Paul Bland

Stripping the Meaning from Meaningful Choice

[Co-authored by Paul Bland and Alexis Rickher]

In a series of decisions stemming back about 20 years, the U.S. Supreme Court has broadened the scope of the Federal Arbitration Act to make it possible for corporations to insist that their employees and consumers must submit more and more cases to mandatory arbitration. In making these decisions, the Court has effectively said “it’s alright to expand mandatory arbitration, because courts will guard individuals against unfair arbitration clauses using traditional rules of contract law.” Under the Supreme Court’s guidance, a consumer or employee can’t argue that mandatory arbitration is unfair in itself, but if a corporation has written an arbitration clause that tacks on other unfair provisions that are not necessarily a part of arbitration, courts can strike down those provisions as “unconscionable.”(See Footnote 1)

Following the Supreme Court’s guidance on this point, when corporations have tacked unfair provisions onto arbitration clauses, a host of courts have struck down those provisions as unconscionable and unenforceable in particular cases. There is a general rule of contract law in every state (although the contours and scope of this law varies quite a bit from state to state) that unconscionable – which can be roughly paraphrased as very unfair – contract terms will not be enforced, and courts have played an important role in blocking some of the most unfair types of arbitration clauses that some corporations have tried to force on their customers and employees. For example, some courts have struck as unconscionable the following types of arbitration clauses:

o Clauses that would require individuals with small claims to travel great distances across the country to arbitrate their claims. (See Footnote 2)

o Clauses that would not only send people to arbitration but would also re-write the laws, so that the statutes of limitations would be changed to the point that individuals would have to bring their claims within a few months of having been wronged, even where the laws normally applicable to their claims would give them several years to bring their claims. (See Footnote 3)

o Clauses that would require individuals to pay more in fees to the arbitrators than the amount of money at issue in their case. (See Footnote 4)

o Clauses that would require individuals to submit to gag orders that barred them from speaking to anyone – even relatives! – about the facts or outcome of their cases. (See Footnote 5)

As a result of these types of court decisions, most sophisticated corporations have re-written their arbitration clauses to make them fairer. Corporations that want their mandatory arbitration clauses to be enforced so that they can take advantage of what they perceive to be a far more favorable forum for them have learned, in essence, that with many courts, pigs get fat but hogs get slaughtered. Unlike the U.S. Supreme Court, most consumer advocates believe that pre-dispute binding arbitration clauses are unfair in all consumer and employment contracts, but so long as courts are striking down the most extreme and abusive lengths to which some corporations will go in writing these contracts, the system has been made a great deal fairer in many cases.

Unfortunately, a slowly growing number of courts have begun to re-write the law of unconscionability in a way that renders it meaningless. Under the approach favored by these courts, essentially no arbitration clause written by a corporation – no matter how unfair, no matter how extreme – could ever be stricken down. What is ironic – if not Orwellian – about these cases is that they justify this extreme position under the heading of “meaningful choice.”

Here’s how it works. While the law of unconscionability differs a great deal from state to state, in most states it has two general components: “procedural unconscionability” (that relates to how a contract was formed), and “substantive unconscionability” (which relates to the unfairness of particular contract terms). In most parts of the country, it generally works in this way: if the stronger party to a contract drafted the contract and requires individuals to submit to it on a take-it-or-leave it basis (this is all that is required in many states to find that a contract is procedurally unconscionable), AND some substantive term of the contract is extremely one-sided and unfair, then courts will either not enforce the particular unfair term, or they will sometimes strike the entire part of the contract containing the term. (See Footnote 6)

In some other parts of the country, however, courts demand more to find that a contract is procedurally unconscionable. It is not enough to make a court take a hard look at the fairness of the substantive terms for a contract to have been imposed on a take-it-or-leave-it basis, but a consumer or employee must show some other types of unfairness in the way that a contract was formed. There are typically a variety of things that an individual can point to in order to establish that a take-it-or-leave-it contract rises to the level of procedural unconscionability. For example, some courts have also looked to whether the contract was “hidden” in the fine print of a lengthy contract where a normal consumer would be unlikely to find it.

