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Justices to Decide Enforceability of Arbitration Clause Is an arbitration agreement in a consumer loan document enforceable if it doesn't specify who is to pay the arbitrator's fee and other costs? The Supreme Court will decide this question. The Court will review an Eleventh Circuit decision that held such a clause unenforceable. (99 LWUSA 609; Search words for LWUSA Archives: Knox and Golann.) The Eleventh Circuit is apparently the only circuit to have ruled this way. Some courts have held that an arbitration agreement is unenforceable where it requires the plaintiff to pay the costs, but in this case the circuit rejected an agreement that was merely silent as to who would pay. Arbitration clauses like this one are cropping up in virtually every type of consumer transaction, including: * Credit card agreements; * Home improvement contracts; * Automobile leases and purchases; * Mobile and manufactured home sales; and * Cellular phone agreements. This case "has enormous implications, not only for consumer transactions, but also for employment law and health law, where mandatory arbitration clauses are increasingly being used," says Patricia Sturdevant of the National Association of Consumer Advocates in Washington. "These clauses are a pernicious threat because they set up a dual system of justice – courts for corporations and arbitration for consumers." When mandatory arbitration clauses don't specify who pays the fees, consumers may have a difficult time finding an attorney willing to handle their case, say experts. "If a person comes in with a $3,000 claim, she isn't going to find a lawyer to take her case," says Knox McLaney of Montgomery, Ala., who represents the consumer in this case. "The lawyer has to pay the filing fee up front. It doesn't take an economic whiz to figure out you can't make money doing these cases." Mobile Home Purchase The plaintiff in this case obtained a loan from a consumer finance company to purchase a mobile home. The loan agreement contained a mandatory arbitration clause that didn't specify which party was responsible for the arbitrator's fees and other costs. When the plaintiff later sued under the federal Truth in Lending Act, claiming the loan documents failed to disclose certain financing costs, the lender moved to compel arbitration. The plaintiff claimed that the arbitration clause was invalid because it did not limit her costs and therefore interfered with the ability to pursue her rights under TILA. The lender argued that the agreement should be enforced because the arbitrator had the power to fairly apportion fees between the parties. But the Eleventh Circuit said that fact "provides no guarantee that a consumer successfully arbitrating under this clause will not be saddled with...prohibitive costs...despite the small sum that is likely to be the object of the dispute... "This clause says nothing about the payment of filing fees or the apportionment of the costs of arbitration. It neither assigns an initial responsibility for filing fees or arbitrators' costs, nor provides for a waiver in cases of financial hardship. It does not say whether consumers, if they prevail, will nonetheless be saddled with fees and costs in excess of any award...[T]his...raises serious concerns with respect to...expenses that may curtail or bar a plaintiff's access to the arbitral forum." Lenders' attorneys responded to the ruling by advising their clients to err on the safe side and consider revising their documents. The best approach may be to spell out exactly what costs a consumer will be responsible for, said Crofton, Md., attorney Robert Cook, a former chair of an ABA subcommittee on TILA. And some companies might want to consider paying all the costs of arbitration – win or lose, he added. Arbitration Burdens Experts say that these clauses impose significant burdens on consumers. "For tiny claims, it's just not cost-effective to pursue them individually, and class actions generally aren't allowed in arbitration," says Paul Levy, a lawyer with Public Citizen in Washington. Sturdevant agrees. "For many claims, the only way to go after the corporation is in a class action. You have to be acting on behalf of a group to make a challenge feasible." Now that the case is pending before the Supreme Court, plaintiffs' lawyers should "keep pushing these cases through," advises McLaney. "Argue the same issue raised before the Eleventh Circuit as to whether a federal consumer protection statute can be made the subject of binding arbitration." "Don't be frightened away from a case just because there's an arbitration clause," says Sturdevant. "At first, courts thought arbitration was the perfect blind date, but now the tide is shifting as lawyers are becoming more sophisticated in pointing out what's wrong with these clauses." Although the specific question before the Supreme Court is fairly limited, some lawyers hope that the Court will take this opportunity to make a broader statement about mandatory arbitration generally. "This may well be a context in which the Supreme Court says, 'We've been wandering farther and farther down the arbitration-rules-all road, and maybe it's time to take a step back,'" says Levy. A decision from the Supreme Court is expected next term. U.S. Supreme Court. Green Tree Financial Corp. v. Randolph, No. 99-1235. Certiorari granted, April 3, 2000. Ruling below: 178 F.3d 1149 (11th Cir. 1999). © 2000 Lawyers Weekly Inc., All Rights Reserved.

