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F. Paul Bland, Jr.
TRIAL LAWYERS FOR PUBLIC JUSTICE
1717 Massachusetts Ave., N.W.
Suite 800
Washington, D.C. 20036
Phone: (202) 797-8600
Fax: (202) 232-7203
Counsel of Record, Counsel for Amicus Curiae
Trial Lawyers for Public Justice

Deborah M. Zuckerman
Stacy J. Canan
Michael Schuster
AARP Foundation
601 E Street, N.W.
Washington, D.C. 20049
Phone (202) 434-2060
Fax (202) 434-6424

Jeffrey White
ASSOCIATION OF TRIAL LAWYERS OF AMERICA
1050 31st Street, N.W.
Washington, D.C. 20007
Phone (202) 965-3500
Fax (202) 965-0920

Patricia Sturdevant
NATIONAL ASSOCIATION OF CONSUMER
ADVOCATES
1717 Massachusetts Avenue, N.W., Suite 704
Washington, D.C. 20036
Phone (202) 332-2500
Fax (202) 332-4152

• INTEREST OF AMICUS
  
• STATEMENT OF FACTS
  
• SUMMARY OF ARGUMENT
  
• I. THERE IS SUBSTANTIAL EVIDENCE THAT NAF IS LIKELY TO BE BIASED IN FAVOR OF CORPORATIONS IN THE FINANCIAL SERVICES INDUSTRY, SUCH AS DEFENDANTS
  
  • A. NAF HAS MADE INAPPROPRIATE PROMISES TO COMPANIES IN THE FINANCIAL SERVICES INDUSTRY
    
    • 1. The "No Class Action" Promise
      
    • 2. Other Promises of Preferential Treatment
      
    • 3. NAF'S Solicitations Make General Promises to Business Clients of Preferential Treatment
      
  • B. NAF HAS A CLOSE RELATIONSHIP WITH LENDERS
    
  • C. NAF'S CONDUCT IN THIS LITIGATION FURTHER SUGGESTS A PREDISPOSITION TOWARDS THESE DEFENDANTS
    
  • D. THE ISSUE OF NAF LIKELY BIAS IS NOT MOOTED BY THE ASSERTED INDEPENDENCE OF ITS ARBITRATORS
    
    
• II. WHERE THERE IS EVIDENCE ESTABLISHING THAT A PARTICULAR ARBITRATION SERVICE PROVIDER IS LIKELY TO BE BIASED IN FAVOR OF ONE PARTY TO A DISPUTE, A CLAUSE REQUIRING THAT THE DISPUTE BE HANDLED BY THAT PROVIDER IS UNCONSCIONABLE AND UNENFORCEABLE
  
  • A. UNCONSCIONABLE ARBITRATION CLAUSES ARE UNENFORCEABLE
    
  • B. A CLAUSE SENDING A DISPUTE TO A BIASED ARBITRATION SERVICE PROVIDER IS UNCONSCIONABLE
    
  • C. THE QUESTION OF UNCONSCIONABILITY IS TO BE DETERMINED BEFORE AN ARBITRATION AGREEMENT IS ENFORCED
    
    
• III. IF THIS COURT DOES NOT AGREE THAT THE ABOVE EVIDENCE CONCLUSIVELY ESTABLISHES NAF'S BIAS, AND DOES NOT DENY THE MOTION TO COMPEL ARBITRATION ON SOME OTHER BASIS, IT SHOULD REMAND FOR FURTHER DISCOVERY ON THE ISSUE OF BIAS
  
• CONCLUSION

  ---

Statutes
9 U.S.C. § 1, et seq
Cases
Aetna Life Ins. v. Lavoie, 475 U.S. 813 (1986)
Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997)
Arnold v. United Companies Lending Co., 511 S.E.2d 854 (W. Va. 1998)
Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892 (2d Cir. 1997)
Barcon Assoc., Inc. v. Tri-County Asphalt Corp., 430 A.2d 214, (N.J. 1981)
Berger v. Cantor Fitzgerald Securities, 942 F. Supp. 963, (S.D.N.Y. 1996)
Board of Educ. v. W. Harley Miller, Inc., 236 S.E.2d 439, (W. Va. 1977)
Cheng-Canindan v. Renaissance Hotel Assocs., 57 Cal. Rptr.2d 867
(Cal. Ct. App. 1996), rev. denied, 1997 Cal. LEXIS 817 (1997)
Cole v. Burns Int'l Security Services, 105 F.3d 1465 (D.C. Cir. 1997)
In re Cross & Brown Co., 167 N.Y.S.2d 573 (N.Y. App. Div. 1957)
Diemaco v. Colt's Manufacturing Co., Inc., 11 F. Supp.2d 228 (D.Conn. 1998)
Ditto v. Re/Max Preferred Properties, Inc., 861 P.2d 1000 (Okl. Ct. App. 1993)
Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996)
Foles v. Richard Wolf Med. Instruments Corp., 56 F.3d 603 (5th Cir. 1995)
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)
Graham v. Scissor-Tail, 623 P.2d 165 (Cal. 1990)
Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999)
Hudson v. Chicago Teachers Union Local No. 1, 743 F.2d 1187 (7th Cir. 1984), aff'd, 475 U.S. 292 (1986)
Iwen v. U.S. West Direct, 977 P.2d 989 (Mont. 1999)
Matter of Locklin, 101 F.3d 435 (5th Cir. 1996)
Morrissey v. Brewer, 408 U.S. 471 (1972)
Patterson v. ITT Consumer Financial Corp., 18 Cal. Rptr.2d 563 (1993), rev. denied, cert. denied, 510 U.S. 1176 (1994)
Powertel v. Bexley, 743 So. 2d 570 (Fla. App. 1999)
Richo Structures v. Parkside Village, Inc., 82 Wis.2d 547 (1978)
Sanko S.S. Co., Ltd. v. Cook Industries, Inc., 495 F.2d 1260 (2d Cir. 1973)
Sosa v. Paulos, 924 P.2d 357 (Utah 1996)
Williams v. Aetna Finance Co., 700 N.E.2d 859 (Ohio 1998), cert. denied, 119 S. Ct. 1357 (1999)
Wrightson v. ITT Financial Services, 617 So.2d 334 (Fla. Dist. Ct. App. 1993), rev. denied, 632 So.2d 1026 (Fla. 1994)

