Consumer Class Action Blog

News, analysis and commentary on state and federal consumer class action litigation

Issue du Jour: Forced Arbitration

Posted by Philip Kay on August 27, 2009

The issue du jour in consumer law has to be the enforcement of mandatory arbitration clauses in consumer contracts.

Last month, the Minnesota Attorney General settled its suit against the National Arbitration Forum (NAF), one of the largest arbitration companies in the country.  The suit alleged that NAF concealed its ties to the credit card industry despite arbitrating a large number of credit card disputes as a third party “neutral.”  NAF allegedly recruited credit card companies as clients and helped draft mandatory arbitration clauses in an effort to steer business its way.  As part of the settlement, NAF agreed to stop handling all consumer credit arbitrations.

Two days after the NAF settlement, the American Arbitration Association announced that it would no longer handle consumer debt-related arbitration “until new [national] guidelines are established.”

Large companies have reacted to the NAF settlement and AAA’s decision in very different ways.  Earlier this month, Bank of America announced that it was abandoning mandatory arbitration in all consumer disputes.  AT&T, on the other hand, has dug in its heels and amended its terms of service to preclude consumers from participating in class actions, whether handled via litigation or arbitration.  The service agreement already precludes any litigation outside of small claims court.

This all serves as a backdrop for yesterday’s decision out of the California Court of Appeals.  In Parada v. Superior Court, 2009 WL 2603093 (Cal. App., 4 Dist., Aug. 26, 2009), plaintiff-investors filed suit against Monex Deposit Company based on investments gone bad.  Monex filed a motion to compel arbitration based on the mandatory arbitration provisions in their contacts with the plaintiffs. The arbitration provisions required arbitration before a panel of three arbitrators from JAMS and prohibited consolidation or joinder of claims.  The trial court granted Monex’s motion and compelled arbitration, and the plaintiffs appealed.

The California Court of Appeals reversed the trial court and found that the arbitration provisions were unconscionable and therefore unenforceable.  The court further found that because the unconscionable paragraphs could not be severed from the rest of the arbitration provisions, the plaintiffs could not be compelled to arbitrate their claims despite the contract’s “severability” clause.

In a well-written opinion, the court made several findings.  First, it found that the court and not the arbitrator had the power to decide whether the arbitration provisions were unconscionable and therefore unenforceable.  The court held that if the party resisting arbitration is claiming the arbitration clause is unconscionable, a court and not the arbitrator must decide the issue. While declining to decide the issue of whether parties to a contract can agree to have the arbitrator decide unconscionability, the court very correctly pointed out in dicta the arbitrator’s clear conflict of interest when he gets to decide the issue of arbitrability.

The court then engaged in a lengthy analysis of the doctrine of unconscionability and found that Monex’s arbitration provisions were both procedurally and substantively unconscionable.  The major factor leading to the court’s finding was that the arbitration provisions called for a panel of three arbitrators, the cost of which was to be borne equally between the parties. The court noted that three JAMS arbitrators would cost $9,600 for an eight-hour day. A four-day arbitration would cost $38,400. Each plaintiff would have to pay half that amount, which would be $19,200 – plus $1,600 in case management fees per party – for a total of $20,800. Since the Monex agreements did not permit consolidation or joinder of claims, each plaintiff would have to initiate a separate arbitration and pay $20,800 minimum in fees for a four-day arbitration, regardless of the amount in controversy.  The court found these costs unconscionably prohibitive.

Another factor leading to the court’s unconscionability finding was that Monex offered no explanation or justification for the prohibition on consolidation or joinder of claims.  The prohibition on consolidation or joinder merely drove up the cost per party of arbitration. The court observed:  “The primary, if not only, reason for requiring arbitration of disputes before a panel of three arbitrators from JAMS, for prohibiting consolidation or joinder of claims, and for splitting the costs of arbitration, must be to discourage or prevent Monex customers from vindicating their rights.”

Finally, the court found that since Monex drafted its unconscionable arbitration provisions “deliberately for the improper purpose of discouraging or preventing its customers from vindicating their rights,” the unconscionable provisions were not severable from the rest of the arbitration provisions.  Therefore, the entire arbitration clause was void and the plaintiffs could proceed in court with their claims.

Me, I’ve never liked arbitration.  Even back in my defense days when I would routinely file (and win) motions to compel arbitration, I always found arbitration to be disconcerting.  The rules are never clear, you never know your (or your opponent’s) boundaries, and often the arbitrator is afraid to really put his foot down and seems more concerned with being liked than with being right.  Nah, I prefer to litigate in real court with established procedures, clear precedent and professional judges who aren’t worried where their next case will come from.

By the way, when will Apple stop breastfeeding AT&T and allow other carriers to provide service for my iPhone?  AT&T’s new “anti-class action” amendment to their service agreement is just another reason (not that I needed another) to dump them as soon as Apple says I can.

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5 Responses to “Issue du Jour: Forced Arbitration”

  1. Thanks for covering this. However, I believe the statement “First, it found that the court and not the arbitrator had the power to decide whether the arbitration provisions were enforceable.” is wrong as the court specifically declined to decide that issue (although it did discuss it).

    • Philip Kay said

      Steve,
      The court’s opinion states as follows: “The Court Decides the Issue of Unconscionability in This Case. As a threshold matter, we must decide who-the trial court or the arbitration panel-determines whether the arbitration provisions in the Atlas Account Agreements are unconscionable. Monex argues the parties agreed the arbitration panel, not the court, must decide that issue. Petitioners argue unconscionability must always be decided by the court, notwithstanding the parties’ agreement otherwise. If the party resisting arbitration is claiming the arbitration clause is unconscionable, a court must decide this claim.”

      Would you agree that the court decided the issue of who, the court or the arbitrator, had the power to determine whether the arbitration clause was unconscionable and therefore unenforceable?

      • While at this point, anyone’s interpretation of the case is as valid as mine, I based by opinion on the following language (which was cut and pasted) in the decision. It can all be found within a couple paras under “I. Discussion”:

        We withhold our opinion whether we agree with our colleagues in Murphy v. Check ‘N Go of California, Inc., supra, 156 Cal.App.4th 138 and Bruni v. Didion, supra, 160 Cal.App.4th 1272. To permit the arbitrator to decide the issue of arbitrability, even if the contract so provides, raises issues we need not reach in this case. One such issue that particularly concerns us is whether having the arbitrator decide the issue of arbitrability presents the arbitrator with a conflict of interest.

        We do not reach the question whether parties to a contract can agree to have the arbitrator decide
        unconscionability

      • Philip Kay said

        I interpret this as the court discussing (but not deciding) the separate issue of whether parties to a contract can agree to have the arbitrator decide the issue of arbitrability.

        Since the court already decided that in this case it would decide whether the arbitration clause was enforceable (based on the Discover Bank case which held that if the party resisting arbitration is claiming the arbitration clause is unconscionable, a court must decide the issue), it didn’t need to reach a decision on the separate issue of whether parties to a contract can agree to have the arbitrator decide the issue of arbitrability.

  2. Tony Brown said

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    A definite great read..Tony Brown

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