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Justices to Rule on Employment, Arbitration, Criminal Law Cases By Alison B. Bianchi The U.S. Supreme Court will decide a number of important cases dealing with arbitration, employment, divorce, criminal law, products liability and other areas in the term that begins next month. Lawyers handling cases that would be affected by the upcoming decisions may want to seek a stay until the Court issues its rulings. Others may want to advise their clients that the law is uncertain pending the Court's review. Here's a look at some of the most important cases of the upcoming term and their potential impact: Consumer Arbitration The Supreme Court will decide whether an arbitration agreement in a consumer loan document is enforceable if it doesn't specify who is to pay the arbitrator's fee and other costs. The Court will review an Eleventh Circuit decision that said such a clause was unenforceable. This is apparently the only circuit to have ruled this way. While some courts have held that an arbitration agreement is unenforceable where it requires the plaintiff to pay the costs, in this case the Eleventh Circuit rejected an agreement that was merely silent as to who would pay. The plaintiff in this case had obtained a loan from a consumer finance company to purchase a mobile home. The loan agreement contained a mandatory arbitration clause that didn't specify which party was responsible for the arbitrator's fees and other costs. The plaintiff claimed that the clause was invalid because it did not limit her costs and therefore interfered with the ability to pursue her rights under the federal Truth in Lending Act. The lender argued that the agreement should be enforced because the arbitrator had the power to fairly apportion fees between the parties. But the Eleventh Circuit said that fact "provides no guarantee that a consumer successfully arbitrating under this clause will not be saddled with...prohibitive costs...despite the small sum that is likely to be the object of the dispute… "[T]his…raises serious concerns with respect to…expenses that may curtail or bar a plaintiff's access to the arbitral forum." Experts say that clauses like this one are cropping up in virtually every type of consumer transaction, including: Credit card agreements;   Home improvement contracts;   Automobile leases and purchases;   Mobile and manufactured home sales; and   Cellular phone agreements. This case "has enormous implications, not only for consumer transactions, but also for employment law and health law, where mandatory arbitration clauses are increasingly being used," said Patricia Sturdevant of the National Association of Consumer Advocates in Washington. Green Tree Financial Corp. v. Randolph, No. 99-1235. Certiorari granted April 3, 2000. Ruling below: 178 F.3d 1149 (11th Cir. 1999). Employment Law Arbitration In a case that could have a big impact on employment arbitration, the Court will also decide whether the Federal Arbitration Act applies to employment contracts. The Act provides that agreements to arbitrate are binding, but says that it doesn't apply to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." The Court will review a Ninth Circuit case that said an employer couldn't compel arbitration because the exclusion applies to all employment contracts, not just those of employees engaged in interstate transportation. Nine other circuits have ruled the other way. "A decision for the plaintiff would be enormous. It would change the law in all the other circuits. But a decision for the defendant will force the Ninth Circuit into the same box everyone else is in," said Paul Bland, who heads the Mandatory Arbitration Abuse Prevention Project at Trial Lawyers for Public Justice in Washington. The Ninth Circuit case involved a plaintiff who signed a mandatory arbitration agreement as part of a job application – a requirement for all employees. The worker later sued for discrimination under a state statute, but the employer moved to compel arbitration in federal court under the Act. The Ninth Circuit ruled that the arbitration agreement was an employment contract, and disputes over employment contracts can't be forced into arbitration. It relied on an earlier decision which said that the Act's exclusion applies to all employment contracts. Craft v. Campbell Soup Co., 117 F.3d 1083; 98 LWUSA 1028; Search words for LWUSA Archives: Soup and Promulgated. Circuit City Stores, Inc. v. Adams, No. 99-1379. Certiorari granted May 22, 2000. Ruling below: 194 F.3d 1070 (9th Cir. 1999). ADA The Court has agreed to decide if a state employee can sue in federal court under the ADA. The circuits are split on the issue, and the Court has twice agreed to resolve the conflict, but those cases settled before it could rule. This time, the Court will review an Eleventh Circuit case that said Congress "unequivocally" intended to abrogate the states' sovereign immunity from ADA claims. At issue is how to apply a 1996 Supreme Court case that limits suits against states under the Eleventh Amendment. (Seminole Tribe of Florida v. Florida, 517 U.S. 44.) In that case, the Court held that if a state hasn't waived its immunity, it can't be sued in federal court unless there is (1) an express statement of intent by Congress and (2) a valid exercise of power under Sect. 5 of the Fourteenth Amendment. University of Alabama v. Garrett, No. 99-1240. Certiorari granted April 17, 2000. Ruling below: 193 F.3d 1214 (11th Cir. 1999). Divorce – Pensions The Court has agreed to decide whether an ex-wife can get the proceeds of her husband's life insurance and pension plans where he never replaced her as the beneficiary. The Court will review a Washington Supreme Court case which said that the ex-wife wasn't entitled to the money, and it should go to the husband's children by a previous marriage. The husband died two months after the couple's divorce without having changed the beneficiary of either plan. A state law provided that after a divorce, beneficiary designations of an ex-spouse were automatically revoked. The wife argued that the state law was preempted by ERISA. But the Washington Supreme Court disagreed. "The mere fact that [state law] may operate upon the beneficiary designation in an ERISA plan is not of itself a sufficient connection to require preemption... "While a state statute...may bring...default distribution provisions into effect, it does not alter the nature of the plan itself, the administrator's fiduciary duties, or the requirements for plan administration. The...effect of [the state law] upon an ERISA plan is too slight to overcome the presumption against preemption of state family and family property law." "There've been hundreds of these cases around the country," notes Barbara DiFranza, who practices family law in Salinas, Calif. "The devil is in the detail in divorces." While the Supreme Court case is pending, lawyers should be "very careful that [any divorce] judgment is perfectly clear as to who gets what," cautions DiFranza. "And after each case, lawyers should send their clients a letter saying, 'Don't forget to change your records with the plan.'" Egelhoff v. Egelhoff, No. 99-1529. Certiorari granted June 19, 2000. Ruling below: 989 P.2d 80 (Wash. 1999). Product Liability If a medical device manufacturer told the FDA it would market its product for certain uses and then promoted it for others, can it be sued under state tort law for "fraud"? The Court has agreed to review a Third Circuit decision which said that the suit isn't preempted by the 1976 Medical Device Amendments to the Federal Food, Drug, and Cosmetics Act, 21 U.S.C. Sect. 321, et seq. The case involved over 2,000 plaintiffs who claimed they were injured by orthopedic bone screws implanted in their spines. The manufacturer argued that the suit was preempted by the Act, which says that a state cannot impose any requirement on medical devices that is "different from, or in addition to" a federal requirement. But the court said that "the state common law relied upon does not impose any obligation on [the defendant] that is inconsistent with federal law." The defendant's argument "boils down to a contention that the litigation of suits of this kind is fundamentally inconsistent with the regulatory process established by the [Act]. We see no inconsistency between the FDA having the exclusive prerogative of bringing the actions to enforce the [Act] and preserving the right of people in the plaintiffs' position to bring common law fraudulent misrepresentation claims." The court relied on 1996 Supreme Court ruling that said that a pacemaker manufacturer could be sued in tort for defective design, violation of federal regulations and negligent manufacturing and labeling. (Medtronic v. Lohr, 518 U.S. 470.) While the case before the Court is limited to a state-law fraud claim over bone screws, the ruling "could have a broad application on the issue of preemption" generally, says Indianapolis plaintiffs' attorney Boyd Hovde. Buckman Co. v. Plaintiffs' Legal Committee, No. 98-1768. Certiorari granted June 29, 2000. Ruling below: 159 F.3d 817 (3d Cir. 1998). Criminal Law Police Roadblocks Where police set up a roadblock to trap drug offenders, does this violate the Fourth Amendment? The Court has agreed to decide this question. It will review a Seventh Circuit decision that said that such a roadblock was unconstitutional. The circuits are split on this issue. The Seventh Circuit cited similar decisions from the Sixth, Tenth and D.C. Circuits, while noting that the Eleventh Circuit has ruled to the contrary. In this case, the police asked drivers for their license and registration, looked into cars and led drug-sniffing dogs around them. Each stop lasted about five minutes. A 1990 Supreme Court decision said that a drunk driving roadblock did not violate the Fourth Amendment. (Michigan Department of State Police v. Sitz, 498 U.S. 444.) But the Seventh Circuit distinguished that case because here the city wasn't trying to protect public safety by getting impaired drivers off the road, it was just trying to catch criminals who might have drugs in their cars. "[T]he purpose behind the program is critical to its legality. The program must be a bona fide effort to implement an authorized regulatory policy rather than a pretext for a dragnet search for criminals...Leading a drug-sniffing dog around a car cannot be justified by reference to a desire to detect traffic violations, and so the use of the dog at the city's roadblocks shows...that the purpose of the roadblocks is to catch drug offenders... "[T]o be reasonable under the Fourth Amendment, a search ordinarily must be based on individualized suspicion of wrongdoing, save in cases of special need based on concerns other than crime detection...But here the roadblock is meant to intercept a completely random sample of drivers; there is neither probable cause nor articulable suspicion to stop any given driver." Indianapolis v. Edmond, No. 99-1030. Certiorari granted February 22, 2000. Ruling below: 183 F.3d 659 (7th Cir. 1999). Drug Tests The Court will also decide whether a state hospital violated the Fourth Amendment by conducting warrantless drug tests of pregnant women who demonstrated signs of cocaine use – and reporting positive results to the police. The Fourth Circuit held that this was constitutional. Under state law, women who use cocaine after the 24th week of pregnancy can be charged with distributing a controlled substance to a minor. The hospital agreed to perform urine tests on pregnant women who showed any of nine "indicia" of cocaine use, including no prenatal care, unexplained birth defects and a history of cocaine use. If a woman tested positive, the police were notified and the woman could choose between being arrested and entering a drug treatment program. The plaintiffs sued the hospital, arguing that the tests violated the Fourth Amendment. But the Fourth Circuit said that "in light of the documented health hazards of maternal cocaine use and the resulting drain on public resources, [hospital] officials unquestionably possessed a substantial interest in taking steps to reduce cocaine use by pregnant women...[Further,] there can be little doubt that testing the urine of maternity patients...was the only effective means available to accomplish the primary policy goal of persuading women to stop using cocaine during their pregnancies [and] the degree of intrusion, both objective and subjective, suffered by [the plaintiffs] was minimal." Ferguson v. City of Charleston, No. 99-936. Certiorari granted February 28, 2000. Ruling below: 186 F.3d 469 (4th Cir. 1999). Civil Rights The Court will decide whether arresting a woman for not wearing her seatbelt – a misdemeanor punishable by a $50 fine –violates the Fourth Amendment such that she can sue under 42 U.S.C. Sect. 1983. The answer to this question may affect the policies in some police departments of making arrests for minor offenses like jaywalking in certain areas in order to discourage drug trafficking or other crimes. The Court will review an 11-6 en banc decision from the Fifth Circuit that said such an arrest was constitutional. In that case, a woman was stopped and arrested for failing to wear her seatbelt or fasten her children's seatbelts. The officer handcuffed her and took her to jail, where she spent an hour before being released. She sued under Sect. 1983, arguing that the officer's actions violated the Fourth Amendment. But the Fifth Circuit said that "when probable cause exists to believe a suspect is committing an offense, the government's interest in enforcing its laws outweighs the suspect's privacy interests, and an arrest of the suspect is reasonable...We deviate from this principle...only when an arrest is conducted in an extraordinary manner, unusually harmful to an individual's privacy or even physical interests." A dissenting judge complained that the "mere fact that [the] officer...was justified in pulling [the plaintiff] over, and would have been justified in issuing her a citation, does not necessarily mean that he was justified in taking the far more intrusive step of effecting her full custodial arrest, complete with behind-the-back handcuffing, transporting to jail, and booking." Atwater v. City of Lago Vista, No. 99-1408. Certiorari granted June 26, 2000. Ruling below: 195 F.3d 242 (5th Cir. 1999). Wetlands The Court will also review a Seventh Circuit case which held that the Army Corps of Engineers' regulation of intrastate areas of water used by migratory birds doesn't violate the Commerce Clause of the U.S. Constitution. The case involves a former strip mine in Illinois that 23 communities want to use as a landfill. Since the strip mine was closed, areas that once were pits have become ponds used by a variety of migratory birds. The Clean Water Act prohibits discharging pollutants without a permit into "waters of the United States." The Corps has interpreted this to include any water or wetland that "could affect" commerce, as well as any that is "used or suitable for use by migratory birds." Last term, the Court decided two other Commerce Clause cases. In a 5-4 decision, the Court struck down a provision of the federal "Violence Against Women Act" that allowed victims of "gender-motivated violence" to sue their attackers. The Court held that the provision exceeded Congress's power under the Commerce Clause. (U.S. v. Morrison, 120 S.Ct. 1740.) In the second decision, the Court unanimously ruled that the federal arson statute did not cover the burning of a private home, because if it did, it might exceed the commerce power. (Jones v. U.S., 121 S.Ct. 1904.) Both rulings applied a 1995 case in which the Court held that the Commerce Clause did not justify a law making it a federal crime to possess a gun in a school zone. (U.S. v. Lopez, 514 U.S. 549.) That decision originally "was viewed as a minor case," said Yale Law School professor Jack Balkin. Now, it's clear that "the Supreme Court is saying, 'We really meant a significant change in the law, and make no mistake about it.'" Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers, No. 99-1178. Certiorari granted May 22, 2000. Ruling below: 191 F.3d 845 (7th Cir. 1999). Labor Law Where a labor arbitrator orders reinstatement of a worker who was fired from a safety-sensitive job because he tested positive for drugs, can a court reject the award on public policy grounds? The Court will review a Fourth Circuit decision that upheld the arbitrator's decision under the Labor Management Relations Act, 29 U.S.C. Sect. 185. The circuits are split on this issue. In the Fourth Circuit case, the court said that because the employer's substance abuse policy didn't require termination for employees who tested positive, "the arbitrator rationally could have concluded that there was not just cause for that punishment under the facts here...[Further,] although there is a public policy against the use of illegal drugs by those in safety-sensitive positions, there is no such public policy against the reinstatement of employees who have used illegal drugs in the past." Eastern Associated Coal Corp. v. United Mine Workers of America, No. 99-1083. Certiorari granted March 20, 2000. Ruling below: 188 F.3d 501 (4th Cir. 1999) (unpublished). © 2000 Lawyers Weekly Inc., All Rights Reserved.