Other Sources
Alan Kaplinsky, "Excuse me, but who's the predator: Banks can
use arbitration clauses as a defense," Business Law 24
(May/June 1998)
Alan Kaplinsky, "Alternative to Litigation Attracting Consumer
Financial Services Companies," Consumer Financial Services
L. Report (1997)

List of Exhibits
Exhibit 1: The Brown Letter.
Exhibit 2: The Haydock Letter.
Exhibit 3: Walker Deposition Excerpt.
Exhibit 4: The Anderson Letter.
Exhibit 5: Documents taken from the 1994 Bankruptcy Petition of NAF's corporate parent, Equilaw, Inc.
Exhibit 6: Anderson Deposition Excerpt.
Exhibit 7: Alan Kaplinsky, "Excuse me, but who's the predator: Banks can use arbitration clauses as a defense." Business Law 24 (May/June 1998).
Exhibit 8: Alan Kaplinsky, "Alternative to Litigation Attractin Consumer Financial Services Companies," Consumer Financial Services L. Report (1997).
Exhibit 9: The Stillwell Letter of March 24, 1993.
Exhibit 10: The Stillwell Letter of June 10, 1993.

The American Association of Retired Persons ("AARP") is a non-profit organization with approximately 32 million members aged 50 and older. As the largest membership organization serving older Americans, AARP is greatly concerned about unfair and deceptive practices in the financial services and credit markets. AARP thus supports laws and public policies to protect consumers' rights and to preserve the means for them to seek legal redress when they are harmed in the marketplace.

The Association of Trial Lawyers of America ("ATLA") is a national voluntary bar association of approximately 50,000 attorneys practicing in every state, including the State of Florida. ATLA members primarily represent plaintiffs in personal injury, civil rights, consumer rights and employment discrimination cases. ATLA believes that a neutral decision maker, whether it is the court or an arbitrator, is essential to the protection of these rights.

The National Association of Consumer Advocates ("NACA") is a non-profit corporation whose members are private and public sector attorneys, legal services attorneys, and law professors and students whose primary practice involves the protection and representation of consumers.

STATEMENT OF FACTS

In light of the fact that the parties to this appeal have already extensively briefed the facts, this amicus brief will only touch upon a few salient facts that inform the argument set out below.

Plaintiff Natalie Baron filed this case as a putative class action under the Truth in Lending Act ("TILA") against Best Buy Co. ("Best Buy"), Beneficial National Bank USA, Union Fidelity Life Insurance Co. and Virginia Surety Company, Inc. ("the Insurers").

The defendants moved to compel arbitration, alleging that Baron had agreed to submit all claims that she might have against the defendants to mandatory arbitration before the National Arbitration Forum ("NAF"). Defendants' motion was supported by an affidavit from NAF's Curtis Brown, Vice President and General Counsel.

Baron sought discovery from NAF, requesting documents relating to the factual underpinnings of Brown's affidavit and to potential bias by NAF. NAF refused to answer Baron's discovery requests, and refused to comply with Baron's subpoena alleging, among other things, that it was a quasi-governmental entity that was "immune" from the discovery process. NAF petitioned the U.S. District Court in Minnesota to quash Baron's subpoena. A Magistrate Judge in that court denied NAF's motion and ordered it to produce the requested information. NAF still refused to answer Baron's discovery queries, and appealed the Magistrate's ruling to the District Court in Minnesota. That court also ordered NAF to comply with the subpoena. Because the District Court in this case had already taken the motion to compel arbitration under advisement, however, NAF never responded to discovery requests.

Despite this refusal, Baron placed some evidence relating to NAF's neutrality before the trial court. This evidence included a letter dated January 14, 1999, from Brown to a prospective financial industry client to solicit business ("the Brown letter"). This letter states in the 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 and ensures that credit-related lawsuits will be directed to arbitration, not a jury trial." (emphasis in original). The Brown Letter promises that NAF arbitration "will make a positive impact on the bottom line." (emphasis in original).

Baron also placed into evidence a 1999 deposition of Clinton Walker, General Counsel of First USA Bank, reflecting upon NAF's relationship with that bank. The deposition reveals, at 98-99, that lawyers at First USA communicate with NAF "from time to time"; and at 102-103, that First USA has initiated more than 40,000 arbitrations against consumers with NAF in collection matters, but that fewer than 10 consumers have initiated arbitrations against First USA with NAF. First USA has paid NAF at least $2 million in fees. Id. at 108.

The U.S. District Court hearing this case decided that it could resolve the defendants' motion to compel arbitration without waiting for the NAF to respond to Baron's discovery requests. The District Court denied the motion to compel arbitration, citing (among other things), concerns with the neutrality of the NAF, and holding that Best Buy's arbitration clause is unconscionable.

