provides that Courts of Appeal decisions should be published when any one of four specific disjunctive criteria is met:
(1) the opinion sets forth a new rule of law or applies an existing rule to new facts;
(2) the opinion creates an apparent conflict with a decision by another Court of Appeal;
(3) the opinion involves a legal issue of continuing public interest; or
(4) the opinion makes a contribution to legal literature by reviewing development of common law rule.
Rule 979, providing for the depublication of certain Court of Appeals decisions, by contrast, sets forth no criteria for the depublication of those decisions. Thus, the clear implication of Rule 976(a) is that decisions of the Courts of Appeal should only be depublished when none of these four publication criteria are met.
NAF does not deny that the opinion deals with an important area of law, or applies that
law in a new area; rather, it merely stresses that it disagrees with one characterization of one
aspect of the NAF’s structure included in the Court of Appeals’ opinion. Even if this Court were
inclined to agree with this attack upon the Court of Appeals’ reasoning, Mercuro should not be
depublished. Courts and counsel in other cases should be free to rely on Mercuro to the extent
they find it persuasive – and the NAF should be free to attack Mercuro’s analysis in legal briefs
to other courts, as it does in its letter to this Court and as it regularly does in other cases where
individuals challenge arbitration clauses that corporate defendants seek to enforce.
The solution
to controversial speech is more speech, not mandated secrecy.
II. THE COURT OF APPEALS’ DECISION IS CORRECT.
A. The Court of Appeals’ Decision in Mercuro Faithfully Follows the Approach That This Court Specified for Evaluating Claims of Unconscionability.
In Armendariz, this Court directed that “the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” Id. This language was quoted in the Mercuro opinion, 96 Cal. App.4th, and it was followed. The Mercuro court traced that case’s fairly extreme facts of procedural unconscionability, such as the employer’s threat to make the employee “pay big time” for resisting the arbitration clause, and concluded that in the circumstances of that case, very little would be required in the way of substantive unconscionability to render the clause unenforceable. 96 Cal. App.4th at 175. The Court of Appeals then discussed the one-sided, non-mutual nature of the arbitration clause.
Only then does the Court of Appeals turn to the issue of repeat player bias. It is this brief discussion that NAF relies upon to urge depublication of the entire opinion. By considering the fact of repeat-player bias as a factor in the conscionability of a contract, the Mercuro decision is merely following this Court’s guidance in Graham v. Scissor-Tail (1990) 28 Cal.3d 807, 171 Cal. Rptr. 604, 623 P.2d 165, 177, which held that clauses which require arbitration by non-neutral arbitrators are unconscionable. In addition, this Court has directly recognized that “the fact that the employer is a ‘repeat player’ in the arbitration system that is more likely to be a source of business for the arbitrator” is the factor “most likely to induce bias. . . .” Armendariz, 24 Cal.4th at 110. In light of that guidance, there is nothing improper or surprising about the Mercuro court’s recognition of this issue as a factor in a case where there has already been a very strong showing of procedural unconscionability.
B. The Court of Appeals’ Statement in Mercuro About the Repeat Player Bias Is Consistent With a Wealth of Other Evidence.
A significant body of authority supports both the Court of Appeal’s and this Court’s statements with respect to the issue of repeat player bias. A recent study of the results of arbitration in California HMOs by the California Research Bureau found that in every instance where an arbitrator awarded a plaintiff (generally raising medical malpractice claims) over $1 million, “the arbitrator was only employed in that case.” Marcus Nieto and Margaret Hosel (2001) Arbitration in California Managed Health Care Systems at 22-23. The study went on to find that arbitrators selected by this system were 20 times more likely to enter summary judgment for HMOs than were courts, and that those awards that were made to plaintiffs were lower.
The Equal Employment Opportunity Commission, similarly, has stated that “results cannot but be influenced by the fact that the employer, and not the employee, is a potential source of future business for the arbitration.” Gilbert F. Caselias, Policy Statement on Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment, 11 EEOC Compliance Manual at 8 (July 10, 1997). See also David Schwartz, Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration, 1997 Wisc. L. Rev. 33, 61 (“[T]he independent arbitration companies have an economic interest in being looked on kindly by large institutional corporate defendants who can bring repeat business.”).
There is also empirical evidence involving NAF that strongly suggests that its Code is not
effective in preventing repeat player bias. The evidence came in interrogatory answers filed in a
civil action filed in Alabama state court by one of NAF’s clients, the credit card company First
USA.
The case is Bownes v. First USA Bank, N.A., Civil Action No. 99-2479-PR (Cir. Ct.
Montgomery Cty.). The interrogatory answers indicated that First USA had prevailed in 19,618
cases, and the card member had prevailed in 87 cases in arbitration before NAF. That works out
to a success rate for the lender of 99.6%,
which is hardly consistent with NAF’s assertion in its
letter supporting depublication that it has “the fairest of possible arbitrator selection processes.”
