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1999 Term, Number 12  / April 3, 2000

Today the Supreme Court granted certiorari in two cases, one of which is of potential interest to the business community. Amicus briefs in support of the petitioners are due on Thursday, May 18, 2000, and amicus briefs in support of the respondent are due on Monday, June 19, 2000. Any questions about the case should be directed to Donald Falk (202-263-3245) or Eileen Penner (202-263-3242) in our Washington office.

Arbitration Agreements — Appealability and Enforceability. The Supreme Court granted certiorari today in Green Tree Financial Corp.-Alabama v. Randolph, No. 99-1235, to decide whether a district court order compelling arbitration under the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16, is a final decision subject to immediate appeal even if the order is issued in an "embedded proceeding" that includes other, substantive claims. If the Court finds appellate jurisdiction, it also will decide whether an arbitration provision is unenforceable if it is silent as to the amount and allocation of the costs and fees of arbitration.

Larketta Randolph financed a mobile home purchase through Green Tree Financial Corp.-Alabama. Randolph signed a financing agreement requiring her to purchase "vendor’s single interest" insurance, which protects the lender against the costs of repossession should a borrower default. The financing agreement also contained a provision requiring arbitration of all disputes arising under the agreement, including statutory claims.

In 1996, Randolph filed a putative class action alleging that Green Tree had violated the Truth in Lending Act (TILA) by failing to disclose this insurance requirement properly, and had violated the Equal Credit Opportunity Act (ECOA) by requiring arbitration of her statutory claims. The district court ordered arbitration of Randolph’s claims, and dismissed the entire action with prejudice. 991 F. Supp. 1410 (M.D. Ala. 1998).

The Eleventh Circuit reversed. 178 F.3d 1149 (1999). Rejecting Green Tree’s argument to the contrary, the court of appeals held that it had jurisdiction to hear Randolph’s appeal under 9 U.S.C. § 16(a)(3), which allows appeals from "a final decision with respect to an arbitration that is subject to [the FAA]." The Eleventh Circuit acknowledged that its decision conflicted with decisions of several courts of appeals holding that an order compelling arbitration is not appealable if the arbitrability issue is "embedded" in an action addressing other issues such as Randolph’s TILA and ECOA claims here. ("Embedded" proceedings contrast with "independent" proceedings that involve only an issue of arbitrability, and that indisputably result in appealable final decisions.) In the Eleventh Circuit’s view, however, "a district court’s order compelling arbitration in an embedded proceeding is an appealable ‘final decision’ where it dismisses [all] remaining claims," id. at 1154, so that "there is nothing left to be done in the district court," id. at 1156.

The Eleventh Circuit then held that TILA precluded enforcement of the arbitration provision. The court reasoned that the arbitration clause, which was silent "with respect to filing fees, arbitrators’ costs and other arbitration expenses," "fail[ed] 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." 178 F.3d at 1158.

The Eleventh Circuit’s decision to allow this appeal deepened the conflict among the circuits over the appealability of orders compelling arbitration in "embedded" proceedings after dismissal of the case. Compare, e.g., Napleton v. General Motors Corp., 138 F.3d 1209 (7th Cir. 1998) (holding that they are not) with Arnold v. Arnold Corp., 920 F.2d 1269 (6th Cir. 1990) (holding that they are). The decision also conflicts with decisions of the Alabama Supreme Court upholding the same arbitration clause, and is in tension with decisions of other federal courts of appeals concerning the enforceability of arbitration provisions that are silent as to who will bear the fees and costs of arbitration, e.g., Dobbins v. Hawks Enters., 198 F.3d 715 (8th Cir. 1999) (requiring parties to address fees and costs with the arbitrator before raising the issue in court); Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361, 366 (7th Cir. 1999) (declining to hold arbitration agreement ex ante unenforceable based on fees plaintiff might be charged).

This case is of substantial interest to lenders and other businesses that use contracts containing arbitration provisions. The cost-effectiveness of arbitration clauses may depend on when orders compelling arbitration are appealable. In addition, a decision refusing to enforce arbitration provisions that do not explicitly "guarantee" that plaintiffs will not pay "steep" arbitration costs and fees to vindicate statutory rights (178 F.3d at 1158) would upset settled expectations as to many existing arbitration clauses, and would undermine the strong presumption under the FAA favoring enforcement of arbitration agreements.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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