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Plaintiffs Are Finding New Ways to Challenge Mandatory Arbitration By Sylvia Hsieh As mandatory arbitration clauses become more and more common in employment and consumer contracts, plaintiffs' lawyers are finding new ways to challenge them, experts tell Lawyers Weekly USA. "Courts are more and more frequently refusing to enforce these clauses, in part because plaintiffs' lawyers are getting more sophisticated in how they challenge them," says Patricia Sturdevant, executive director of the National Association of Consumer Advocates in Washington. As a result, management lawyers say that companies should be reevaluating the arbitration provisions in their contracts as new arguments are litigated. "Every time there's a new case, my advice is to look at your plan, see if you have the same potential risk and decide whether you want to amend the plan to eliminate the risk," says Evan Spelfogel, a New York management lawyer who drafts arbitration agreements for employers. Employers are writing these clauses into employment applications and businesses are including them in a variety of consumer contracts, including car and home improvement loans, HMO membership contracts, investment agreements and purchase agreements for computers, cell phones and other consumer items. "There's been a sudden explosion of mandatory arbitration clauses in contracts between businesses and individuals," says Paul Bland, who heads the Mandatory Arbitration Abuse Prevention Project at Trial Lawyers for Public Justice in Washington. Plaintiffs' lawyers complain that many of these provisions "stack the deck" and instead of offering an alternative forum, make it impossible for a plaintiff to bring a claim at all. In response to this trend, ATLA has formed a new litigation group, also chaired by Bland, to come up with ways of challenging the practice. "It's the focus of attention of every trial lawyer," says Michael Donovan, a Philadelphia plaintiffs' lawyer. "It's the 900 pound gorilla in employment law," agrees Bland. Employers have been turning to binding arbitration as a way to control "outrageous" jury awards, says Rob Pattison, a San Francisco management lawyer. And now the practice is spreading as manufacturers and other businesses move to incorporate these provisions into consumer contracts. "Virtually all creditors are sticking these into form agreements or monthly billing agreements," says Stuart Rossman, director of litigation at the National Consumer Law Center in Boston. "This is the number one issue. There's an incredible amount of litigation in this area." Here's a closer look at some of the arguments plaintiffs' lawyers are successfully raising: * Fees are too high. One successful argument is that mandatory arbitration clauses are unconscionable because the fees are too steep for plaintiffs. This has been "the single most effective argument" for plaintiffs, says Bland. A typical employment dispute before the American Arbitration Association costs $500 to file a complaint and $150 per day for the hearing room, plus the cost of the arbitrator, says Toni L. Griffin, an AAA spokeswoman in New York. An arbitrator in a "straightforward" employment case typically charges around $800 to $1,100 per day and usually takes a few days to hear the case, she adds. Plaintiffs' lawyers complain that these costs are higher than those for filing a lawsuit. In addition, some arbitration provisions require a panel of three arbitrators and this can amount to thousands of dollars just to have a complaint heard, notes professor David Schwartz of the University of Wisconsin Law School. For consumer disputes before the AAA, the plaintiff would have to pay $125 to file a written complaint and an additional $100 for a telephone complaint. An in-person review would be more expensive, according to Griffin. Consumer lawyers complain that in many cases the cost of arbitration exceeds the amount of the claim. "Are you going to put $225 on the table over a $50 claim? And risk paying the other side's attorney fees if you lose?" asks John T. Ward, a consumer class action attorney in Baltimore. This argument is starting to be successful, and courts are overturning arbitration clauses where the cost exceeds the size of the claim or the cost of filing in court. For example, the Tenth Circuit recently refused to enforce an arbitration provision in a discrimination suit where the employee was forced to pay half of the arbitrator's fee – estimated to be between $1,875 and $5,000. (Shankle v. B-G Maintenance Management of Colorado, 163 F.3d 1230 (1999).) And the Eleventh Circuit ruled that a plaintiff could sue under the Truth in Lending and Equal Credit Opportunity Acts where the arbitration clause in an installment sales contract was silent as to who would pay, making the plaintiff's costs uncertain. (Randolph v. Green Tree Financial Corp., 178 F.3d 1149 (1999).) The safest strategy for companies is to agree to pick up the whole cost, says Georgia State University professor Douglas Yarn, who teaches alternative dispute resolution. More and more companies are willing do this in light of recent court decisions, notes Griffin. However, a company may want to agree to pay only for disputes with current employees, because otherwise it could "invite" claims from terminated employees, warns Yarn. * Remedies are limited. Arbitration provisions that restrict certain remedies are also being successfully challenged. A new wave of arbitration clauses are "far more onerous," because they try to eliminate punitive damages, class action suits, and other remedies, says Sturdevant. Plaintiffs' lawyers are arguing that plaintiffs can't be forced into arbitration if the process doesn't provide the same remedies as a court. This would include limits on discovery or damages, such as punitive damages, and restrictions on class actions or injunctive relief. This argument is particularly important in the consumer context, where individual claims might otherwise not be worth bringing. Provisions that shorten the statute of limitations for filing a complaint can also be challenged, lawyers say. In one recent case, a Florida appeals court held that an arbitration clause in a cellular phone contract was unconscionable because it eliminated the possibility of punitive damages and injunctive relief and prevented class action suits by forcing individual consumers to arbitrate claims. (Powertel v. Bexley, 743 So.2d 570 (1999).) Many arbitration agreements also bar plaintiffs from collecting attorney fees. Bland says he expects to see this issue litigated soon because many consumer and civil rights statutes contain "one-way" fee provisions, which allow winning plaintiffs to collect fees, but not defendants. "Now, companies are starting to put two-way fee clauses into arbitration agreements. But if the arbitration clause is set up to deter you from going forward, then arbitration isn't as good a remedy as court and there's a strong fairness argument," he says. * Violates public policy. Plaintiffs' lawyers have also argued that plaintiffs shouldn't be forced into arbitration where they have the right to sue under a statute or state constitution. Most courts have held that a plaintiff can waive those rights as long as the waiver is knowing and voluntary, but some courts are saying that discrimination and civil rights statutes create a public policy against waiving the right to sue. The EEOC has taken the position that mandatory arbitration provisions are per se violations of Title VII, even if the employee agrees to them. Consumer lawyers are latching onto this argument, claiming that the purpose of state consumer protection statutes is to have disputes heard in a public forum so as to uncover fraud. The California Supreme Court recently held that a consumer who had signed an arbitration agreement with an HMO could still sue for injunctive relief on behalf of the public under a state consumer protection statute. (However, the plaintiff must arbitrate his individual claim for money damages.) (Broughton v. Cigna Healthplans of California, 90 Cal. Rptr.2d 334 (1999).) In another recent case, the Florida Supreme Court said that an arbitration clause in a purchase and sale agreement for a new home didn't cover the plaintiff's tort claim that the property was improperly built, because this would "deprive her of rights to trial by jury, due process and access to courts." (Seifert v. U.S. Home Corp., No. 91,821 (1999).) And the Fourth Circuit is currently hearing a case where the issue is whether an arbitration clause in an employment agreement is trumped by the state human rights act, which says that certain acts of discrimination violate public policy and entitle plaintiffs to a jury trial. (Brown & Root, Inc. v. Breckenridge, No. 99-1831 (1999).) A U.S. District Court refused to enforce the arbitration agreement, and the employer appealed to the Fourth Circuit. "Many courts are finding that discrimination laws or state human rights acts as a matter of public policy override arbitration agreements," says Michael Ranson of Charleston, W.Va., who represents the employee in that case. Spelfogel says he always advises clients that an arbitration provision should only prevent an employee from going to court, not from filing an EEOC charge, but he says many arbitration agreements bar an EEOC complaint as well. * Provision is one-sided. Some courts have also overturned arbitration agreements for being too one-sided. In a recent case, the California Court of Appeal found that an arbitration clause was unconscionable because it forced the employee to arbitrate, but allowed the employer to sue. (Ramirez v. Circuit City Stores Inc., 90 Cal.Rptr.2d 916 (1999).) "It is by now well settled that an agreement that requires the weaker party to arbitrate any claims he or she may have, but permits the stronger party to seek redress through the courts, is presumptively unconscionable," the court said. State courts in Montana, Ohio and West Virginia have ruled similarly. But the Third Circuit held to the contrary in a case involving a consumer arbitration clause that forced the consumer to arbitrate, but allowed the lender to sue in court. (Harris v. Green Tree Financial Corp., 183 F.3d 173 (1999).) Businesses typically want to reserve the right to pursue certain rights in court, says Yarn. For example, in the construction industry, even though almost all disputes are arbitrated, the right to sue under a "materialman's lien" statute is generally preserved, he says. Similarly, lenders may want to preserve the right to pursue a deficiency, repossession or foreclosure while requiring the consumer to arbitrate. * Forum is inconvenient. Some companies are adding "forum selection" clauses to their arbitration agreements. This issue will come up more often as e-commerce expands and businesses trading over the Internet try to limit their liability by requiring binding arbitration in one state, lawyers predict. Plaintiffs' lawyers can argue this creates a disadvantage for plaintiffs who will be far from their attorney and be forced to incur travel costs. "Who's going to hire a lawyer in some city halfway across the country and fly out there for hearings?" Schwartz asks. Mary Fons, a consumer lawyer in Stoughton, Wis., is currently representing a consumer who signed a mortgage with an arbitration clause that would force her to go to Chicago to arbitrate a complaint. The plaintiff is claiming lending fraud. A U.S. District Court compelled arbitration, but altered the terms of the agreement so that the defendant had to pay the costs and the arbitration would occur in Wisconsin, says Fons. (Danner v. Amresco Residential Mortgage Corp., No. 99-C-0860 (E.D. Wis. 1999).) * Unfair surprise. Plaintiffs' lawyers are arguing that their clients usually don't even know they've signed an arbitration agreement until they try to sue and the company goes to court to compel arbitration. The agreements are usually made before a dispute even arises, so consumers and employees aren't aware of the rights they're waiving, lawyers say. This is a growing issue in consumer transactions, where the arbitration agreement is shrink-wrapped inside the box, or in credit transactions, where an amendment is sent as an "envelope stuffer" with the billing statement. "It's not in the original credit card contract. They're mailing it out in the monthly mailing in the stuff people throw out," says Fons. Employment lawyers can also raise this argument if employees who have worked at a company for years are given an arbitration agreement to sign without being able to negotiate it. Online transactions that call for mandatory arbitration are likely to raise a similar question of whether a "click-wrap" agreement is sufficient notice, lawyers predict. Plaintiffs' lawyers argue that an agreement to arbitrate can't be "voluntary and knowing" if it is made unilaterally and the consumer doesn't know about it. "If I'm a consumer presented with a document and I can't negotiate at all, and every other lender presents me with the same take-it-or-leave-it agreement, I have a problem with that," says Yarn. But he notes that banking laws allow banks to change the terms of a credit contract unilaterally. This issue is being litigated in Maryland in a national class action against Chevy Chase Bank for raising the interest rate on cardholders and later inserting an arbitration clause into its contracts. (Wells v. Chevy Chase Bank, FSB, No. 08159 (Md. Ct. Spec. App.).) The plaintiffs are arguing that even though the original contract said the bank could amend existing terms, it was silent as to arbitration, and therefore the bank wasn't free to add an entirely new term by inserting an arbitration agreement, says Ward, who is representing the class. * Preempted by federal law. Some lower courts have held that warranty claims by consumers can't be arbitrated because that would conflict with the federal Magnuson-Moss Act, 15 U.S.C. Sect. 2301 et seq. The Act allows a manufacturer to provide for alternative dispute resolution in a warranty, but also allows consumers to sue for damages. The Alabama Supreme Court recently said that the Act prohibits binding arbitration clauses in a written warranty, and therefore it supercedes the Federal Arbitration Act. (Southern Energy Homes Inc. v. Lee, 732 So.2d 994 (1999).) "The agency charged with promulgating rules under the Magnuson-Moss Act, the Federal Trade Commission, has stated that the Act prohibits a written warranty from even making 'reference' to 'any binding, non-judicial remedy,'" the court said. Although a warranty may require that informal dispute-resolution be attempted before a court action is filed, it can't be binding or bar the consumer from later suing, the court said. Because the arbitration clause was unenforceable, the plaintiff could also go to court on her implied warranty claims. This argument can be used to defeat binding arbitration in any consumer dispute against a manufacturer or dealer – including cases where an arbitration provision appears in a written warranty, security agreement or sales contract, says G. Houston Howard, II, a Wetumpka, Ala., plaintiffs' lawyer who specializes in consumer litigation against mobile home manufacturers. © 2000 Lawyers Weekly Inc., All Rights Reserved.

