No. 02-424
__________________________________________________
In The
Supreme Court Of The United States
Patricia Snowden,Petitioner,and
Karen Dowhite, Sheila Diane Dowhite, Lilistyne Dowhite, Renee Wingo Roberts, and Michael Smith, Sr.
Plaintiffs,
v.
CheckPoint Check Cashing and Elite Financial Services, Incorporated
Respondents,
and
Unknown Other Persons and Entities,
Defendants
On Petition for a Writ of Certiorari to the United States
Court of Appeals for the Fourth Circuit
PETITION FOR A WRIT OF CERTIORARI
John Thomas Ward
Ward & Kershaw
113 West Monument Street
Baltimore, MD 21202
(410) 539-6500
Richard A. Fisher
Richard Fisher Law Office
1510 Stuart Road, Suite 210
Cleveland, TN 37312
(423) 479-7009
F. Paul Bland, Jr.
(Counsel of Record)
Michael J. Quirk
Trial Lawyers for Public Justice, P.C.
1717 Massachusetts Avenue, NW,
Suite 800
Washington, D.C. 20036
(202) 797-8600
additional counsel listed on inside cover
Philip M. Andrews
John A. Bourgeois
Kramon & Graham
One South Street
Suite 2600
Baltimore, MD 21202
(410) 752-6030
Jack Block
Sachnoff & Weaver, Ltd.
39 South Wacker Drive, 29th Floor
Chicago, IL 60606
(312) 207-6486
QUESTION PRESENTED
Whether the lower court erred by holding, in direct conflict with three state courts of last resort, that under the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 et seq., and this Court’s holding in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), an arbitrator—not a court—has authority to decide whether a contract containing an arbitration clause is void ab initio in its entirety because one party had no legal authority to enter into it and because its terms are illegal under applicable state law.
PARTIES TO THE PROCEEDING
The parties to the proceedings below were petitioner Patricia Snowden, plaintiffs Karen Dowhite, Sheila Diane Dowhite, Lilistyne Dowhite, Cynthia Powell, Renee Wingo Roberts, and Michael Smith, Sr., respondents CheckPoint Check Cashing and Elite Financial Services, Incorporated, and defendants Unknown Other Persons and Entities.
TABLE OF CONTENTS
Page
QUESTION PRESENTED. . . . . . . . . . . . . . . . . . . . . . . . . . . i
PARTIES TO THE PROCEEDING. . . . . . . . . . . . . . . . . . . .ii
I. There is a Deep Split of Authority on Whether
the FAA Authorizes a Court or an Arbitrator to
Decide if an Entire Contract is Illegal and Void.. . . 11
II. By Enforcing the Arbitration Clause When
the Whole Contract is Alleged to be Illegal
and Void, the Decision Below Conflicts with
this Court’s Holdings that the FAA Places
Arbitration Clauses on the Same Footing as
Other Contracts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Cases
Alabama Catalog Sales v. Harris, 794 So.2d
312 (Ala. 2000).
Allied-Bruce Terminix Co., Inc. v. Dobson,
513 U.S. 265 (1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Bess v. Check Express, 294 F.3d 1298 (11th Cir.
2002).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 16
Burden v. Check Into Cash of Kentucky, LLC,
267 F.3d 483 (6th Cir. 2001), cert. denied,
122 S. Ct. 1436 (Apr. 1, 2002) (No. 01-1078).. . . . .13, 16
Camaro Trading Co., Ltd. v. Nissei Sangyo
America, Ltd., 577 So.2d 1274 (Ala. 1991).. . . . . . . . . .12
Chastain v. Robinson-Humphrey Co., Inc., 957
F.2d 851 (11th Cir. 1992).. . . . . . . . . . . . . . . . . . . . . . . . 15
Doctor’s Associates, Inc. v. Casarotto, 517 U.S.
681 (1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17-18
Equal Employment Opportunity Comm’n v.
