Randolph v. Green Tree Financial , 178 F.3d 1149 ( 1999 )

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________ FILED
U.S. COURT OF APPEALS
No. 98-6055 ELEVENTH CIRCUIT
06/22/99
________________________
THOMAS K. KAHN
CLERK
D.C. Docket No. CV-96-D-11-N
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.
I. BACKGROUND
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
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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
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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
4
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 Tree1 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
1
Her suit also named as a defendant Green Tree Financial Servicing Corporation. The
district court dismissed this party from the action.
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.
5
appeal. Green Tree subsequently moved to dismiss the appeal for lack of
jurisdiction.
II. STANDARD OF REVIEW
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).
III. ANALYSIS
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 --
(1) an order --
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(A) refusing a stay of any action under section 3 of this
title,
(B) denying a petition under section 4 of this title to
order arbitration to proceed,
(C) denying an application under section 206 of this
title to compel arbitration,
(D) confirming or denying confirmation of an award or
partial award, or
(E) modifying, correcting, or vacating an award;
(2) an interlocutory order granting, continuing, or modifying
an injunction against an arbitration that is subject to this
title; or
(3) a final decision with respect to an arbitration that is
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
7
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.
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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.”);
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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
10
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”).
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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
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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
3
28 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 . . . .”
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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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
14
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
15
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
16
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
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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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
18
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
19
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
20
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
21
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
22
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,
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.
23
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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