Where an arbitration agreement in a consumer loan document didn't specify who would pay the arbitrator's fee and other costs, it is unenforceable, says the Eleventh Circuit.

This is apparently the first circuit to rule this way. Some courts have held that an arbitration agreement is unenforceable where it requires the plaintiff to pay the costs, but this court rejected the agreement where it was merely silent as to who would pay the costs.

Arbitration clauses like this one are cropping up in "virtually every" type of consumer transaction, experts tell Lawyers Weekly USA, including:

• Credit card agreements;
• Home improvement contracts;
• Mobile and manufactured home sales;
• Automobile leases and purchases; and
• Cellular phone agreements.

These clauses are "uniform" throughout the consumer finance industry, says Philadelphia attorney Michael Donovan, who represented the plaintiff in an arbitration case in the Third Circuit.

Consumer law advocates hail the decision as good news for plaintiffs.

"The court is saying that any time the amount a consumer has to pay to arbitrate, whether he wins or loses the case, is significantly more in comparison to the damages being sought – or it is uncertain how much a consumer will have to pay – the arbitration clause is unenforceable," says attorney Jon Sheldon of the National Consumer Law Center in Boston.

Plaintiffs should now be raising this argument in every jurisdiction, says Montgomery, Ala., attorney Knox McLaney, who represented the plaintiff in the case.

"This is a portent of things to come," agrees Douglas Yarn, a law professor at Georgia State University and a former counsel with the American Arbitration Association.

However, companies "aren't going to retreat from putting in these clauses. Their lawyers are just going to go back to the drawing boards in drafting them," says Donovan.

And Yarn complains that the decision "will make the arbitral process more formal, more legalistic, more like litigation, more costly, and therefore, less attractive for both sides."

The plaintiff in the Eleventh Circuit case obtained a loan from a consumer finance company to purchase a mobile home. The loan agreement contained a mandatory arbitration clause that didn't specify which party was responsible for the arbitrator's fees and other costs.

When the plaintiff later sued under the federal Truth in Lending Act, claiming the loan documents failed to disclose certain financing costs, the lender moved to compel arbitration.

The plaintiff claimed that the arbitration clause was invalid because it didn't limit her costs and therefore interfered with the ability to pursue her rights under TILA.

The lender argued that the agreement should be enforced because the arbitrator had the power to fairly apportion fees between the parties.

But the court said that fact "provides no guarantee that a consumer successfully arbitrating under this clause will not be saddled with...prohibitive costs...despite the small sum that is likely to be the object of the dispute...

"This clause says nothing about the payment of filing fees or the apportionment of the costs of arbitration. It neither assigns an initial responsibility for filing fees or arbitrators' costs, nor provides for a waiver in cases of financial hardship. It does not say whether consumers, if they prevail, will nonetheless be saddled with fees and costs in excess of any award... [T]his...raises serious concerns with respect to...expenses that may curtail or bar a plaintiff's access to the arbitral forum."