Waffle House, Inc., 122 S. Ct. 754 (2002). . . . . . . . . . . 17
Fastfunding Company, Inc. v. Betts, 758 So.2d
1143 (Fla. App. 2000).. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Gilmer v. Interstate/Johnson Lane Corp., 500
U.S. 20 (1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
I.S. Joseph Co., Inc. v. Michigan Sugar Co., 803
F.2d 396 (8th Cir. 1986).. . . . . . . . . . . . . . . . . . . . . . . . . 15
Lawrence v. Comprehensive Bus. Servs. Co.,
933 F.2d 1159 (5th Cir. 1987).. . . . . . . . . . . . . . . . . . . . 13
McNally Pittsburg, Inc. v. Int’l Ass’n of Bridge
Structural & Ornamental Iron Workers,
812 F.2d 615 (10th Cir. 1987).. . . . . . . . . . . . . . . . . . . . 15
Nature’s 10 Jewelers v. Gunderson, 648 N.W.2d
804 (2002). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12-13, 16
Party Yards, Inc. v. Templeton, 751 So.2d 121
(Fla. App. 2000).. . . . . . . . . . . . . . . . . . . . . . . . . . . .12, 16
Pittsfield Weaving Co. v. Grove Textiles, Inc.,
430 A.2d 638 (N.H. 1981). . . . . . . . . . . . . . . . . . . . . . . 11
Prima Paint Corp. v. Flood & Conklin Mfg.
Co., 388 U.S. 395 (1967). . . . . . . . . . . . . . . . . . . . .passim
Sandvik AB v. Advent Int’l Corp., 220 F.3d
99 (3d Cir. 2000).. . . . . . . . . . . . . . . . . . . . . . . . .14-15, 16
Southland Corp. v. Keating, 465 U.S. 1 (1984). . . . . . . . . . 14
Sphere Drake Ins. Ltd. v. All American Ins.
Co., 256 F.3d 587 (7th Cir. 2001). . . . . . . . . . . . . . . 15, 16
Three Valleys Munic. Water Dist. v. E.F. Hutton
& Co., 925 F.2d 1136 (9th Cir. 1991). . . . . . . . . . . . . . . 15
Statutes
Federal
Federal Arbitration Act, 9 U.S.C. §§ 1
et seq.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
9 U.S.C. § 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
9 U.S.C. § 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
9 U.S.C. § 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1-2, 14
9 U.S.C. § 16(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
28 U.S.C. § 1254(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Racketeer Influenced and Corrupt Practices
Act, 18 U.S.C. §§ 1961 et seq. . . . . . . . . . . . . . . . . . . . . .8
Truth In Lending Act, 15 U.S.C. §§ 1601
et seq.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
State
Md. Code Ann., Fin. Inst. § 11-204(a). . . . . . . . . . . . . . .2, 9
Md. Code Ann., Fin. Inst. § 11-222. . . . . . . . . . . . . . . . . 2-3
Md. Code Ann., Com. Law § 12-306(a)(2)(i). . . . . . . . . . . .3
Md. Code Ann., Com. Law § 12-314(b)(1). . . . . . . . . . . 3, 9
Md. Code Ann., Com. Law § 12-316 . . . . . . . . . . . . . . 3-4, 9
State Constitution
Md. Const. Art. III, § 57. . . . . . . . . . . . . . . . . . . . . . . . . 3, 8
Miscellaneous
Black’s Law Dictionary (West Publ. Co., 6th ed.
1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
OPINIONS BELOW
The opinion of the U.S. Court of Appeals for the 4th Circuit (App. 1-13) is reported at 290 F.3d 631 (2002). The unreported opinion of the U.S. District Court for the District of Maryland (App. 15-18) was entered on September 7, 2001.
JURISDICTION
The judgment of the court of appeals was entered on May 15, 2002. Pursuant to Rule 13.5 of the Rules of this Court, Rehnquist, C.J. as Circuit Justice, granted Petitioners an extension of time for filing this petition to and including September 12, 2002. This Court has jurisdiction under 28 U.S.C. § 1254(1).
STATUTORY PROVISIONS INVOLVED
The substantive provision of the Federal Arbitration Act of 1925 (“FAA”) at issue, 9 U.S.C. § 2, reads as follows:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract.
The procedural provision of the FAA at issue, 9 U.S.C. § 4, reads in relevant part as follows:
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. . . .The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. . . .If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof. . . .
(emphasis added)
The state law provisions at issue in the case read as follows:
Md. Code Ann., Fin. Inst. § 11-204. Requirement of license
(a) Unless a person is licensed by the Commissioner, the person may not:
(1) Make a loan; or
(2) In any way use any advantage provided by the Maryland Consumer Law.