Another issue that several courts have looked at is whether a consumer could have easily obtained the good or service from some other business without having to agree to the objectionable term. If it would have been hard for an individual to find a corporation that would not insist upon a similarly unfair arbitration clause, these courts would say that this fact helped establish procedural unconscionability because the consumer did not have a “meaningful choice.”

Unfortunately, a few courts have recently latched onto this meaningful choice factor and elevated it from a factor in a broader test to an absolute requirement. According to some of these courts, if an individual cannot prove with admissible evidence that it was absolutely impossible for them to find a job or to get a particular good or service without being forced to agree to the identical contract term, that they cannot prove that a contract is unconscionable. This burden of proof is, obviously, virtually impossible for anyone to establish.

Here are a couple of extreme recent examples:

o A district court in New Mexico held that an arbitration clause in a nursing home contract was not unconscionable, because the the consumer had not proven that he had no meaningful choice. Why not? Because when choosing a medical facility for his ill wife, an aging husband could have found a home that did not require him to sign an arbitration clause if he had been willing to drive 60 miles each way to see her. As the court put it, "Staying in Alamogordo rather than going to Las Cruces was therefore a choice, not an absolute necessity." (See Footnote 7) For a court to say that an old man has a meaningful choice if his other option is driving 120 miles round-trip to visit his wife is to make that phrase itself meaningless.

o Another court recently held that an arbitration clause could not be considered unconscionable – not matter what its terms were – where the consumer had failed to prove that it was impossible to purchase a computer from another company without signing the arbitration clause. (See Footnote 8) Under the logic of this approach, so long as it is still theoretically possible that some computer company in the world would sell a computer without all of the contract terms to which a consumer objects, then no court will consider the fairness of any other term in the contract.

o A district court in Wisconsin held that because a consumer could have elected to save up for a car instead of seeking financing, the consumer had a meaningful choice and, therefore, the contract was conscionable. (See Footnote 9) Under this approach, no provision in a car loan contract would ever be unconscionable, because any consumer could just pay for the car. This theory obviously would exempt lenders from any legal limits or restrictions on their standard form contracts.

Courts have played an important role in calling “balls and strikes” in evaluating the fairness of arbitration clauses, and many corporations have cleaned up their act and eliminated the most egregiously unfair provisions to avoid having their contracts invalidated. If this bizarre reading of the “meaningful choice” doctrine expands, however, then the real world effect will be to insulate all mandatory arbitration clauses from any judicial scrutiny, no matter how unfair they might be. If corporations are told, in effect “run wild, because you’re exempt from any limits under the normal rules of state law limiting unfair contracts,” then a Wild West situation will soon prevail where the most extreme arbitration clauses will prevail. Before long, we’ll probably see some corporation pick its own lawyers (or perhaps the CEO’s mother) as the sole arbitrator of all legal claims against it.

It is not just courts that have embraced this absurd test. In a hearing on mandatory binding arbitration agreements before the Subcommittee on Commercial and Administrative Law of the House Judiciary Committee, a Congressman from Utah named Chris Cannon listened to a consumer victim describe buying her dream home for hundreds of thousands of dollars, only to discover it was a “lemon home” that had been badly built. When she challenged her homebuilder, she was forced her to arbitrate her case, and she received very unfair treatment in a number of ways. Rep. Cannon came to the hearing with the obvious purpose of defending mandatory arbitration at all costs, and he decided to challenge Ms. Fogal’s testimony by trying to get her to admit that she chose to sign the agreement. She responded that she didn’t feel that it was much of a choice, because every new homebuilder in the Houston area required an arbitration agreement. Here is the Congressman’s response: “The nice thing is you can rent, but that is a different issue, I suppose. There are alternatives.” Ms. Fogal shot back with “Well, there goes your homeownership,” and Congressman Cannon responded “It is not really adhesion [take-it-or-leave-it] because you have lot of options in life.” It seems that Representative Cannon believes that the American Dream of owning your own home should only be available to those people willing to sign-away their constitutional rights.