Some lenders' attorneys are advising their clients to err on the safe side and consider revising their documents.

While companies shouldn't remove arbitration clauses altogether, it's important to make sure that they're "even-handed," says Washington attorney Thomas Hefferon, who represents lenders. "A clause which is even-handed is a lot harder to attack."

Clients need to remember that "Pigs get fat, but hogs get slaughtered," says Suffolk University law professor Dwight Golann, vice-chairman of a consumer advisory council to the Federal Reserve Board. Arbitration is speedy, relatively inexpensive and eliminates runaway juries, he says, but companies "who go beyond that by tilting their clauses against consumers run the risk of getting nothing at all."

Here are some ways for a company to make sure an arbitration clause will be enforced:

Spell out costs.

The best approach may be to spell out just what costs a consumer will be responsible for paying, says Crofton, Md., attorney Robert Cook, the former chair of an ABA subcommittee on TILA.

A good "rule of thumb," he says, "is that the cost for a plaintiff to get into arbitration shouldn't significantly exceed the costs one would expect in order to go to court."

The company needs to make sure the costs a consumer might have to pay aren't so high they "prohibit the consumer from vindicating his or her statutory rights," warns Yarn.

In order to address the problem of high filing fees (which can range anywhere from $500 to $4,000), Hefferon suggests that companies consider specifying that they will pay the "up-front costs" of arbitration.

If a company wants the ability to get these costs back at the end, it could adopt a "winner-take-all approach, so that the financial institution pays the up-front costs and then whoever loses at the end of the day will ultimately pay," suggests Yarn.

But Hefferon warns that a court might have a problem with that. "As long as the courts don't have a loser-pays system, a lender runs the risk of a court saying that arbitration is more burdensome than litigation and that a loser-pays requirement chills consumers' willingness to bring claims."

• Pay all the costs.

  Cook says some companies might want to consider paying all the costs of arbitration – win or lose.

  He says the likelihood that such a policy will encourage a rash of frivolous claims is minimal. "The aggravation of going through the arbitration process is more than sufficient to keep consumers from filing endless complaints, and for companies the benefits of arbitration outweigh the risk of nuisance claims."

  This could be an attractive option for lenders that are primarily concerned about class actions and who want to convince consumers to bring individual claims instead. (Under TILA, damages for individual claims are generally limited to $1,000 or $2,000, depending on the type of loan, while damages for class actions are capped at $500,000, not including actual costs.)

  Because arbitration doesn't lend itself well to class action claims, consumers might be willing to give up those claims in exchange for cost-free arbitration, says Hefferon.

  In fact, says Golann, "some smarter lenders already have arbitration provisions that are virtually cost-free, but include an exception barring class claims."

  A company could also agree to pay the costs of arbitration, but only for claims under a certain dollar amount – where the disparity between potential damages and arbitration costs are most dramatic, suggests Yarn.

• Specify the forum.

  One mistake the lender in this case made is that it failed to specify which arbitration forum, such as the American Arbitration Association, would be used to handle any disputes, says Cook.

  "Arbitration forums usually have their own rules on how costs should be divided between parties," and many arbitration associations have "hardship exemptions" for disadvantaged claimants, he says.

  But Yarn says that specifying a forum probably isn't enough on its own, because while most associations give arbitrators the authority to award costs to a claimant, they don't "guarantee" it.

  And "hardship exemptions" generally only cover filing fees, notes Patricia Sturdevant, executive director of the National Association of Consumer Advocates in Washington. "You still have processing fees, administrative fees, hearing fees, and of course you have to pay for the arbitrator's time."

  In fact, in many cases it's best not to specify a particular forum, says Hefferon. Particularly in rural areas, the company may want the flexibility to use a local attorney, who will often be cheaper, rather than a traditional arbitrator.

  Other Concerns

  Several experts note that there are other common consumer arbitration provisions which have caused problems in the employment context.

  For instance, companies should avoid limitations on the remedies available in arbitration, especially punitive damages and attorney fees.

  "The arbitration process itself is protection against the threat of runaway juries and wildly inflamed punitive damage awards" because the case is handled by a professional arbitrator, not a lay jury, says Cook. "If the arbitrator thinks the company's actions are so egregious that punitives are warranted – then they probably are."

  If the company is concerned about the rare "runaway arbitrator," he says, "it can include an arbitration appeals process with a panel of arbitrators."

  One-sided arbitration provisions that allow a company to bring its claims in court, but force the consumer to use arbitration, can also be a problem, says Golann.

  But Philadelphia attorney Alan Kaplinsky, who represented the lender in a Third Circuit case that upheld a similar arbitration clause on other grounds, says that "an arbitration clause isn't unenforceable simply because it requires the consumer to arbitrate all claims but allows the lender to litigate certain claims, such as collection proceedings."

  Further, lenders aren't going to be willing to give up the right to certain claims, such as those for foreclosure or repossession, which are beyond the scope of arbitration, says Cook.

  Companies should also be wary of including forum selection provisions in their arbitration agreements.

  "Clauses that require a consumer to arbitrate in a forum far away from where the transaction took place have been a red flag for courts," says Golann.

  U.S. Court of Appeals, 11th Circuit. Randolph v. Green Tree Financial Corp., No. 98-6055. June 22, 1999. Lawyers Weekly USA No. 9916017 (10 pages). To order a copy of the opinion, call 800-933-5594.
  
  © 1999 Lawyers Weekly Inc., All Rights Reserved.
  

PUBLISH (http://www.law.emory.edu/11circuit/june99/98-6055.opn.html)

(http://www.law.emory.edu/pub-cgi/print_hit_bold.pl/11circuit/june99/98-6055.opn.html?Green+Tree#first_hit)

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

________________________

No. 98-6055

________________________

LARKETTA RANDOLPH, on behalf of herself and all others similarly situated,

Plaintiff-Appellant,

versus

GREEN TREE FINANCIAL CORP. -- ALABAMA; and GREEN TREE FINANCIAL CORPORATION,

Defendants-Appellees.

_______________________

Appeal from the United States District Court

for the Middle District of Alabama

_______________________

(June 22, 1999)

Before HATCHETT and CARNES, Circuit Judges, and FARRIS*, Senior Circuit Judge.**

CARNES, Circuit Judge:

________________

*Honorable Jerome Farris, Senior U.S. Circuit Judge for the Ninth Circuit, sitting by designation.

** This decision is rendered by a quorum, due to the retirement of then-Chief Judge Hatchett on May 14, 1999. 28 U.S.C. § 46(d).

Plaintiff Larketta Randolph appeals the district court's order compelling arbitration of her claim against defendants Green Tree Financial Corporation and Green Tree Financial Corp. -- Alabama (collectively, "Green Tree"), which financed her purchase of a mobile home. She alleges that Green Tree's financing documents violate the Truth in Lending Act, 15 U.S.C. § 1601 et seq. ("TILA"), that its mandatory arbitration requirement violates the Equal Credit Opportunity Act, 15 U.S.C. §§ 1691-1691f ("Equal Credit Act"), and that the TILA precludes the arbitration of disputes arising under that legislation. The district court ordered the parties to proceed to arbitration and dismissed the action with prejudice. Green Tree challenges our jurisdiction to hear this appeal. We conclude that the district court's judgment was an appealable "final decision." We also hold that the arbitration agreement in this case defeats the remedial purposes of the TILA and is unenforceable.

This case stems from Randolph's January 25, 1994, purchase of a mobile home from Better Cents Home Builders, Inc., in Opelika, Alabama. Randolph financed her purchase through Green Tree Financial Corp. -- Alabama, a wholly-owned subsidiary of Green Tree Financial Corporation. Randolph contends that Green Tree required her to obtain "vendor's single interest" insurance, which protects a vendor or lienholder against the costs of repossession in the event of default, but did not mention this requirement in its Truth in Lending Act disclosure.