Md. Code Ann., Fin. Inst. § 11-222. Violation of provisions
Any person who violates any provision of § 11-204(a) of this subtitle is guilty of a misdemeanor and on conviction is subject to a fine not exceeding $5,000 or imprisonment not exceeding 3 years or both.
Md. Const. Art. III, § 57. Legal Rate of Interest
The Legal Rate of Interest shall be Six per cent per annum; unless otherwise provided by the General Assembly.
Md. Code Ann., Com. Law § 12-306. Interest
(a)(2) For any loan with an original principal balance of $2,000 or less, the maximum interest rate is:
(i) 2.75% interest per month on that part of the unpaid balance not more than $500;
Md. Code Ann., Com. Law § 12-314. Loans for six thousand dollars or less
(b)(1) A loan made in the amount of $6,000 or less, whether or not the loan is or purports to be made under this subtitle, is unenforceable if a rate of interest, charge, discount, or other consideration greater than that authorized by the law of this State is contracted for by any person unless the excess rate contracted for is the result of a clerical error or mistake and the person corrects the error or mistake before any payment is received under the loan.
Md. Code Ann., Com. Law § 12-316. Knowing violations
Any licensee or his officer or employee who knowingly violates any provision of §§ 12-303 through 12-306, § 12-308, § 12-311, § 12-313, or § 12-314 of this subtitle is guilty of a misdemeanor and on conviction is subject to a fine not exceeding $500 or imprisonment not exceeding 6 months or both.
STATEMENT OF THE CASE
This case presents the question of whether, under the FAA, a court or an arbitrator has the authority to decide whether a contract containing an arbitration clause is void ab initio in its entirety because one party lacked signatory authority to enter into the contract and because the contract’s terms violate applicable state civil and criminal law. A deep split of federal and state appellate authority has emerged on this issue as four federal circuit courts, including the court below, have held that challenges to the existence of a contract must be resolved through arbitration, while three State supreme courts have held that under the FAA only courts may decide these issues because they implicate the very existence of any agreement to arbitrate between the parties.
In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), the Court held that a claim of fraud in the inducement of a contract containing an arbitration clause was subject to arbitration because the arbitration provision was severable from the rest of the agreement. Prima Paint addressed a contract defense claim that would have rendered the contract voidable, though not automatically void.
The Fourth Circuit below extended Prima Paint by holding that an arbitrator must resolve challenges to the formation and existence of a legal contract. Petitioner argued below that Respondents’ entire payday loan contracts, including their arbitration provisions, were void ab initio because Respondents were unlicensed to make the loans involved in this case and because the interest rates charged by Respondents rendered the loans illegal and void under applicable state law.
The Fourth Circuit’s holding that these claims are subject to arbitration deepens an existing split of authority and directly conflicts with several state supreme court decisions holding that, under the FAA, a court must determine the existence of a contract between the parties before it can order arbitration. This decision also conflicts with the rationale behind the rulings of other federal circuits that courts must resolve allegations that an entire contract is void. Finally, by singling out the arbitration clause to be enforced when the existence and legality of the entire contract is in dispute, the decision below conflicts with this Court’s repeated holdings that the FAA does no more than place arbitration agreements on the same footing as other contracts.
A. Factual Background
Petitioner Patricia Snowden entered into her first loan with
Respondents at one of Checkpoint Check Cashing’s Baltimore
locations on June 12, 1999. To obtain $150 cash, Snowden had
to submit a check for $180 that would be payable within 14
days, on the date of her next paycheck. These transactions are
commonly referred to as “payday loans.” Checkpoint deposited
the check, and the check cleared. On June 29, 1999, Snowden
began to repeat this process, obtaining $200 cash by submitting
a check for $240 that was also payable within 14 days on the
date of her next paycheck. Checkpoint deposited the check,
and the check cleared. Between June 1999 and February 2000,
Snowden and Checkpoint engaged in approximately 12 payday
loan or “roll-over” transactions.
App. 16. For a borrowed
principal that never exceeded $250 at one time and a borrowing
period that totaled 168 days, Patricia Snowden paid Checkpoint
more than $600 in additional interest costs. As an annual
percentage rate, these charges that Snowden paid to Checkpoint
totaled more than 500%.