In our capacity as amici, we attach as Exhibits to this brief several similar letters, excerpts from depositions and other materials that have surfaced in other lawsuits around the country that provide further support for the District Court's concerns about NAF's neutrality. Amici suggest that this material is illustrative of the sort of information that might have been developed if discovery had not been resisted and delayed in this case.

Exhibit 1 hereto is an attachment to the Brown Letter that was not in the record below. This attachment, on NAF letterhead, compares NAF with the American Arbitration Association ("AAA"). Among the differences noted is that NAF limits awards to the amount of the claim, that NAF only permits consolidation with the agreement of all parties, that it is easier to get a default under NAF's rules than with the AAA's rules, and that NAF's Uniform Rules give less power to individual arbitrators than do AAA's rules.

Exhibit 2 hereto is a letter dated April 16, 1998, from Roger Haydock, Director of Arbitration at NAF, to Alan Kaplinsky1 ("the Haydock Letter"). The Haydock Letter warns that the "class action bar" is threatening to bring lawsuits involving the Y2K issue, and states that the "only thing" (emphasis in original) that will "prevent" such suits is the adoption of an NAF arbitration clause "in every contract, note and security agreement."

In an attachment to the Haydock Letter, NAF lists numerous officials of lenders and lawyers who specialize in defending lenders as "Information Resources" whom new prospective clients should contact for endorsements. One of these "Resources" is Kaplinsky, who is counsel on the amicus brief filed in support of defendants in this case by the American Bankers Association, the American Financial Services Association and the Consumer Bankers Association ("The Bankers' Amicus Brief").2 Another "Resource" is Christopher Lipsett of the law firm of Wilmer Cutler & Pickering. Lipsett is counsel on the amicus brief filed in support of defendants in this case by Thomas Lambros and William Sessions. Taken together, all of the amicus briefs in support of defendants in this case are either written by paid counsel for the NAF itself or for persons who serve as "Information Resources" for NAF. No consumer advocates or consumer attorneys are listed as an "Information Resource."

This attachment to the Haydock Letter also states that NAF provides arbitration services for nearly 20 lenders, including Banc One, Beneficial Financial Bank, First North American National Bank, and TMI Financial.

Another attachment to the Haydock Letter urges companies to reduce their "collection costs" by hiring the NAF and "[s]aving the money you've been spending on court costs, attorney fees, and discovery."

Exhibit 4 hereto is a letter dated October 20, 1997 from Edward Anderson of NAF to a prospective client (hereafter "The Anderson Letter").3 Documents taken from the 1994 Bankruptcy Petition of NAF's corporate parent, Equilaw, Inc., Exhibit 5 hereto, indicate that Mr. Anderson was then a Director, officer, and major shareholder of Equilaw. (He then owned 4,500 of the 10,000 total shares in Equilaw.) A deposition of Mr. Anderson taken in1994 indicates that prior to coming to NAF, he was Assistant General Counsel to ITT Consumer Financial Corporation.4 Anderson Deposition Excerpt, Exh. 6, at 12. Mr. Anderson first learned of Equilaw and NAF when ITT was considering hiring these companies to provide arbitration services for it. Id. at 19. ITT did, in fact, hire NAF and Equilaw. Id. at 44.

The Anderson Letter states that "major American companies are moving all of their contracts to an arbitration basis as fast as possible. There is no reason for your clients to be exposed to the costs and risks of the jury system." It goes on to state "Every award is limited to the amount claimed!" (emphasis in original). Attached to the Anderson Letter is a "Legal Memorandum" from "Forum Counsel" on the subject of "Arbitration & Class Actions in Financing." The memo advises that "In the court system, financing transactions are always at risk for Class Action treatment. . . ." It further advises that "Most often, the claims of class action plaintiffs' lawyers are based on printed or computer-generated documents or standard procedure manuals, which leave little room to argue against `commonality' and `typicality.'" The memo states that "no change in these standards seems likely in the near term." It goes on to advise that rules drafted in the manner of the NAF's will preclude class actions, even if the plaintiffs' claims are "common" and "typical."

SUMMARY OF ARGUMENT

Best Buy's arbitration clause is unconscionable and therefore unenforceable because it requires plaintiffs to submit their claims to a forum that has exhibited a likely bias in favor of financial services corporations and against those companies' consumers. NAF is dependent upon these companies for nearly all of its revenue. To cultivate and continue this business, NAF has effectively marketed its arbitration services as providing a defense for financial services companies against lawsuits from their consumers. For example, NAF boasts to financial services businesses and their defense counsel that it prohibits class actions, that it limits recoveries to the amount initially claimed, that it doesn't decide cases on "equity," and that it limits discovery.

The defendants here seek to have NAF replace the civil justice system for any disputes involving the defendants. But while NAF would supplant the publicly accountable system of courts and juries, it has not held itself to the same ethical standards imposed upon courts and juries. If a court were to solicit business from a party that might come before it with strong hints that the solicited party would get a good deal in her or his courtroom, there is no doubt that this would be improper and sanctionable behavior. If a judge were to engage in ex parte communications with a party and counsel for that party about what the judge could do for the party, there is no doubt that this would be inappropriate behavior.

I. THERE IS SUBSTANTIAL EVIDENCE THAT NAF IS LIKELY TO BE BIASED IN FAVOR OF CORPORATIONS IN THE FINANCIAL SERVICES INDUSTRY, SUCH AS DEFENDANTS.