Randolph's retail installment contract with Better Cents, which names Green Tree Financial Corp. as the assignee, contains an arbitration provision. It reads, in pertinent part:

17. ARBITRATION: All disputes, claims, or controversies arising from or relating to this Contract or the relationships which result from this Contract, or the validity of this arbitration clause or the entire Contract, shall be resolved by binding arbitration by one arbitrator selected by Assignee with consent of Buyer(s). This arbitration Contract is made pursuant to a transaction in interstate commerce, and shall be governed by the Federal Arbitration Act at 9 U.S.C. Section 1. Judgment upon the award rendered may be entered in any court having jurisdiction. The parties agree and understand that they choose arbitration instead of litigation to resolve disputes. The parties understand that they have a right or opportunity to litigate disputes through a court, but that they prefer to resolve their disputes through arbitration, except as provided herein. THE PARTIES VOLUNTARILY AND KNOWINGLY WAIVE ANY RIGHT THEY HAVE TO A JURY TRIAL EITHER PURSUANT TO ARBITRATION UNDER THIS CLAUSE OR PURSUANT TO A COURT ACTION BY ASSIGNEE (AS PROVIDED HEREIN). The parties agree and understand that all disputes arising under case law, statutory law, and all other laws including, but not limited to, all contract, tort, and property disputes will be subject to binding arbitration in accord with this Contract. The parties agree and understand that the arbitrator shall have all powers provided by the law and the Contract . . . [including] money damages, declaratory relief, and injunctive relief. Notwithstanding anything hereunto the contrary, Assignee retains an option to use judicial or non-judicial relief to enforce a security agreement relating to the Manufactured Home secured in a transaction underlying this arbitration agreement, to enforce the monetary obligation secured by the Manufactured Home or to foreclose on the Manufactured Home. . . . The initiation and maintenance of an action for judicial relief in a court [on the foregoing terms] shall not constitute a waiver of the right of any party to compel arbitration regarding any other dispute or remedy subject to arbitration in this Contract, including the filing of a counterclaim in a suit brought by Assignee pursuant to this provision.

Randolph brought this suit in district court in January, 1996, alleging that Green Tree⁽¹⁾ violated the TILA by failing to include the requirement of vendor's single interest insurance in its TILA disclosure, and violated the Equal Credit Act by requiring arbitration of all claims.⁽²⁾ She sought certification of a class of individuals who had entered into similar agreements with Green Tree. In response, Green Tree moved to compel Randolph to arbitrate her complaint pursuant to the arbitration agreement. It also moved to stay the action pending arbitration or, in the alternative, to dismiss it.

The district court granted the motion to compel arbitration, and declined to certify a class. See Randolph v. Green Tree Fin. Corp., 991 F.Supp. 1410, 1424-25 (M.D. Ala. 1997). Because it concluded that all the issues raised in Randolph's complaint must be submitted to arbitration, it denied the motion to stay the action and instead dismissed her claims with prejudice. See id. Randolph filed this appeal. Green Tree subsequently moved to dismiss the appeal for lack of jurisdiction.

The jurisdictional issue is a question of law, which we review de novo. See, e.g., Triggs v. John Crump Toyota, Inc., 154 F.3d 1284, 1287 (11th Cir. 1998). We review de novo the district court's order compelling arbitration. See, e.g., Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 756 (11th Cir. 1993).

A. WHETHER THE DISTRICT COURT'S ORDER WAS APPEALABLE AS A "FINAL DECISION" UNDER THE FEDERAL ARBITRATION ACT

As a threshold matter, we decide whether we have jurisdiction over this appeal. Though we would normally look to 28 U.S.C. § 1291 to determine our jurisdiction over the dismissal of this action, "Congress has set forth special rules governing appeals from a district court's arbitration order." McCarthy v. Providential Corp., 122 F.3d 1242, 1243 (9th Cir. 1997). Those rules are set forth in section 16 of the Federal Arbitration Act, 9 U.S.C. § 16. That provision states:

(a) An appeal may be taken from --

• an order --

• refusing a stay of any action under section 3 of this title,
• denying a petition under section 4 of this title to order arbitration to proceed,
• denying an application under section 206 of this title to compel arbitration,
• confirming or denying confirmation of an award or partial award, or
• modifying, correcting, or vacating an award;
• an interlocutory order granting, continuing, or modifying an injunction against an arbitration that is subject to this title; or subject to this title.

(b) Except as otherwise provided in section 1292(b) of title 28, an appeal may not be taken from an interlocutory order --

(1) granting a stay of any action under section 3 of this title;

(2) directing arbitration to proceed under section 4 of this title;

(3) compelling arbitration under section 206 of this title; or

(4) refusing to enjoin an arbitration that is subject to this title.

9 U.S.C. § 16. Put succinctly, the provision "identifies two broad classes of cases in which an appeal is possible, and one in which it is not." Napleton v. General Motors Corp., 138 F.3d 1209, 1216 (7th Cir. 1998) (Wood, J., dissenting). Subsection § 16(a)(1)-(2) allows appeals "from orders that somehow prevent arbitration from going forward"; conversely, § 16(b) bars appeals "from interlocutory orders that in one way or another allow the arbitration to proceed." Id.

The other circumstance under which appeals are allowed is set out in § 16(a)(3) -- "a final decision with respect to an arbitration that is subject to this title." The question here is whether the district court's order compelling arbitration of the issues raised in Randolph's complaint and dismissing her claims with prejudice falls within that category. If it does, we have jurisdiction. If it does not, the parties must proceed to arbitration.

In arguing that we lack jurisdiction, Green Tree distinguishes between "embedded" and "independent" proceedings, a distinction which has been drawn by a number of circuits that have considered § 16(a)(3). An "embedded" proceeding is one in which the arbitration issue arises as part of a broader action dealing with other issues. In this case, for example, Randolph's action alleges a substantive violation of the TILA as well as raising the arbitrability question; indeed, the motion to compel arbitration was filed by the defendant, Green Tree. In an "independent" proceeding, the motion to compel arbitration is the only issue before the court.

Several circuits have held that orders compelling arbitration which arise in embedded proceedings must be treated as interlocutory and non-appealable, not as "final decisions" under § 16(a)(3). See, e.g., John Hancock Mut. Life Ins. Co. v. Olick, 151 F.3d 132, 135-36 (3d Cir. 1998); Seacoast Motors of Salisbury, Inc. v. Chrysler Corp., 143 F.3d 626, 628 (1st Cir. 1998) ("The general rule governing what constitutes a final decision under section16 is that an order compelling arbitration is not final, and therefore not immediately reviewable, if the arbitrability issue is 'embedded' . . . ."); Napleton, 138 F.3d at 1212 (7th Cir.) ("[T]he jurisdictional lodestar of appealability is whether the decision favoring arbitration is from an independent or from an embedded proceeding."); McCarthy, 122 F.3d at 1244 (9th Cir.) ("'[I]f the motion to compel arbitration is "embedded" in a substantive suit pending before that court, the district court's decision to compel arbitration of some or all of the claims before it is not considered to be final, and therefore not reviewable.'" (quoting Prudential Ins. Co. of Am. v. Lai, 42 F.3d 1299, 1302 (9th Cir. 1994))); In re Pisgah Contractors, Inc., 117 F.3d 133, 136 (4th Cir. 1997); Altman Nursing, Inc. v. Clay Capital Corp., 84 F.3d 769, 771 (5th Cir. 1996) ("An order involving an embedded proceeding is always an interlocutory order; an order involving an independent claim is always final."); Gammaro v. Thorp Consumer Discount Co., 15 F.3d 93, 95 (8th Cir. 1994); Filanto, S.P.A. v. Chilewich Int'l Corp., 984 F.2d 58, 60-61 (2d Cir. 1993).

In most embedded proceedings treating orders compelling arbitration as interlocutory makes sense, because after the arbitrability issue has been decided, other issues remain in the case for the district court to resolve; so an order directing the parties to proceed to arbitration could not possibly be considered a "final decision" under § 16(a)(3). In cases like this one, however, where the district court's dismissal of the action leaves no additional issues for it to resolve, treating the distinction between embedded and independent proceedings as decisive makes less sense. Nevertheless, a number of circuits have adhered, with a concededly "myopic[]" focus, to the embedded/independent distinction when determining whether they had jurisdiction to hear an appeal under § 16(a)(3). See Napleton, 138 F.3d at 1213 ("[T]his Circuit has focused, almost myopically, on whether a proceeding is independent or embedded.").

The circuits taking this approach have insisted that a district court's order compelling arbitration in an embedded proceeding is interlocutory and non-appealable, even if the district court dismisses the remaining claims. See, e.g., Seacoast, 143 F.3d at 628-29 (dismissal of embedded proceeding without prejudice is non-appealable); Napleton, 138 F.3d at 1212 (same); McCarthy, 122 F.3d at 1244-45 (arbitration order in embedded proceeding not appealable where district court dismissed action and ordered court clerk to close file); Altman Nursing, 84 F.3d at 771 (arbitration order in embedded proceeding non-appealable, even though district court's order ended all litigation); Gammaro, 15 F.3d at 95-96 (arbitration order non-appealable where court dismissed remaining issues).