In November 1999, in the midst of these transactions, Checkpoint inserted into its loan documents with Petitioner Snowden a provision requiring arbitration of disputes related to the parties’ past and future transactions. App. 16. The provision stated in relevant part as follows:
5. Arbitration Provision. Any claim, dispute, or controversy (whether in contract, tort, or otherwise, whether pre-existing, present or future, and including statutory, common law, intentional tort, and equitable claims) arising from or relating to this Agreement or any check or instrument cashed by CheckPoint or fee charged by CheckPoint either prior or subsequent to this Agreement or the relationships that result from this Agreement (including, to the full extent permitted by applicable law, relationships with third-parties who are not signatories to this Agreement or this Arbitration Provision) or the validity, enforceability, or scope of this Arbitration Provision or the entire Agreement (collectively “Claim”), shall be resolved, upon the election of you or CheckPoint or said third-parties, by binding arbitration pursuant to this Arbitration Provision and the Commercial Arbitration Rules in effect at the time the Claim is filed. A party who has asserted a claim in a lawsuit in court may elect arbitration with respect to any claim(s) subsequently asserted in that lawsuit by any other party or parties. THERE SHALL BE NO AUTHORITY FOR ANY CLAIMS TO BE ARBITRATED ON A CLASS ACTION BASIS. FURTHER, AN ARBITRATION [sic] CAN ONLY DECIDE CHECKPOINTS [sic] OR YOUR CLAIM AND MAY NOT CONSOLIDATE OR JOIN THE CLAIMS OF OTHER PERSONS WHO HAVE SIMILAR CLAIMS.
Quoted at App. 3-4 (emphasis in original).
The question before the Court is whether this provision is enforceable in light of Petitioner’s allegations that Respondents lacked authority under applicable state law to enter into the agreements at issue and that the illegal terms of the agreements render them void and unenforceable in their entirety.
B. The Proceedings Below.
Patricia Snowden, as representative of a putative class of borrowers, filed suit against Respondents on June 26, 2000, in the federal district court for the District of Maryland. The complaint asserted that Checkpoint’s payday loan contracts violated the federal Truth in Lending Act (15 U.S.C. §§ 1601 et seq.), the Racketeer Influenced and Corrupt Practices Act (18 U.S.C. §§ 1961 et seq.), and Maryland’s Consumer Loan Act (Md. Com. Law §§ 301 et seq.), Interest and Usury Statute (Md. Com. Law §§ 101 et seq.), and the State’s common law of fraud. App. 4-5.
The plaintiff class alleged that Checkpoint was charging
and collecting usurious interest for short-term consumer loans
under the guise of cashing checks. The complaint alleged that
the charges on these payday loans resulted in annual percentage
rates of 300 to 400 percent, more than ten to twelve times
Maryland’s 2.75 percent interest per month (33 percent per
annum) usury threshold on small consumer loans.
The
complaint further alleged that Checkpoint enforced these illegal
payments in part by threatening borrowers with criminal
prosecution under Maryland’s bad check law. Finally, the
plaintiffs alleged that Checkpoint was not licensed under the
Maryland Consumer Act, and therefore was issuing consumer
loans in violation of state law. App. 8.
On March 29, 2001, Checkpoint moved the district court to
compel arbitration of all of Snowden’s claims.
Snowden
argued in response that the court should rule that Checkpoint’s
mandatory arbitration clause was unenforceable because the
entire payday loan agreement in which it appeared was void ab
initio as a matter of law. This argument was based on the
separate facts that Checkpoint was not licensed in Maryland to
make consumer loans, which rendered its contracts illegal and
void,
and that the loans themselves imposed usurious interest
charges, a practice punishable as a crime under Maryland’s
Consumer Loan Law.
Id. Snowden further argued that
Checkpoint’s arbitration clause was itself unconscionable as a
contract of adhesion that deprived prevailing plaintiffs of their
right to recover attorneys’ fees and of the right to proceed on a
class-wide basis in any case. Id. at 12.
On September 7, 2001, the district court denied Checkpoint’s motion to compel arbitration without prejudice. The court noted that Snowden was a named plaintiff in a case where a motion for class certification would be forthcoming, and ruled that it would be inappropriate to order her claims into arbitration before the court determined whether she had any role to play in the pending class action. Id. at 17.