A. NAF HAS MADE INAPPROPRIATE PROMISES TO COMPANIES IN THE FINANCIAL SERVICES INDUSTRY.

NAF has evidenced a likely bias in favor of financial services companies by engaging in inappropriate ex parte contacts soliciting business from financial institutions. Instead of communicating with these companies as a truly neutral decision maker, NAF's solicitations to financial services companies and their defense counsel communicate a strong sympathy for those companies. NAF's solicitations suggest that consumer lawsuits are a battle between the companies and their customers, and that NAF will be taking the companies' side in "improving their bottom line" in that battle. The letters described above establish that NAF officials solicit new business by promising prospective business clients and their counsel that its procedures will favor their interests relative to those of their consumers in adjudicating any future dispute.

1. The "No Class Action" Promise.

As set forth above, the Brown Letter promises in its first sentence that NAF will "eliminate" class actions. The Haydock Letter promises that the NAF will "prevent" Y2K class actions. The attachment to the Anderson Letter coaches businesses in how to avoid class actions by hiring NAF.

Why does NAF keep hammering this theme? Why does the Brown Letter put the "no class action" promise in the first sentence, underscored, emphasizing its importance? The answer is simple: NAF is promising would-be banking clients that it will protect them from significant potential liabilities by "preventing" (the language of the Anderson Letter) consumers with small claims from having any meaningful means of relief. NAF is effectively promising lenders that its procedures will insulate them from a broad category of potential liabilities.

The well-recognized reality is that it is not economically feasible for consumers to pursue relatively small claims on an individual basis against a large bank. Very few, if any, consumer attorneys are financially able to pursue individual claims for modest sums (such as the TILA claim at issue here) against large, powerful companies such as defendants. And, when a consumer's individual claims are small, it is economically infeasible for them to hire an attorney to represent their interests on a billable hour basis.

Consumer attorneys are, however, often able and willing to pursue such claims on a class action basis. When similar claims are aggregated, the amount in controversy becomes sufficiently large to enable consumers to locate counsel who will represent them and defend their interests. Indeed, there have been several cases across the nation in recent years where charge card companies were held accountable for widespread wrongdoing through consumer class actions.

If plaintiffs are denied a class action remedy, then they will likely be denied any meaningful remedy for most wrongs that defendants might commit against them.

The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor.

Amchem Products, Inc. v. Windsor, 521 U.S. 591, 617 (1997) (citation omitted). Accordingly, the arbitration clause here does not offer consumers just another forum for resolving disputes; rather it immunizes defendants from meaningful legal accountability.
It is impossible to imagine a state or federal court sending out a letter to consumer attorneys noting that class actions often lead to big recoveries, and then guaranteeing that it would certify any case as a class action (even if individual issues predominated over common issues in the consumers' cases) if only the consumer attorneys would bring their cases in and pay fees to that court. The result would be public outrage, banner media headlines, ethical inquiries and possibly even impeachment. The NAF has essentially done just this, however, with the one difference that it has made its promises of preferential treatment to the likely defendants of class actions.

2. Other Promises of Preferential Treatment.

The Brown and Anderson Letters prominently promote NAF's rule limiting awards to the amount of the original claim as a principle advantage to the companies of choosing the NAF as arbitrator. The strong suggestion is that this provision favors the companies being solicited and disfavors their consumers. Under this rule, no matter what information the plaintiff develops in discovery, his or her claim is capped at the initial demand. The nature of financial services litigation, however, is that the full extent of a company's wrongdoing (and thus the damages that would be appropriate to award the plaintiff) often cannot be known until the plaintiff has had an opportunity to pursue reasonable discovery. Complex fraud schemes, for example, can generally only be identified after layers of deceit and obfuscation are peeled away and the true facts are made known. NAF's rule capping awards at the amount of the original claim is particularly pernicious because NAF's rules pressure consumers to reduce the amount of their claim at the outset of a case. NAF's rule achieves this end by tying its fee schedule to the amount of the claim and increasing the fees levied rapidly as the amount of the claim increases.

An attachment to the Haydock Letter also urges potential financial services clients to hire the NAF to "sav[e] the money you've been spending on . . . discovery." Why does NAF promise lenders that it will restrict discovery? Because NAF (and the lenders) know that most plaintiffs in significant banking litigation cannot prove their cases without access to full and fair discovery. Consumers have the burden of proof, but few borrowers with valid legal claims have independent access to a lender's documents. Sharp limits on discovery will mean that many consumers will have little chance to effectively pursue their claims.

Finally, as noted above, the Brown Letter promises that NAF arbitrators will not decide cases on "equity," unlike "some other arbitration providers." The plaintiff in this case has asserted equitable claims as well as claims at law for damages, however, as she is entitled to do under TILA. NAF's promise not to consider equity appears to undermine a fundamental purpose of many consumer lawsuits and most consumer statutes to use the tools of equitable relief to require wrongdoers to correct their illegal practices.

3. NAF'S Solicitations Make General Promises to Business Clients of Preferential Treatment.

Several of NAF's solicitations suggest that it is likely to favor lenders in their disputes with their consumers. The Anderson Letter, for example, urges would-be clients not to expose themselves "to the costs and risks of the jury system." The 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. The approach of the Anderson Letter is not that of an entity committed to even-handed judging of disputes, but instead that of a for-profit vendor soliciting lucrative work by advising lenders how it can help them reduce their liabilities (avoid the "risks of the jury system"). This suggestion is of a piece with the Brown Letter's promise to improve a client's "bottom line."