The reality of American commerce is that most people do not read the fine print of the contracts they sign. This isn’t unreasonable or lazy of them – standard form contracts are printed in tiny font, run to many thousands of words, and Americans should have a right to trust that courts will protect them from particularly unfair and unreasonable terms buried in those contracts. Over the past ten years, a number of courts have recognized the importance of their role in establishing a floor of what is permissible in these contracts of adhesion by striking down contracts that are unconscionable. If the trend of taking meaningful choice to an extreme and making it an absolute requirement continues unchecked, however, courts may effectively abdicate their duty to protect consumers from unconscionable contracts.

1. See Doctor’s Assoc’s, Inc. v. Casarotto, 517 U.S. 681, 687 (1996) (“[G]enerally applicable contract defenses such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements without contravening [9 U.S.C. § 2].”)
2. E.g., Patterson v. ITT Consumer Fin. Corp., 14 Cal. App.4th 1650, 18 Cal. Rptr.2d 463 (1993).
3. E.g. Alexander v. Anthony Int’l, Ltd. P’ship, 341 F3d 256 (3d Cir. 2003).
4. E.g., Leonard v. Terminix Int’l Co., 854 So.2d 529 (Ala. 2002).
5. E.g., Ting v. AT&T Corp., 319 F.3d 1126 (9th Cir. 2003).
6. E.g., Simpson v. MSA of Myrtle Beach, Inc., 644 S.E.2d 663, 373 S.C. 14 (S.C. 2007) (in a take-it-or-leave-it contract, the substantive terms of a contract between a corporation and a consumer may be viewed with “considerable skepticism”); Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002) (holding that under California law that a contract of adhesion is procedurally unconscionable).
7. Thompson v. THI of New Mexico at Casa Arena Blanca, 2006 WL 4061187, *13 (D. N.M. Sept. 12, 2006).
8. Sherr v. Dell, Inc., 2006 WL 2109436 (S.D.N.Y. July 27, 2006).
9. Battle v. Nissan Motor Acceptance Corp., 2007 WL 1095681 (E.D.Wis. Mar. 09, 2007).

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Posted at 4:50 PM, Jul 05, 2007 in
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Here in Mississippi arbitration has gotten out of hand as well. Last summer the Mississippi Supreme Court in Cleveland v. Mann bound wrongful death beneficiaries to a medical arbitration agreement which none of them neither saw nor signed. What was so distressing about this decision was in Mississippi the wrongful death act has been held to create a new cause of action which accrues to the named statutory beneficiaries upon the decedent's death. In effect the Court allowed a person to bind a third person to an arbitration agreement to arbitrate the third person's rights away. This is in a state in which citizens have a constitution right of access to the courts. More recently one of the most pro-business and pro-reform Justices on the Court, Justice Jess Dickinson, dissented in Smith v. Captain D's, LLC, in which the majority refused to submit a claim to arbitration where a 17 year old employee was raped by a manager of restaurant. Justice Dickinson, the sole dissenter, believed the rape "arises out of or relates to the employment" and he was in favor of binding the 17 year old victim to a binding arbitration clause contained in her employment application.

Arbitration can be a good thing when people at arms length agree to arbitrate their claims. A perfect example is agreeing to arbitrate contract claims. However, the extension of arbitration into personal injury and tort claims is troubling due to the impact it has on a person's right to open and accessible courts which is a right guaranteed in many state constitutions.

Posted by: Patrick | July 5, 2007 11:40 PM

Wouldn't it be nice if former Judge Rober Bork had a contract with Yale University that included an arbitration clause that required him to arbitrate his slip and fall claim against the school?

Posted by: LeoB | July 6, 2007 6:08 PM

Many thanks to Mr. Bland for his outstanding work on this subject. This is one of those things that most people pay no attention to at all - until it bites THEM in the butt. It's also difficult for most to research and understand, being couched in legal concepts and court rulings that are unfamiliar to the average consumer. Like me!

I paid no attention whatsoever to the arbitration clauses slipped into my credit card statements until after disaster struck and a collection agency threatened "binding mandatory arbitration." HUH? Boy did I have a lot to learn.

I'm one of the fortunate few who was able to mount a successful fight to prevent the arbitration from occurring. I couldn't find a lawyer to help me - I had to do it myself. It was a painful, albeit educational experience.

I'm very grateful to Paul Bland for his efforts in this area. It's much needed, whether most people realize it or not.

Posted by: TR | July 18, 2007 6:45 PM