On May 15, 2002, the Fourth Circuit vacated the district court’s order and remanded the case with instructions to grant Checkpoint’s motion to compel arbitration against Snowden. The court of appeals held first that the district court’s order denying the motion to compel arbitration without prejudice was an appealable order under 9 U.S.C. § 16(a)(1). The court then turned to Snowden’s arguments against enforcement of the arbitration clause. App. 6-7.
On this point, the Fourth Circuit held that Snowden’s arguments that Checkpoint’s unlicensed loan contract was illegal and void must be resolved through arbitration under this Court’s holding in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). App. 8-9. The court recognized that Prima Paint involved claims of fraud in the inducement of a contract, Id. at 9, which, unlike Snowden’s claims, did not render the entire contract void and therefore did not implicate the making of the arbitration agreement. The court also noted several federal circuit court decisions holding that Prima Paint’s severability doctrine does not extend to allegations that an entire contract is void. Id. at 9-10. Still, the court held that Snowden’s allegations must be arbitrated because they did not challenge a party’s assent to the underlying contract. Id. at 10. Finally, the Fourth Circuit rejected Snowden’s argument that the arbitration clause itself was unconscionable, finding that the clause did not attempt to override applicable statutory provisions creating a right for prevailing plaintiffs to recover attorneys’ fees and that the arbitration clause’s prohibition of class action proceedings was valid because Snowden and other payday loan borrowers from Checkpoint would still be able to obtain legal representation based on the availability of statutory fee awards. Id. at 12-13.
REASONS FOR GRANTING THE WRIT
I. There is a Deep Split of Authority on Whether the FAA Authorizes a Court or an Arbitrator to Decide if an Entire Contract is Illegal and Void.
Review is warranted because there is a direct split of authority between the Fourth Circuit’s holding below (along with decisions of at least three other federal circuit courts) and the holdings of three State supreme courts as to whether a court or an arbitrator has authority under the FAA to determine whether an underlying contract is void based on a party’s lack of signatory authority or based on the contract’s illegal terms under applicable state law.
In Pittsfield Weaving Co., Inc. v. Grove Textiles, Inc., 430 A.2d 638 (N.H. 1981), the New Hampshire Supreme Court unanimously refused to enforce an arbitration provision in a contract for the sale of yarn based on its finding that the entire contract was unconscionable. After noting that state contract law rendered any contract deemed unconscionable to be void, the court rejected the defendant’s argument that Prima Paint required arbitration of the plaintiff’s allegations and held that, if the trial court found the entire contract, “including the arbitration clause,” to be unconscionable, then it could under the FAA properly deny the defendant’s motion for arbitration. Id. at 639-40 (emphasis in original).
In Alabama Catalog Sales v. Harris, 794 So.2d 312 (Ala.
2000), the Alabama Supreme Court held that under the FAA a
court, rather than an arbitrator, must determine whether a
payday loan contract with an arbitration clause was illegal and
void because its usurious interest rate violated the state’s Small
Loan Act. The court rejected the defendant’s argument that
Prima Paint required submission of the plaintiffs’ allegations
to arbitration, finding instead that Prima Paint applies narrowly
to arguments that a contract is voidable or subject to revocation,
and that the plaintiffs’ argument that the payday loan contract
was void went to the very existence of an agreement. Id. at
315-317; see also Camaro Trading Co., Ltd. v. Nissei Sanryo
America, Ltd., 577 So.2d 1274 (Ala. 1991) (holding that court,
rather than arbitrator, must determine whether contract
containing arbitration clause is illegal and void).
In Nature’s 10 Jewelers v. Gunderson, 648 N.W.2d 804
(S.D. 2002), decided after issuance of the decision below, the
South Dakota Supreme Court held that an arbitration clause in
a franchise agreement was unenforceable because the entire
agreement was void where the franchisor’s registration with the
State to operate franchise stores had expired several months
before the parties entered into their agreement. Because the
franchisor’s license to conduct this type of business had
previously expired, the South Dakota Supreme Court held that
the entire franchise agreement violated the applicable state
statute and was void from its inception (not merely voidable at
the parties’ election). Therefore, the agreement’s arbitration
provision could not be enforced. The court concluded that it
“will not permit the individuals who committed the illegal acts
on behalf of the corporation to benefit from the arbitration
clause in the illegal contract.” Id. at 807.