The Haydock Letter similarly characterizes the prospect of Y2K lawsuits as a battle between "the class action bar" and lenders. The letter suggests that NAF takes the lenders' side in that battle, urging defense counsel for lenders to use the NAF as a means of foiling "the class action bar."5

B. NAF HAS A CLOSE RELATIONSHIP WITH LENDERS.

It may be true, as defendants' amici argue, that all for-profit arbitrators compete for business. Nonetheless, it is clear here that NAF is particularly dependent upon one group of businesses the financial services companies and that it's fervor for that business has led it to make inappropriate promises to those businesses.

The attachment to the Haydock Letter boasts that NAF provides arbitration services for numerous lenders and financial institutions, and it relies upon lenders and their defense counsel for referrals to new clients. NAF knows that there are numerous other providers of arbitration services (indeed, the Brown Letter reflects its competition with AAA). NAF also knows that if its arbitrators were to rule for consumers too often by the standards of the financial services industries and its defense lawyers, or enter awards for consumers that were too large by those standards, these companies would cancel their lucrative contracts with and refuse to further endorse NAF. A few pro-consumer rulings, and NAF could go from its current multi-million dollar business right back to the bankruptcy court where it languished in 1994.

Nor do NAF's relationships with persons self-identified as defense counsel for lenders appear to be mere coincidence. In the letters described above, NAF appears to reflect the published attitudes of its sponsor and "Information Resource" Alan Kaplinsky. In an article entitled "Excuse me, but who's the predator: Banks can use arbitration clauses as a defense," Bus. Law. 24 (May/June 1998), attached as Exhibit 7 hereto, Kaplinsky wrote that "Consumers have been ganging up on banks. But now the institutions have found a way to defend themselves." Id. at 24. The article makes clear that mandatory arbitration is this "defense" for financial institutions against consumer claims, and notes that "Arbitration is a powerful deterrent to class action lawsuits. . . ." Id. 24-26. See also Kaplinsky, "Alternative to Litigation Attracting Consumer Financial Services Companies," Consumer Financial Services L. Report (1997) (Exhibit 8 hereto) ("[i]n an attempt to eliminate the risks inherent in litigation and discourage future lawsuits, many consumer financial services companies have implemented arbitration programs." (emphasis added) Consumers looking for truly neutral, independent decisionmakers might well ask if Kaplinsky would recommend NAF to clients such as First USA, write briefs (as here) for banking trade associations "applauding" NAF and lend his name to NAF promotion as an "Information Resource," if he did not feel that NAF would serve his twice-published objective of serving as a "defense" for lenders against consumer lawsuits.

The facts set forth above relating to NAF's relationship with ITT Consumer Financial ("ITT") also suggest that NAF views its role as one to help defend lenders rather than to neutrally judge consumer disputes. Shortly after ITT hired NAF to handle its disputes, Anderson left his job of defending ITT against consumer suits and became one of NAF's three principal officers and a 45% shareholder. Despite his prior role with ITT and his prominence within NAF, however, NAF continued to handle ITT disputes, albeit in a manner which suggests that it was not remarkably attentive to matters of conflict of interest.6 Similarly, Anderson testified that he saw no problem in having an arbitration company in which he owned 45% of the stock hear disputes involving another company of which he was president. Exhibit 6 at 58. NAF's friendly handling of ITT cases is further illustrated by Patterson v. ITT Consumer Financial Corp., 18 Cal. Rptr. 2d 563 (1993), cert. denied, 510 U.S. 1176 (1994). In that case, a California court refused to enforce ITT's arbitration clause where it found that NAF's rules would have required the consumer plaintiffs to travel from California to Minnesota to have their claims heard, and would require a consumer with a dispute over a $2,000 loan to pay a minimum fee of $850. The court noted that "the procedure seems designed to discourage borrowers from responding at all."
Taken as a whole, these facts are not suggestive of a scrupulous attention to independence, neutrality, or the appearance of propriety.

C. NAF'S CONDUCT IN THIS LITIGATION FURTHER SUGGESTS A PREDISPOSITION TOWARDS THESE DEFENDANTS.

NAF's cooperation with the defendants in this case further illustrates its close relationship with the financial services industry. While NAF refused to answer any of the plaintiff's discovery requests in this case, asserting sweeping and novel privileges (including a supposed "quasi-governmental entity" privilege),7 at the same time it was communicating ex parte with defense counsel to provide them with an affidavit supporting their position. NAF's notion that it can testify for defendants but not answer any questions about its testimony suggests not only a favoritism towards the defendants, but also a disregard for rudimentary due process that can only be described as troubling in a body that seeks to displace the civil justice system.

Imagine an analogous setting, if defendants had filed a motion asking the chief judge of a court to order a judge recused. Then, imagine, in this hypothetical, the trial judge and the plaintiff's counsel talking and working together to create a coordinated response opposing that motion. No one would doubt that such ex parte cooperation would be improper. Yet the NAF which seeks to put itself in the place of the American civil justice system has apparently engaged in just such contacts here.

D. THE ISSUE OF NAF LIKELY BIAS IS NOT MOOTED BY THE ASSERTED INDEPENDENCE OF ITS ARBITRATORS.

Several of the defendants (and their amici) argue that it does not matter whether the director and officials running the NAF are biased. Even if the principals of the NAF are substantially biased in favor of financial services companies, these parties argue, it is of no moment because the actual arbitrators are independent and neutral.

These remarkable arguments have no merit. The facts set forth above suggest that at least three of NAF's principals and highest ranking officers (Anderson, Haydock, and Brown) have effectively expressed a likely favoritism towards NAF's corporate clients and against their customers. The record here demonstrates that these persons will have ample ability to act upon those impulses.

