The Lawletter Vol 39 No 5
In the last few years, the U.S. Supreme Court has issued controversial opinions that allow companies that use take-it-or-leave-it arbitration provisions in consumer contracts to require that unsatisfied consumers arbitrate all claims against the issuing companies on an individual,
rather than a class-wide, basis. See AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011); Stolt Nielsen S.A. v. Animalfeeds Int'l Corp., 559 U.S. 662 (2010). Due to the high cost of arbitration, the practical effect of these decisions has been to discourage consumers from asserting any contractual dispute against the issuing companies and to thereby insulate large companies from liability for relatively minor small-dollar claims.
Even so, some state courts have avoided the potentially far-reaching effects of Concepcion and Stolt Nielsen by analyzing the alleged unconscionability of an arbitration provision in a consumer contract under state law grounds. One particularly illuminating opinion is Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013). In that case, the Washington Supreme Court ruled that a binding arbitration clause in a debt adjustment contract was unconscionable. The contract at issue required an indebted Washington consumer to travel to Orange County, California, to resolve her claim, shortened Washington's Consumer Protection Act statute of limitations from four years to 30 days, and required the consumer to pay the company's attorney's fees and costs if her claim was unsuccessful.
In ruling that the arbitration clause in Freedom Enterprise Inc.'s ("Freedom") contract was substantively unconscionable, the Gandee court first found that the venue provision imposed prohibitive costs on the consumer. Next, the court determined that the "'loser pays' provision serves to benefit only Freedom and . . . effectively chills Gandee's ability to bring suit" under the state Consumer Protection Act. Id. at 1201. Third, the court concluded that the shortening of the state statute of limitations from four years to 30 days was substantively unconscionable.
Finally, the court rejected Freedom's argument that the court's state law analysis was preempted by the U.S. Supreme Court's opinion in Concepcion. According to the Gandee court, Concepcion disallowed a California state court rule that invalidated an arbitration clause "that might be otherwise conscionable under California law." Id. at 1203. In contrast, the Gandee court's application of Washington's generally applicable unconscionability doctrine to the facts of the case before it was consistent with Concepcion and the Federal Arbitration Act. Thus, the Gandee court concluded: "Concepcion provides no basis for preempting our relevant case law nor does it require the enforcement of Freedom's arbitration clause." Id.
Gandee limits the scope of Concepcion and the Federal Arbitration Act to arbitration provisions that are potentially conscionable under relevant state law. This suggests that where an arbitration agreement is so one-sided or overly harsh that it would be classified as unconscionable under state law grounds, a state court may feel free to invalidate the arbitration provision notwithstanding the Supreme Court's opinion in Concepcion. Although Concepcion may reflect the Supreme Court's recent trend of expanding the scope and general applicability of arbitration clauses, that opinion is not so far-reaching as to preempt traditional state law analysis of allegedly unconscionable contracts.