The decision below and other recent circuit court decisions
are directly contrary to these State supreme court holdings. The
Fourth Circuit held that, because Snowden’s “allegations of
usurious interest rates and non-licensure” are not addressed to
the arbitration clause itself and do not allege a failure of assent
to the entire conract, they could not serve as a basis for the
denial of Checkpoint’s motion to compel arbitration. App. ##;
see also Burden v. Check into Cash of Kentucky, LLC, 267 F.3d
483, 490 (6th Cir. 2001), cert. denied, 122 S. Ct. 1436 (Apr. 1,
2002) (No. 01-1078) (allegations that payday loan contract is
illegal and void ab initio under state law due to lender’s lack of
requisite license and loans’ usurious terms must be arbitrated);
Bess v. Check Express, 294 F.3d 1298, 1305-06 (11th Cir. 2002)
(same); cf. Lawrence v. Comprehensive Business Services Co.,
833 F.2d 1159 (5th Cir. 1987) (claim that franchise agreement
is illegal under state statute is subject to arbitration). These
were precisely the types of allegations that served as the basis
for the Alabama, South Dakota, and New Hampshire Supreme
Courts to deny arbitration motions in cases decided under the
FAA. Review is warranted here to resolve this deep split of
authority among the federal and state courts of appeal on these
recurring questions of federal law.
This split of authority is also reflected in a larger body of
cases where federal and state courts of appeal have struggled to
define the outer limits of Prima Paint’s severability doctrine.
Most circuit courts have refused to extend Prima Paint’s
holding regarding allegations of fraud in the inducement of a
contract to the very different type of allegation that the entire
contract is void ab initio and therefore never came into
existence in the first place.
These courts have held that this
latter type of allegation by definition implicates the “making of
the agreement for arbitration,” 9 U.S.C. § 4, and therefore must
be decided by a court as a precondition to any arbitration order
under the FAA.
For example, in Sandvik AB v. Advent Int’l
Corp., 220 F.3d 99 (3d Cir. 2000) (Becker, J.), the Third
Circuit held that a party cannot enforce an arbitration clause
while denying that it is bound by the contract containing that
clause because, “[e]ven under the severability doctrine [of
Prima Paint], there may be no arbitration if the agreement to
arbitrate is non-existent.” Id. at 101. The Third Circuit
construed Prima Paint as applying only to allegations that
would render a contract voidable, and held that courts must
resolve all allegations that would render an entire contract (and
therefore its arbitration clause) void:
Mindful of the doctrine announced in Prima Paint, which did not consider a situation in which the existence of the underlying contract was at issue, we draw a distinction between contracts that are asserted to be “void” or non-existent, as is contended here, and those that are merely “voidable,” as was the contract at issue in Prima Paint, for purposes of evaluating whether the making of the arbitration agreement is in dispute.
Id. at 107.
The decision below directly conflicts with this
rationale underpinning Sandvik’s holding by requiring
arbitration of Snowden’s claims that Checkpoint’s contract is
void, and therefore never came into existence, based on
Checkpoint’s lack of signatory authority and on its illegal
terms.
Federal and state courts of appeal have struggled and come
into conflict over where to draw the line between disputes
regarding contracts that courts must resolve and those disputes
that are referable to arbitration. The court below and several
other federal circuits have held that courts may only address
disputes over assent to the contract as a whole, and that any
other challenge to the existence or legality of the contract must
be arbitrated under Prima Paint.
But other courts hold that
courts must decide any allegation that would render contract
void ab initio, including the argument made below that the
entire contract is illegal under applicable state law, because a
void contract by definition never came into existence and
therefore never had an enforceable arbitration clause.
By
viewing the “making of the agreement for arbitration” under the
FAA solely as a question of party assent, the former group of
cases abrogates a substantial body of state laws, like
Maryland’s consumer loan statutes, that regulate contract
formation in order to advance specific public policy goals. By
contrast, the latter group of cases apply to arbitration
agreements the same rules of state law that apply to the making
of any other contract and thereby are consistent with the
underlying purpose of the FAA to place arbitration agreements
on the same footing as other contracts.
The Court therefore should grant review to resolve this split of authority over the scope of Prima Paint, to prevent further confusion among the federal and state courts of appeal, and to ensure that arbitration agreements are subject to the same rules of state law that apply to the many different types of contracts in which they are more and more frequently appearing.
