Green Tree v. Randolph: will this court's decision lessen the effect of the FAA in consumer arbitration?

• Author: Jackson, Karen Haiden
• Position: Federal Arbitration Act

The signs and billboards along Alabama highways claiming that Arbitration is the equivalent to a "License to Steal" leaves little room for doubt that Alabama is a political battlefield for consumer arbitration law. Although arbitration is a forum that has been around for a long time, (1) Alabama citizens and visitors alike who see the signs will likely conclude that arbitration is the latest legal creation designed to deprive individuals of their constitutional right to a trial by jury. Very few individuals, or attorneys for that matter, concern themselves with issues surrounding consumer arbitration. Quite probably, the ones who are most informed of arbitration issues are those who are in the heat of the battle.

One study of Alabama Supreme Court's decisions describes just how political the issues of arbitration have become in Alabama. This study reveals a significant correlation between Alabama judges' views and decisions concerning arbitration issues and the views of their major campaign contributors. The study indicates that judges supported by plaintiffs' attorneys are most likely to vote unfavorably on issues of arbitration enforcement, while judges supported by business campaign contributions are most likely to render votes favoring the enforcement of arbitration agreements. (2)

Because arbitration will be pursued as an alternative dispute resolution for many years to come, (3) and because arbitration issues are being pushed to the political forefront, (4) it is important for attorneys and consumers alike to be knowledgeable about arbitration issues and new developments in arbitration law. Consumer protection laws, freedom to contract, and states' policing powers are important matters that require vigilant scrutiny by both federal and state courts to ensure that individual freedom and state sovereignty are not jeopardized.

The conflict between federal powers mandating enforcement of arbitration agreements and a state's right to invalidate pre-dispute arbitration agreements did not intensify in Alabama until 1995. Prior to Allied-Bruce Terminix Companies, Inc. v. Dobson (5) in 1995, federal courts in Alabama gave considerable weight to the Alabama anti-arbitration statute (6), which provides that pre-dispute arbitration agreements are not enforceable. Since the decision in Terminix, the federal courts in Alabama are required to "rigorously enforce" the mandates of the Federal Arbitration Act (FAA). (7) Pursuant to the FAA, a written provision to arbitrate within a contract involving interstate commerce "shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract." (8)

The Terminix decision provides that the constitutionality of arbitration agreement provisions within contracts that involve interstate commerce will be upheld and the FAA will be applicable to the contracts. (9) So long as interstate commerce is involved with the contract, this decision serves as encouragement for product sellers, services providers, and insurers to include an arbitration provision in consumer contracts. (10)

It is important for consumers and attorneys to be aware of the decision because, in many cases, the arbitration process has adverse consequences for consumers. Those consequences may include limited discovery, inability to obtain effective appellate review, and stifling of the law's development. (11) Repeat corporate players will have the benefit of previous experience with arbitrators and that factor alone may prevent consumers from having competent, conscientious, and impartial arbitrators. (12) Notwithstanding views in the legal community, the return to state autonomy in the enforcement of arbitration agreements will only occur when Congress or the Supreme Court limits the scope of the FAA and gives greater weight to state autonomy in deciding issues of consumer arbitration. (13)

The Supreme Court's dicta in Green Tree v. Randolph concerning "final decisions" and "prohibitive costs" of arbitration appears to be an invitation to state courts to actively police arbitration agreements under the unconscionability doctrine as they often do contracts. (14) With Chief Justice Rehnquist delivering the opinion, the Green Tree Court in a five to four vote affirmed that the order compelling arbitration and dismissing Ms. Randolph's claims was a "final decision" within the meaning of FAA [section] 16 and, therefore, was subject to appeal. (15) On the merits of the appeal, the Court addressed the issue of enforceability and affirmed the order compelling arbitration. In the absence of some showing that Ms. Randolph was prohibited from bringing her statutory claim, the majority of the Court concluded that an arbitration agreement's silence concerning the costs of an arbitration proceeding and filing would not render the arbitration provision unenforceable. (16)

After a presentation of background facts, this Article addresses the issues of the case and analyzes the case at each court level. Furthermore, this Article discusses the possible impact Green Tree will have in certain areas of consumer arbitration law. This Article concludes by identifying yet unresolved issues likely to arise as a result of the Green Tree decision.

BACKGROUND FACTS

In 1994 Larketta Randolph purchased a mobile home from Better Cents Home Builders, Inc. in Opelika, Alabama with financing arrangements through Green Tree Financial Corp. (17) The contract terms required Ms. Randolph to pay approximately $15.00 to $20.00 annually for "vendors single interest" insurance in order to protect the vendor or the creditor from the costs of repossession in the event of a default. (18) The installment agreement also contained an arbitration provision that read, in pertinent part:

All disputes, claims or controversies arising from or relating to this contract or the relationships which result from this contract, or the validity of the arbitration clause or the entire contract, shall be resolved by binding arbitration ... The parties agree and understand that they choose arbitration instead of litigation to resolve disputes ... 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. (19) (emphasis added) Two years later in 1996, Ms. Randolph filed a complaint in the Federal Court for the Middle District of Alabama seeking recovery from Green Tree Financial Corp.--Alabama (Green Tree) under two theories. First, she claimed that Green Tree's financing documents were in violation of the Truth in Lending Act (20) (TILA) for failure to disclose the "vendors single interest" insurance requirement as a finance charge. (21) Second, in her later amendment she claimed that the contract's inclusion of the arbitration clause was a violation of the Equal Credit Opportunity Act (22) (ECOA) by its requirement for a waiver of statutory causes of action. (23) Furthermore, based on the TILA's procedural rights, Ms. Randolph sought the Court's certification of a class of individuals who entered into similar agreements with Green Tree. (24)

U.S. DISTRICT COURT

The District Court's role in the interpretation of arbitration agreements is required to be one that shall "rigorously enforce agreements to arbitrate." (25) Federal policy demands that the court take the role requiring that "questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration." (26)

Federal courts have repeatedly held that "the validity of a contract, taken as a whole, must be submitted to arbitration. (27) If the arbitration agreement is valid with sufficient interstate contacts and no valid defense exists to its enforcement, the court shall not hear any other issues brought before it. (28) After a motion to compel arbitration is filed, the court's review is two-fold. First, without any consideration to the validity of the contract as a whole, the court determines whether the parties have entered into a valid arbitration provision provided for in the agreement. If the parties agreed to arbitrate their claims, the court decides whether the dispute falls within the scope of the agreement. (29) When the court finds a valid arbitration agreement exists, there must then be a showing of sufficient minimum contacts to establish that interstate commerce is involved, thus making the FAA applicable to enforce the arbitration agreement. (30) In deciding Terminix, the Supreme Court clearly established that in contracts involving interstate commerce the FAA preempts state law and courts must give full weight to the pro-arbitration congressional policy of the FAA. (31) Simply stated, the court shall not apply any state anti-arbitration statute to a contract meeting the above criteria to avoid ordering the parties to arbitration. (32)

Having met the burdens of establishing the existence of a valid arbitration agreement and interstate contacts, the burden then shifts to the party opposing arbitration. That party must present a valid reason why the arbitration agreement should not be enforced. (33) FAA [section] 2 grants relief from compelling arbitration where the opposing party presents a well-supported defense. (34) Once the court is satisfied that the making of the arbitration provision is valid and no defenses exist to its enforcement, the court must compel the parties to arbitration. (35)

In applying the standard of review, the District Court found it easy to dispose of Ms. Randolph's claims. First, the burden of whether a valid agreement existed was easily met because neither party disputed the fact that they had...