By contrast, both the Sixth and Tenth Circuits have taken a less mechanical approach to the question of whether an arbitration order is an appealable "final decision" under § 16(a)(3). In Armijo v. Prudential Insurance Co. of America, 72 F.3d 793, 797 (10th Cir. 1995), the Tenth Circuit treated the district court's dismissal of the plaintiffs' remaining claims, apparently with prejudice, as an appealable final decision. Similarly, in Arnold v. Arnold Corp. -- Printed Communications for Business, 920 F.2d 1269, 1276 (6th Cir. 1990), the Sixth Circuit recognized its appellate jurisdiction over an order compelling arbitration in an embedded proceeding, relying on the fact that the district court had entered final judgment and had "nothing left . . . to do but execute the judgment." See also Napleton, 138 F.3d at 1214-15 (Wood, J., dissenting); McCarthy, 122 F.3d at 1246-47 (Pregerson, J., dissenting); Filanto, S.P.A., 984 F.2d at 61 n.3 (dicta noting that at least a limited appeal might have been available "[h]ad the complaint been dismissed").

We are thus faced with a circuit split on the question whether a district court's order compelling arbitration in an embedded proceeding is an appealable "final decision" where it dismisses the remaining claims. This question is one of first impression in our circuit. In answering it, we begin by recognizing that "final decision" is a term of art which was of long standing when Congress enacted § 16(a)(3), and we will therefore take guidance from prior judicial interpretations of the term. See, e.g., Napleton, 138 F.3d at 1211 (citation omitted). In interpreting this term, however, we proceed from a different position than circuits such as the Seventh Circuit, because we have never accorded the same degree of "talismanic significance," id., that others have to the distinction between independent and embedded proceedings.

Instead, our interpretation of the term "final decision" has generally followed "the simplest traditional definition of finality: the decision has disposed of all the issues framed by the litigation, leaving nothing to be done but execute the order." 15B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 3914.17, at 18-19 (2d ed. 1992). See also Catlin v. United States, 324 U.S. 229, 233, 65 S. Ct. 631, 633 (1945) (decision of the district court is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment."). We have taken that approach both with respect to the general provision dealing with the appealability of final decisions of the district courts, 28 U.S.C. § 1291,⁽³⁾ see, e.g., Shannon v. Jack Eckerd Corp., 55 F.3d 561, 563 (11th Cir. 1995), and with respect to the FAA itself, see Thomson McKinnon Sec., Inc. v. Salter, 873 F.2d 1397, 1399 (11th Cir. 1989).⁽⁴⁾ See also Morewitz v. West of England Ship Owners Mut. Prot. & Indem. Ass'n (Luxembourg), 62 F.3d 1356, 1361 (11th Cir. 1995) (FAA case holding that decisions of the district court are final if they leave the district court with nothing to do but execute judgment, but relying on 28 U.S.C. § 1291, not 9 U.S.C. § 16(a)(3)).

In most arbitration appeals there will be little difference between the traditional definition of "final decision" and one that relies on the distinction between embedded and independent proceedings. If the district court's order compelling arbitration in a so-called embedded proceeding leaves other issues unresolved, the court will have more left to do than simply execute the judgment, so there will be no final decision. But that is not true in cases such as this one, where the district court dispensed with the remaining issues by dismissing the case. Only if we followed the other circuits (save the Sixth and Tenth) and attached excessive significance to the "embedded" versus "independent" proceeding distinction, instead of applying the venerable definition of "final decision," would we lack jurisdiction here.

That we decline to do. Nothing in the plain language of the statute requires us to make the embedded/independent distinction decisive. Moreover, the history of § 16(a)(3)'s enactment favors our standard reading of "final decision," and counsels against attaching undue significance to the embedded/independent distinction. Section 16 was enacted against the background of the demise of the Enelow-Ettelson doctrine, which had employed the old distinction between law and equity to determine when a stay could be appealed. See Ettelson v. Metropolitan Life Ins. Co., 317 U.S. 188, 191-92, 63 S. Ct. 163, 164-65 (1942); Enelow v. New York Life Ins. Co., 293 U.S. 379, 382-83, 55 S. Ct. 310, 311-12 (1935). The Supreme Court, applying the Enelow-Ettelson doctrine to arbitration law, acknowledged that the continuing application of this doctrine illustrated "the persistence of outmoded procedural differentiations," Baltimore Contractors, Inc. v. Bodinger, 348 U.S. 176, 184, 75 S. Ct. 249, 254 (1955), but it did so nonetheless, "leaving Congress to make such amendments as it may find proper." Id. at 185, 75 S. Ct. at 254.

Ultimately, the Court abandoned the Enelow-Ettelson doctrine altogether. See Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 287, 108 S. Ct. 1133, 1142 (1988). Soon after, Congress stepped in to "make Gulfstream, and the case law that it overruled, largely academic on the arbitration scene" by enacting what is now 9 U.S.C. § 16 as part of the Judicial Improvements and Access to Justice Act of 1988, Pub. L. 100-702, Title X, § 1019(a), 102 Stat. 4642, 4671 (1988). See David D. Siegel, Practice Commentary, 9 U.S.C. § 16, at 501 (West 1999).

In short, § 16 was enacted to clear away the deadwood and "furnish a clear rule for appealability of orders relating to arbitration proceedings," not to erect a set of distinctions as esoteric as the law-equity distinction. Napleton, 138 F.3d at 1217 (Wood, J., dissenting); see also Arnold, 920 F.2d at 1275 n.5 ("[O]ne purpose in passing the amendment was to give clarity to an area of the law that had become confused, obscure and relied on the procedural posture of the case."); Campbell v. Dominick & Dominick, Inc., 872 F.2d 358, 361 (11th Cir. 1989) (quoting a statement by Senator Howell Heflin that "under the prior doctrine, '[t]he appealability of orders that direct arbitration, stay arbitration, or stay judicial proceedings depend[ed] on accidents of procedure that d[id] not respond to any rational needs of either appeals timing or arbitration.' 134 Cong. Rec. S16284, S16309 (daily ed. Oct. 14, 1988)."). The intent behind § 16 is equally evident in the provision's legislative history, especially the Senate Judiciary Committee's statement that "under the proposed statute, appealability does not turn solely on the policy favoring arbitration. Appeal can be taken from . . . a final judgment dismissing an action in deference to arbitration. These appeals preserve the general policy that appeals should be available where there is nothing left to be done in the district court." Arnold, 920 F.2d at 1274-75 (quoting Committee on the Judiciary, Section by Section Analysis on S1482, 100th Cong., 2d Sess., 134 Cong. Rec. S16284, Oct. 14, 1988) (alteration in original omitted).

Our view that the embedded/independent distinction ought not defeat our jurisdiction in this case is also supported by logic and common sense. The Fifth Circuit's assertion that "[a]n order involving an embedded proceeding is always an interlocutory order," Altman Nursing, Inc., 84 F.3d at 771 (emphasis added), is wrong. "While orders compelling arbitration in all independent arbitrability proceedings are necessarily final decisions, it does not logically follow that orders in all embedded arbitrability proceedings are necessarily interlocutory." McCarthy, 122 F.3d at 1247 (Pregerson, J., dissenting) (emphasis omitted).

That proposition is confirmed by this case. The district court could have stayed Randolph's claim pending arbitration, but it determined that all of the issues raised were arbitrable. Accordingly, it dismissed the case. Moreover, the dismissal was with prejudice. That is a feature that apparently was not present in most of the cases decided by circuits relying on the embedded/independent distinction. The opinions in those cases either involved dismissals without prejudice or did not clearly state the nature of the dismissal. "'A dismissal with prejudice clearly is a decision that ends the litigation on the merits and leaves nothing for the court to do but execute a judgment.'" Morewitz, 62 F.3d at 1361 (quoting Nichols v. Mobile Bd. of Realtors, Inc., 675 F.2d 671, 673 (5th Cir. Unit B 1982) (quotations omitted)).⁽⁵⁾

Thus, our reading of § 16(a)(3) compels our conclusion that where the district court effectively disposes of all other issues by issuing an order compelling arbitration and dismissing the remaining claims with prejudice, we have appellate jurisdiction over the case. Whatever usefulness the terms "embedded" and "independent" may have in describing some proceedings involving arbitration claims, we decline to follow the same "myopic and talismanic adherence to the independent/embedded distinction," Napleton, 138 F.3d at 1217 (Wood, J., dissenting) (quotations and citation omitted), that some circuits have exhibited. Because the district court's dismissal of Randolph's action with prejudice left it with "nothing . . . to do but execute the judgment," Morewitz, 62 F.3d at 1361 (quotation and citation omitted), we hold that its order compelling arbitration was an appealable "final decision" under 9 U.S.C. § 16(a)(3).

B. THE ENFORCEABILITY OF THE ARBITRATION CLAUSE

Having determined that we have jurisdiction over this appeal, we now turn to the question whether the TILA precludes the enforcement of the arbitration clause in the retail installment agreement signed by Randolph. Because the arbitration clause signed by Randolph in this case fails to provide the minimum guarantees required to ensure that she can vindicate her statutory rights under the TILA, we conclude that the arbitration clause in this case is unenforceable.