For one thing, NAF's Director of Arbitration selects the arbitrator to hear a given dispute, a power which contains enormous potential for abuse. Suppose that the local rules of some court allowed plaintiff's counsel (but not defense counsel) to exercise the sole power to select which judge of that court (or more appropriately, which member of that court's bar) would hear a given case. Would anyone imagine that these defendants and their banker amici would term such a procedure "neutral?" Of course not. In fact, the case law discussed below establishes that any system allowing a biased party the sole power to select an arbitrator is not fair or neutral, and cannot be allowed.

In addition to the power to select the arbitrator, the current version of the NAF rules (as reviewed on NAF's website on January 20, 2000) extend all sorts of other crucial powers to NAF's director and staff, refuting the claim that NAF bias "does not matter." The Rules give the Director the ability to grant extensions (9.D), hear motions (18), alter fees for intervention and hearings (19.B, 19.C), select arbitrators (21), decide requests to disqualify arbitrators (23), set the length of hearings (26), issue orders, including at his own initiative (38), request involuntary dismissal of a claim (41), waive fees (45), request sanctions (46), interpret the code (48.A), and change the code (48.F).

II.WHERE THERE IS EVIDENCE ESTABLISHING THAT A PARTICULAR ARBITRATION SERVICE PROVIDER IS LIKELY TO BE BIASED IN FAVOR OF ONE PARTY TO A DISPUTE, A CLAUSE REQUIRING THAT THE DISPUTE BE HANDLED BY THAT PROVIDER IS UNCONSCIONABLE AND UNENFORCEABLE.

A. UNCONSCIONABLE ARBITRATION CLAUSES ARE UNENFORCEABLE.

The purpose of the Federal Arbitration Act (FAA) is to "place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). The FAA provides that a written arbitration provision covering a contract involving commerce "shall be valid . . .save upon any grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §2. Accordingly, the FAA provides that arbitration agreements may be challenged and invalidated on any generally applicable contract principle. The Supreme Court has expressly stated that state contract law defenses such as unconscionability are available to a party challenging an arbitration agreement. See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996). Also, courts, not arbitrators, decide the validity of an arbitration provision. Gilmer, 500 U.S. at 33.

The proposition that courts shall not enforce arbitration clauses that are unconscionable under a state's general law of contracts is not controversial, and courts regularly refuse to enforce such arbitration agreements. See, e.g., Graham v. Scissor-Tail, 623 P.2d 165 (Cal. 1990); Powertel v. Bexley, 743 So. 2d 570 (Fla. App. 1999); Iwen v. U.S. West Direct, 977 P.2d 989 (Mont. 1999); Williams v. Aetna Finance Co., 700 N.E.2d 859 (Ohio 1998), cert. denied, 119 S. Ct. 1357 (1999); Sosa v. Paulos, 924 P.2d 357 (Utah 1996); Arnold v. United Companies Lending Co., 511 S.E.2d 854 (W. Va. 1998).

Appellants and their amici argue that the District Court did not articulate sufficient evidence to support its finding that the contract here was unconscionable. The District Court's failure to explicitly identify various pieces of evidence is of little moment, however, as "reversal is inappropriate if the ruling of the district court can be affirmed on any grounds, regardless of whether those grounds were used by the district court." Matter of Locklin, 101 F.3d 435, 442 (5th Cir. 1996).

B. A CLAUSE SENDING A DISPUTE TO A BIASED ARBITRATION SERVICE PROVIDER IS UNCONSCIONABLE.

It is clear that arbitration clauses that require arbitration by non-neutral arbitrators are unconscionable, and hence unenforceable.8 In Graham, for example, the California Supreme Court concluded that "a contractual party may not act in the capacity of arbitrator and a contractual provision which designates him to serve in that capacity is to be denied enforcement on grounds of unconscionability." Graham, 623 P.2d at 177. This is so because "irrespective of any proof of actual bias or prejudice, the law presumes that a party to a dispute cannot have that disinterestedness and impartiality necessary to act in a judicial or quasi-judicial capacity regarding that controversy." Id. at 175 (citation omitted). Similarly, the court went on, a person cannot serve as arbitrator if, even though he is not a party to the contract, his "interests are so allied with those of [a] party [to the contract] that, for all practical purposes, he is subject to the same disabilities which prevent the party himself from serving." Id. at 177. Concluding that the designated arbitrator was in a position where it could not be expected to arbitrate with the required degree of "disinterestedness and impartiality," the court declined to enforce the arbitration provision before it. Id. at 178.

The California Supreme Court is by no means alone in refusing to compel arbitration in settings where the arbitrators' neutrality were compromised. In Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999), the Fourth Circuit refused to compel arbitration in a case where an employer's arbitration rules were "crafted to ensure a biased decisionmaker." Id. at 938. Noting that the employer had complete control over the selection of two of the three arbitrators on a panel, to the point where even managers of the employer could be on the list of arbitrators, the court noted that "the selection of an impartial decisionmaker would be a surprising result." Id. at 939. Accordingly, the court (which in general expressed fervent admiration for arbitration) held that the employer had created "a sham system unworthy even of the name of arbitration," and thus held that the employer had breached its contractual obligation to provide an impartial arbitral forum. See also Hudson v. Chicago Teachers Union Local No. 1, 743 F.2d 1187 (7th Cir. 1984), aff'd, 475 U.S. 292 (1986) (arbitrator not independent where she or he was to be picked by and paid by union); Cheng-Canindan v. Renaissance Hotel Assocs., 57 Cal. Rptr. 2d 867 (Ct. App. 1996), rev. denied, 1997 Cal. LEXIS 817 (1997) (procedure was so dominated by an employer that it did not even qualify as arbitration and would not be compelled); Ditto v. Re/Max Preferred Properties, Inc., 861 P.2d 1000 (Okla. Ct. App. 1993) (where only one party had a voice in selection of arbitrator, clause would not be enforced); In re Cross & Brown Co., 167 N.Y.S.2d 573, 575 (App. Div. 1957) (not enforcing an arbitration agreement between a real estate broker and his employer because it appointed the employer's Board of Directors as arbitrator. This contravened the "well-recognized principle of `natural justice' that a man may not be a judge in his own cause."); Board of Educ. v. W. Harley Miller, Inc., 236 S.E.2d 439, 443 (W. Va. 1977) (finding exclusive control over selection of arbitrators by one party inherently inequitable). In these cases, courts presumed bias from connections between one party and the arbitrators, but this case is even clearer, as the arbitrator has effective promised certain results to one party.