C. The Court of Appeals Fairly Characterized NAF’s Rules Relating to Repeat Player Bias.
NAF argues that the Court of Appeals’ decision is based upon false premises, because it “in part conclud[ed] that the [NAF], rather than the parties, would select the arbitrator.” NAF Letter at 2. In fact, it is quite fair to describe NAF’s rules as permitting the NAF to select the arbitrator. Under the NAF Code of Procedure, parties must select an arbitrator from an extremely short list of individuals approved and pre-selected by NAF. As the Court of Appeals noted, “[b]y our count, only eight NAF arbitrators have offices in the Central District of California.” 96 Cal. App.4th at 178. The parties are provided with a list of names that is one more than the number of parties, and each party then gets to make one strike. Left after the strikes would be the one extra arbitrator selected by the NAF.
The significance of these limited NAF arbitration panels is that they permit NAF’s
administrators to steer important cases to “reliable” decision makers. A recent study by Michael
Geist, a Professor at the University of Ottowa Law School, found that NAF arbitrators rule for
the complainant in the internet domain name dispute resolution system far more often than
arbitrators from other providers, because of NAF’s practice of “granting an ever-larger share of
its caseload to a small group of panelists.” New UDRP Study Finds Forum Shopping, Panel
Problems, ADRWorld.com, March 26, 2002.
The study found that “three of NAF’s busiest
panelists have decided 324 out of 324 cases in favor of complainants in default cases,” and
explains that default cases in this setting are not automatic wins in front of non-NAF arbitrators
because of UDRP’s proof requirements. Id. In the employment setting, if NAF can put two
similarly pro-employer arbitrators on a panel, a single strike for the employee will not protect
against NAF selecting a hand-picked arbitrator. Accordingly, NAF’s assault upon the Court of
Appeals’ reasoning has no resonance, and its request for depublication should be denied.
D. NAF’s Promotional Statements to Potential Corporate Clients Illustrate the Worst Aspects of Repeat Player Bias.
As this Court noted in Armendariz, the repeat player bias concern arises from the fact that corporate employers are more likely to be a source of future business for arbitrators. NAF’s own correspondence, advertisements and other documents firmly establish the truth of this concern. It is clear that NAF is engaged in an intense competition with other arbitration service providers such as the American Arbitration Association (“AAA”) and JAMS/Endispute for the business of lenders such as the defendants.
Documents filed in a pending case where TLPJ is one of the counsel representing a
consumer plaintiff demonstrate how this intense competition for lucrative repeat player business
can be.
The corporate representative for one of the defendants in this case testified that the
company sent a draft of its arbitration clause to NAF’s Ed Anderson before incorporating it into
loan agreements. The documents produced by that defendant demonstrated that when Mr.
Anderson of NAF discovered that this draft designated the AAA as the arbitration service
provider, he expressed disappointment and began to set out reasons that NAF’s service was
supposed to be superior to AAA’s service. In one letter, for example, Mr. Anderson stressed that
not having “a claim ‘capped’ could have drastic consequences.”
Eventually the defendants in
this case rewrote their clause to specifically designate NAF rather than its rival, the AAA.
In its advertising material aimed at potential corporate clients,
NAF makes promises that
sharply favor the interests of repeat players and place individual plaintiffs at an obvious
disadvantage. For example, a letter dated September 26, 1996, from NAF ’s Director of
Development, Curtis D. Brown, to in-house counsel for a corporate lender, states “By adding
arbitration language to your contracts, the [N.F.’s] national system of arbitration lets you
minimize lawsuits, and the threat of lender liability jury verdicts.”
On January 29, 1997, Leaf Staines, a policy analyst for NAF, wrote the same lender’s in-house counsel and urged that “[t]here is no reason for Saxon Mortgage, Inc. to be exposed to the costs and the risks of the jury system.” An attachment to that letter offers free legal advice on how lenders can defeat class actions where common questions predominate and the class representatives’ claims are typical.
While NAF’s letter requesting depublication of the Mercuro case asserts that its Code “provides for the fairest of possible arbitrator selection processes,” Letter at 3, that letter conspicuously omits many of the NAF Code’s rules that NAF repeatedly stresses in its advertisements and solicitations aimed at businesses. In these latter communications, for example, NAF has stressed that it has a Loser Pays Rule. In an interview with a glossy magazine targeted to in-house corporate counsel, Mr. Anderson explained that this Loser Pays Rule extends to attorneys’ fees and is aimed at making it more risky for individuals to bring claims against businesses, as a means of achieving tort reform:
Editor: Another goal of Civil Justice Reform is to impose a penalty on commencing litigation as a way to extort a settlement of a frivolous claim. Civil Justice Reform advocates have proposed a "loser pays" rule to counter such tactics.
Anderson: The rules of the National Arbitration Forum allows the arbitrator to award the prevailing party the cost of the arbitration including attorneys' fees. The rules of the other major arbitration administrators have similar provisions. The economics of dispute resolution by arbitration are entirely different from the economics of bringing lawsuits. There is no such thing as a "no risk" arbitration for either side.