II.By Enforcing the Arbitration Clause When the Whole Contract is Alleged to be Illegal and Void, the Decision Below Conflicts with this Court’s Holdings that the FAA Places Arbitration Clauses on the Same Footing as Other Contracts.
The decision below is also in conflict with this Court’s repeated holdings that federal policy regarding arbitration is simply one of enforcing contracts and that the FAA does no more or less than place arbitration agreements on the same footing as other agreements. Earlier this year, the Court refused to enforce an arbitration provision in an employment contract in a case where claims were asserted by a federal agency that was not a party to that contract. See Equal Employment Opportunity Comm’n v. Waffle House, Inc., 122 S. Ct. 754 (2002). In holding that the FAA’s policies regarding arbitration do not overcome the requirement of an agreement between the parties to a dispute, the Court explained that the purpose of the Act was simply to “‘reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements on the same footing as other contracts.’” Id. at 761 (quoting Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991)) (emphasis added). In so holding, this Court reaffirmed that courts must apply the same rules of contract law to arbitration agreements as apply to all other contractual provisions.
Similarly, in Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), this Court held that the FAA preempted a state statute that imposed specific disclosure requirements applicable only to arbitration agreements. The Court echoed its earlier decisions in explaining that, through the FAA, “Congress precluded states from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed upon the same footing as other contracts.” Id. at 687 (internal quotation omitted). In an earlier decision involving FAA preemption, the Court elaborated on the fact that the FAA does no more than place arbitration clauses on the same footing as other contracts and contractual provisions:
States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract.’ 9 U.S.C. § 2 (emphasis added). What states may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal ‘footing,’ directly contrary to the Act’s language and Congress’ intent.
Allied-Bruce Terminix Co., Inc. v. Dobson, 513 U.S. 265, 281 (1995).
Snowden’s allegations challenging the legality of Checkpoint’s payday loan contracts in their entirety present the inverse of what the Court hypothesized in Allied-Bruce Terminix. Snowden alleges that Checkpoint had no authority to make these contracts under Maryland law because it was not licensed to make consumer loans. App. 8. Snowden further alleges that Checkpoint’s excessive interest rates render the entire loan contracts void ab initio under Maryland’s consumer loan and usury laws. Id. The Fourth Circuit held that the arbitration provision of this allegedly illegal and void contract must be singled out and given effect before there is a determination as to whether all of the contract (including the arbitration clause) was legally formed. Id. at 8-10. This is not an application of ordinary contract law and this does not place the arbitration clause on the same footing as the other provisions of Checkpoint’s payday loan contract. Instead, this ruling misapplies the FAA to require arbitration where the basic question of whether there was ever a legal contract between the parties, and therefore whether there was ever an arbitration agreement, is still in dispute.
In short, by extending Prima Paint to require enforcement of an arbitration clause when the entire contract in which it appears is alleged to be illegal and void, the decision below conflicts with this Court’s repeated interpretations of the FAA. In light of this conflict and because the decision below deepens an already substantial split of authority among federal and state appellate courts on the question of whether the FAA requires enforcement of an arbitration provision in an allegedly illegal and void contract, the Court should grant review and resolve these conflicts on this important question of federal law.
CONCLUSION
The petition for a writ of certiorari should be granted.
Respectfully submitted,
John Thomas Ward
Ward & Kershaw
113 W. Monument Street
Baltimore, MD 21202
(410) 539-6500
Richard A. Fisher
Richard Fisher Law Office
1510 Stuart Road,
Suite 210
Cleveland, TN 37312
(423) 479-7009
Jack Block
Sachnoff & Weaver, Ltd.
39 South Wacker Drive,
29th Floor
Chicago, IL 60606
(312) 207-6486
F. Paul Bland, Jr.
(Counsel of Record)
Michael J. Quirk
Trial Lawyers for Public Justice, P.C.
1717 Massachusetts Avenue, NW Suite 800
Washington, D.C. 20036
202/797-8600
Philip M. Andrews
John A. Bourgeois
Kramon & Graham
One South Street
Suite 2600
Baltimore, MD 21202
(410) 752-6030
Counsel for Petitioners
Date: September 12, 2002