C. THE QUESTION OF UNCONSCIONABILITY IS TO BE DETERMINED BEFORE AN ARBITRATION AGREEMENT IS ENFORCED.9

As set forth above, unconscionable arbitration clauses are not enforced. The proper and common practice is for a court to determine the unconscionability of the arbitration clause at the time it is challenged, which is typically before the parties submit to arbitration.

Defendants and their amici argue that this Court should hold that the neutrality of an arbitrator may not be considered before the parties are forced to arbitration.10 E.g. Insurers' Brief at 30-21, Bankers' Brief at 15. They support this proposition by drawing upon a number of cases where a party seeks to have one arbitrator removed (so another might take their place), a situation totally unlike this one, or cases taken from the context of claims under § 10 of the FAA, which provides that arbitration awards may be vacated where the arbitrator displayed "evident partiality," or with cases from other settings where the parties did not dispute the presence of an enforceable agreement.11 Since § 10 provides for judicial review of decisions that arbitrators have rendered, it is not surprising that some courts identified by defendants and their amici have refused to entertain § 10 challenges to an award until after the award has been entered. This fact has nothing to do with the situation here, however, where a District Court refused to enforce an arbitration clause that it deemed unconscionable, and where the District Court questioned the neutrality of the arbitrator.

Where the existence of an enforceable agreement is challenged, courts have no trouble prospectively refusing to enforce arbitration clauses where there are grounds to suspect the neutrality of the arbitrator. In Hooters, for example, the Fourth Circuit had no trouble refusing to enforce an arbitration clause that (among other things) allowed one party excessive control over the selection of the arbitrator. Under the theory of defendants and their amici, the Fourth Circuit erred, and should have waited until the arbitrators selected by Hooters (even if they had been Hooters' managers) had ruled against the waitress before considering whether those arbitrators might be biased in some way.

III. IF THIS COURT DOES NOT AGREE THAT THE ABOVE EVIDENCE CONCLUSIVELY ESTABLISHES NAF'S BIAS, AND DOES NOT DENY THE MOTION TO COMPEL ARBITRATION ON SOME OTHER BASIS, IT SHOULD REMAND FOR FURTHER DISCOVERY ON THE ISSUE OF BIAS.

As noted above, the plaintiff in this case sought discovery directed at questions of NAF's bias. There was nothing remarkable about these requests, as courts have recognized the right of plaintiffs to take discovery relating to factual issues posed by motions to compel arbitration. See Berger v. Cantor Fitzgerald Securities, 942 F. Supp. 963 (S.D.N.Y. 1996); and Wrightson v. ITT Financial Servs., 617 So.2d 334, 336 (Fla. Dist. Ct. App. 1993), rev. denied, 632 So. 2d 1026 (Fla. 1994).

Unfortunately, NAF stonewalled plaintiff's discovery requests, producing not one page of documents and even refusing to identify its arbitrators. (Imagine the uproar if this Court were to insist that the identity of its judges must be kept secret). NAF delayed its responses until the discovery requests were moot.

The delay tactics succeeded only because the District Court determined that these answers were unnecessary the motion to compel arbitration could be denied on the basis of the existing record. If the District Court erred in that judgment, Baron and the other class members should be given an opportunity to complete their discovery. NAF should not be permitted to benefit from its stonewalling.

CONCLUSION

Plaintiffs are entitled to have their claims heard by an impartial decisionmaker. NAF has made plain that it does not fit that description. The District Court's concerns about NAF's neutrality, and the unconscionability of defendants' arbitration clause, were well founded.

Respectfully submitted,
F. Paul Bland, Jr.
Trial Lawyers for Public Justice
1717 Massachusetts Ave., N.W. # 800
Washington, D.C. 20036
(202) 797-8600

Dated: January 24, 2000
Of counsel:

Deborah M. Zuckerman
Stacy J. Canan
Michael Schuster
AARP Foundation
601 E Street, N.W.
Washington, D.C. 20049
Phone (202) 434-6045
Fax (202) 434-6424

Jeffrey White
ASSOCIATION OF TRIAL LAWYERS
OF AMERICA
1050 31st Street, N.W.
Washington, D.C. 20007
Phone (202) 965-3500
Fax (202) 965-0920

Patricia Sturdevant
NATIONAL ASSOCIATION OF CONSUMER
ADVOCATES
1717 Massachusetts Avenue, N.W., Suite 704
Washington, D.C. 20036
Phone (202) 332-2500
Fax (202) 332-4152

1 Kaplinsky is the "Partner-in-charge" of the Consumer Financial Services Group with the law firm Ballard, Spahr, Andrews & Ingersoll. According to this firm's website, its "Consumer Financial Services Group has developed one of the pre-eminent and largest consumer financial services litigation . . . defense practices in the country, defending banks and other financial institutions throughout the United States in class actions and other complex litigation." He apparently has supported NAF's business for some time. According to the 1998 deposition testimony of Clinton Walker, General Counsel of First USA Bank, Kaplinsky was the person who convinced First USA to hire NAF as its arbitration service provider. Walker Deposition, Exhibit 3 hereto, at 220-21.