As an initial matter, we recognize that "[a]rbitration ordinarily brings hardships for litigants along with potential efficiency. . . . In light of a strong federal policy favoring arbitration," some "inherent weaknesses" in the procedural apparatus of an arbitration "should not make an arbitration clause unenforceable." Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054, 1062 (11th Cir. 1998). The Supreme Court has stated, "'[S]o long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.'" Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28, 111 S. Ct. 1647, 1653 (1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637, 105 S. Ct. 3346, 3359 (1985).

Nevertheless, we held in Paladino that some procedural flaws present such barriers to a would-be litigant's exercise of his or her statutory rights that they render an arbitration clause unenforceable. "When an arbitration clause has provisions that defeat the remedial purpose of [a] statute, . . . the arbitration clause is not enforceable." Paladino, 134 F.3d at 1062 (citation omitted). As the Tenth Circuit has stated,

As Gilmer emphasized, arbitration of statutory claims works because potential litigants have an adequate forum in which to resolve their statutory claims and because the broader social purposes behind the statute are adhered to. This supposition[ ] falls apart, however, if the terms of an arbitration agreement actually prevent an individual from effectively vindicating his or her statutory rights. Accordingly, an arbitration agreement that prohibits use of the judicial forum as a means of resolving statutory claims must also provide for an effective and accessible alternative forum.

Shankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230, 1234 (10th Cir. 1999) (citations omitted). While the arbitral forum usually serves as just such an alternative, some barriers of access to that forum may render an arbitration clause unenforceable. See id. at 1234 n.3.

In particular, we held in Paladino that forcing a plaintiff to bear the brunt of "hefty" arbitration costs and "steep filing fees" constitutes "a legitimate basis for a conclusion that the [arbitration] clause does not comport with statutory policy." Paladino, 134 F.3d at 1062. Thus, we held that an employer's arbitration agreement did not "comport with [the] statutory policy" of Title VII because the plaintiff would have had to pay a filing fee of $2000 to arbitrate her claim of gender discrimination, and might have had to bear at least half the substantial cost of the arbitration. Id.

Other courts have raised similar concerns. See Shankle, 163 F.3d at 1234-35 & n.3 (concluding that a "fee-splitting" provision of an arbitration agreement substantially limited an employee's use of the arbitral forum and therefore rendered the arbitration agreement unenforceable); Cole v. Burns Int'l Sec. Servs., Inc., 105 F.3d 1465, 1484-85 & n.12 (D.C. Cir. 1997) (requiring an employer to bear the sole costs of an arbitrator's fees where the arbitration was imposed by the employer, and noting but declining to address the question whether an arbitrator's "refusal to waive filing and other administrative fees could preclude enforcement of an arbitration agreement").

The arbitration clause in this case raises serious concerns with respect to filing fees, arbitrators' costs and other arbitration expenses that may curtail or bar a plaintiff's access to the arbitral forum, and thus falls within our holding in Paladino. This clause says nothing about the payment of filing fees or the apportionment of the costs of arbitration. It neither assigns an initial responsibility for filing fees or arbitrators' costs, nor provides for a waiver in cases of financial hardship. It does not say whether consumers, if they prevail, will nonetheless be saddled with fees and costs in excess of any award. It does not say whether the rules of the American Arbitration Association, which provide at least some guidelines concerning filing fees and arbitration costs, apply to the proceeding, whether some other set of rules applies, or whether the parties must negotiate their own set of rules.

At oral argument, Green Tree asserted that arbitrations arising under this clause typically do not use the AAA rules, but did not specify what set of rules applies. Nor did Green Tree describe the atypical cases in which the AAA rules do not apply. Green Tree also asserted at oral argument that the arbitrator may apportion the fees of the arbitration in his award, but that provides no guarantee that a consumer successfully arbitrating under this clause will not be saddled with a prohibitive costs order, despite the small sum that is likely to be the object of the dispute in arbitrations of this kind. Finally, Green Tree stated to us that no filing fees are required, but the arbitration clause itself says nothing about that, and whether there are filing fees is likely to depend on who conducts the arbitration, something the arbitration clause is silent about.

Accordingly, we conclude that the arbitration clause in this case is unenforceable, because it fails to provide the minimum guarantees required to ensure that Randolph's ability to vindicate her statutory rights will not be undone by steep filing fees, steep arbitrators' fees, or other high costs of arbitration. See Paladino, 134 F.3d at 1062 ("When an arbitration clause has provisions that defeat the remedial purpose of the statute, . . . the arbitration clause is not enforceable." (citation omitted)).

The facts of this case distinguish it from cases in which other circuits have held that an arbitration agreement was enforceable despite substantial arbitration costs. In Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 15-16 (1st Cir. 1999), the First Circuit rejected an argument that the New York Stock Exchange's arbitration procedures were unenforceable to arbitrate a Title VII claim merely because plaintiffs could be charged high forum fees.⁽⁶⁾ But the court in Rosenberg had before it a record suggesting that most successful arbitral claimants were awarded fees and costs; we lack similar information about how claimants fare under Green Tree's arbitration clause. Because the clause is silent on the subject of arbitration fees and costs, Randolph might be required to bear substantial costs of the arbitration even if she were to prevail on her TILA claim.

Another distinguishable case is Doctor's Associates, Inc. v. Stuart, 85 F.3d 975 (2d Cir. 1996). There, the defendants argued that an arbitration agreement was unconscionable and unenforceable because of high filing fees and arbitrators' costs. The Second Circuit held that the agreement was not unconscionable. See Stuart, 85 F.3d at 980-81; see also Doctor's Assocs., Inc. v. Hamilton, 150 F.3d 157, 163 (2d Cir. 1998) (relying on Stuart to find an arbitration agreement enforceable in a similar case, where the plaintiff's estimated total costs of arbitration were between $28,000 and $32,000). But the arbitration clause in Stuart arose in the context of a commercial franchise agreement, see Stuart, 85 F.3d at 977-78, not a small consumer transaction (as in this case) or an employment agreement (as in Paladino). It was challenged on the general grounds that the clause was unconscionable, whereas Randolph argues that the clause in this case prevents her from vindicating specific statutory rights under the TILA.

We conclude that the arbitration clause at issue here is unenforceable. Because we decide the issue on this ground, we need not decide whether the TILA precludes all arbitration agreements.

IV. CONCLUSION

For these reasons, we REVERSE the district court's order and REMAND for further proceedings consistent with this opinion.

 

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FOOTNOTES

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1. Her suit also named as a defendant Green Tree Financial Servicing Corporation. The district court dismissed this party from the action.

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2. In her initial complaint, Randolph also alleged fraud in the inducement of the arbitration agreement, but she omitted that claim in her amended complaint. It was deemed waived by the district court, and Randolph does not raise it on appeal.

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3. U.S.C. § 1291 states that "[t]he courts of appeals . . . shall have jurisdiction of appeals from all final decisions of the district courts of the United States . . . ."

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4. In Thomson McKinnon, we held that under what is now 9 U.S.C. § 16(a)(3), "decisions of the district court are final if they 'end[] the litigation on the merits and leave[ ] nothing for the [district] court to do but execute the judgment.'" Thomson McKinnon, 873 F.2d at 1399 (quoting Catlin, 324 U.S. at 233, 65 S. Ct. at 633). We also noted, however, that the finality of an order granting or denying a request to compel arbitration may depend on whether the order was "entered in the course of ongoing actions for legal or equitable relief on the underlying claims." Id. We held that because the sole question before the district court was subject to arbitration, its decision was final and appealable. We thus recognized the embedded/independent distinction (without using those labels), but did not need to decide whether an order like the one here, dismissing all the plaintiff's claims in an embedded proceeding with prejudice, is a "final decision." More importantly, we did not attach a "talismanic significance" to the distinction between embedded and independent proceedings, but treated it as a part of our usual inquiry into whether the district court's decision leaves nothing for it to do but execute the judgment.

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5. We have no occasion to decide whether an appeal from an order compelling arbitration in an embedded proceeding is a "final decision" when the district court dismisses the action without prejudice. We do note that this court has said that "dismissals without prejudice may be appealable [under 28 U.S.C. § 1291], [but] they are only appealable if they are 'final orders.'" Grayson v. K Mart Corp., 79 F.3d 1086, 1094 n.7 (11th Cir.1996) (citation omitted).

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6. The court did find, however, that the plaintiff should not be compelled to arbitrate her claims, because she was not given adequate notice that her statutory claims would be subject to arbitration. See Rosenberg, 170 F.3d at 20-21.

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