Do an LRA: Implement Your Own Civil Justice Reform Program NOW, Metropolitan Corp. Couns., Aug. 2001. Of course this is not the rule for remedial statutes aimed at protecting the civil rights of workers, as the U.S. Supreme Court noted in Christiansburg Garment Co. v. EEOC (1978) 434 U.S. 412, 418. Another state Supreme Court has held that a similar Loser Pays Rule in an arbitration agreement rendered the agreement substantively unconscionable. See Sosa v. Paulos (Utah 1996) 924 P.2d 357, 362 (an arbitration provision requiring a medical malpractice plaintiff to pay the litigation costs of the doctor if the patient "wins less than half the amount of damages sought in arbitration” was unconscionable).
Another set of NAF rules that disadvantages employees relates to discovery. In one advertisement distributed to corporate in-house counsel on NAF letterhead, NAF pronounced that its rules provide for “[v]ery little, if any, discovery.” In Armendariz, this Court noted “adequate discovery is indispensable for the vindication of FEHA claims.” 24 Cal.4th at 104.
In addition, NAF stresses in its promotional materials marketing its services to companies that its rules (unlike the American Arbitration Association’s rules) prohibit claimants from proceeding on a class action basis. Illustrative of these promises is a January 14, 1999 letter from NAF’s Curtis Brown to a prospective client, stating in the very first sentence that “A number of courts around the country have held that a properly-drafted arbitration clause in credit applications and agreements eliminates class actions . . . .” (Emphasis in original.) This letter also promises that NAF arbitration “will make a positive impact on the bottom line.” (Emphasis in original.) This anti-class action rule is also contrary to California law. See Keating v. Superior Court (1982) 31 Cal.3d 584, 645 P.2d 1192, 183 Cal. Rptr. 360, rev’d on other grounds, Southland Corp. v. Keating (1984) 465 U.S. 1 (“If, however, an arbitration clause may be used to insulate the drafter of an adhesive contract from any form of class proceeding, effectively foreclosing many individual claims, it may well be oppressive and may defeat the expectations of the nondrafting party.”)
Another NAF solicitation sent generically to multiple potential corporate clients states in huge print that NAF is “The alternative to the million dollar lawsuit.” Employees with serious discrimination claims might be alarmed to learn that NAF considers $1 million an excessive award before it has heard any evidence as to the facts of their case or their specific damages.
The NAF document that displays perhaps the greatest predisposition toward corporate defendants is a letter dated April 16, 1998, from Roger Haydock, NAF’s Director of Arbitration, to a corporate defense lawyer. The letter warns that the “class action bar” is threatening to bring lawsuits involving the Y2K issue, and states that the “only thing” that will “prevent” such suits is the adoption of an NAF arbitration clause “in every contract, note and security agreement.” The approach in Mr. Haydock’s letter is not that of an even-handed neutral, but of an advocate advising defense counsel how to defeat a mutual adversary (“the class action bar”).
In short, these promises are flatly inappropriate. NAF wishes to supplant the publicly accountable system of courts and juries, but it has not held itself to the same ethical standards as those imposed on courts and juries. If a judge were to solicit business from a party that might come before it with strong ex parte hints that the solicited party would get a good deal in her or his courtroom, there is no doubt that this would be improper or sanctionable behavior.
Conclusion
For the foregoing reasons, the request for depublication should be denied.
Respectfully submitted,
F. Paul Bland, Jr.
Trial Lawyers for Public Justice
DECLARATION OF SERVICE
I, the undersigned, declare that I am a citizen of the united States, over the age of 18 years, employed in the City and County of San Francisco, California, and not a party to the within action. My business address is 1717 Massachusetts Ave., N.W., Suite 800, Washington, D.C. 20036
I am readily familiar with Trial Lawyers for Public Justice’s practice for collection and processing of documents for mailing, being that true and correct copies of the documents are deposited with the United States Postal Service, with postage thereon fully prepaid, for collection on the date stated below in the ordinary course of business.
I declare under the penalty of perjury that on April 25, 2002, I served the within Letter to Chief Justice Ronald M. George and the Associate Justices of the Supreme Court on the persons listed below by U.S. Mail, at the addresses set forth below.
_________________________________
F. Paul Bland, Jr.
Karen Ann Rooney
Steptoe & Johnson
633 W. 5th Street, Suite 700
Los Angeles, CA 90071
Attorneys for Real Party in Interest
Countrywide Securities Corporation
Melanie A. Calvert
Attorney at Law
150 S. Los Robles Ave., #940
Pasadena, CA 91101
Attorney for Petitioner, Fred Mercuro
Clerk of Court, Div. 7
Second Appellate District
California Court of Appeal
300 South Spring St., Floor 23 North Tower
Los Angeles, CA 90013-1213
Honorable Morris B. Jones
Los Angeles Superior Court
111 North Hill Street
Los Angeles, CA 90012
Respondent
Attorney General Bill Lockyer
State of California
c/o Michael R. Botwin, Deputy Attorney General
455 Golden Gate Avenue, Suite 1100
San Francisco, CA 94102
Edward Anderson
National Arbitration Forum
P.O. Box 50191
Minneapolis, MN 55405-0191
James Sturdevant
The Sturdevant Law Firm
475 Sansome Street, Suite 1750
San Francisco, CA 94111