2 The Bankers' Amicus Brief states at 13 that "[i]n the experience of Amici, the NAF is a nationally respected independent administrator of arbitrations"; "applaud[s]" NAF's services and expresses "confiden[ce]" in NAF's abilities.

3 The addressee of the letter was deleted when it was received by counsel for amici.

4 The Haydock Letter lists Randy Decker of ITT Consumer Financial as another of NAF's "Information Resources."

5 NAF's amicus brief in this case boasts at 5-7 that a host of technology companies have hired it to resolve disputes related to the Y2K issue. These statements take on a very different tilt when viewed in the light of the Haydock Letter. Imagine a group of similarly situated claimants with a legally sound, valid claim against a financial institution arising from some negligence or error related to the Y2K issue. What confidence could they have that NAF would fairly hear their claim, if they learned that NAF officials have been telling defense counsel for lenders that NAF will guard lenders against the consumer "class action bar" and will "prevent" the lenders from facing significant liabilities in this setting?

6 We refer to two documents from the bankruptcy of Equilaw (NAF's corporate parent as of 1994). In Exhibit 9 hereto, an Equilaw official proposes an arbitrator for an ITT Commercial Finance Corp. case despite the fact that the arbitrator's law firm represented three other ITT corporations. In Exhibit 10 hereto, this Equilaw official proposed an arbitrator for another ITT case, even though the arbitrator then represented in an "unrelated" case the law firm representing ITT in that case.

7 NAF's resistence of discovery is only part of its secretive ways. Rule 4 of the NAF Code provides "Arbitration proceedings are confidential, unless the Parties agree otherwise." This rule also provides that "A Party who improperly discloses confidential information shall be subject to sanctions," which can include dismissal of a claim or being required to pay the defendants' attorneys' fees. NAF's rules also provide that no person may attend a "Participatory Hearing Proceeding" who is not a party or their attorneys or representatives, thus excluding the public and media from these hearings no matter how important the subject matter may be to the public interest. As a result of this secrecy, there is little realistic check against potential NAF abuses of discretion. NAF could rule for banks in every single case it arbitrates (and thus give them a strong incentive to continue to patronize NAF), but so long as the banks exercised their unlimited right to confidentiality under NAF's rules, this fact would forever remain "confidential" from consumers and the public.

8 In light of the fact that constitutional due process entitles parties to unbiased decision-makers, see Aetna Life Ins. v. Lavoie, 475 U.S. 813, 824 (1986); Morrissey v. Brewer, 408 U.S. 471, 485-86 (1972), it should come as absolutely no surprise that courts would find unconscionable arbitration clauses that designate arbitrators who are biased. In fact, courts have not hesitated to impose prophylactic measures to assure arbitrator neutrality, including the requirement that arbitrators disclose in advance any possible conflicts to the parties. See Sanko S.S. Co., Ltd. v. Cook Industries, Inc., 495 F.2d 1260, 1264 (2d Cir. 1973); Barcon Assoc., Inc. v. Tri-County Asphalt Corp., 430 A.2d 214, 220 (N.J. 1981).

Insisting that arbitrators be neutral is consistent with, and implicit in, the cases cited by appellant and their amici for the proposition that arbitration is favored, for the U.S. Supreme Court has conditioned its preference for arbitration on the requirement that arbitration offers remedies that are equal to those available in court. See Gilmer, 500 U.S. at 26 ("By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.") See also Cole v. Burns Int'l Security Services, 105 F.3d 1465, 1482 (D.C. Cir. 1997) (the Supreme Court's holding in Gilmer requires, at an absolute minimum, that parties raising claims under Title VII be provided with "a neutral forum.") Surely the same is true for consumers with TILA claims. Where (as here) the neutrality of an arbitration service provider is likely compromised, arbitration is not just another forum.

9 Amici do not concede the existence of an enforceable arbitration agreement where the terms were communicated to the consumer after the transaction was concluded.

10 No doubt it has struck defendants and their industry amici that very few consumer plaintiffs would be sufficiently resilient and financially well grounded to take their cases all the way through a pointless proceeding before a biased arbitrator, only then to bring a court challenge under § 10 of the FAA.

11 The cases cited by defendants are generally distinguishable from this setting. In Aviall, Inc. v. Ryder Sys., Inc., 110 F.3d 892 (2d Cir. 1997), for example, plaintiffs challenged a particular arbitrator. After holding that § 10 "does not provide for pre-award removal of an arbitrator," the court acknowledged that "an agreement to arbitrate before a particular arbitrator may not be disturbed, unless the agreement is subject to attack under general contract principles `as exist at law or in equity.'" Id. at 895 (citation omitted, emphasis supplied). See also Foles v. Richard Wolf Med. Instruments Corp., 56 F.3d 603, 605 (5th Cir. 1995) (plaintiff did "not dispute either that the arbitration agreement is valid, or that his claims fall within it"); Diemaco v. Colt's Mfg. Co., Inc., 11 F. Supp. 2d 228, 233 (D. Conn. 1998) (party merely sought to have the "party-designated arbitrator [removed] on the grounds that he is biased," but did not challenge the arbitration agreement itself.)