Loyola Consumer Law Review

Volume 10 | Issue 4 Article 4

1999 Preserving Judicial Recourse for Consumers: How to Combat Overreaching Clauses Michael D. Donovan Partner, Donovan, Miller, LLC, Philadelphia, PA

David A. Searles Counsel, Donovan, Miller, LLC, Philadelphia, PA

Follow this and additional works at: http://lawecommons.luc.edu/lclr Part of the Consumer Protection Law Commons

Recommended Citation Michael D. Donovan & David A. Searles Preserving Judicial Recourse for Consumers: How to Combat Overreaching Arbitration Clauses, 10 Loy. Consumer L. Rev. 269 (1998). Available at: http://lawecommons.luc.edu/lclr/vol10/iss4/4

This Feature Article is brought to you for free and open access by LAW eCommons. It has been accepted for inclusion in Loyola Consumer Law Review by an authorized administrator of LAW eCommons. For more information, please contact [email protected]. FEATURE ARTICLES Preserving Judical Recourse for Consumers: How to Combat Overreaching Arbitration Clauses by Michael D. Donovan and David A. Searles

I. Introduction Michael Donovan is a founding Our society is known for its litigious partnerof Donovan Miller, LLC nature. Courtroom dramas are staples in Philadelphia,Pennsylvania. of television and movies. The media, David A. Searles is counsel to the from specialized cable shows to firm. Their practicefocuses on mainstream news stories and print securities,shareholder journalism, seem to revel in the and consumer protection coverage of lawsuits and the litigants involved. Among the consequences of litigation. this increased focus on our legal system is the average person's another, or opting for an equally fair assumption that his or her rights can be yet more efficient process, that is often 1 vindicated in a court of law, complete not the case. with a jury of one's peers, a fair and For example, a consumer entering impartial judge, certain procedural into a financing may be bound to arbitrate while the lender retains the safeguards and the right to appeal 2 from an adverse decision. Such an right to go to court. An arbitration assumption, however, may well be clause in an employment agreement misplaced. may provide that the employer chooses Unknown to most consumers is that, the arbitrator and excludes the 3 by entering into many standard form employee from the selection process. today - consumer financing, A health care plan may permit the care employment, insurance, health plans - provider to unilaterally reject an arbitration award if it does not like the they may have given up rights to seek 4 redress in a judicial forum and, instead, result. have bound themselves to an Thus, arbitration clauses are often arbitration process. Although forgoing biased in favor of the business entity litigation in favor of arbitration may party to the contract. This is not seem, at first glance, merely surprising in view of the fact that it is substituting one objective forum for the business that drafted the contract.

1998 Loyola Consumer Law Review * 269 These contracts are classic examples of governing their arbitration agreements adhesion contracts in that they are (1) with consumers, such agreements were in standardized format, using boiler- not the focus of the FAA when it was plate provisions, (2) drafted by the enacted.7 The legislative history of the party in a stronger bargaining position, FAA shows that the purpose of the and (3) imposed on consumers on a FAA was to settle disputes between take-it-or-leave-it basis. The effect of businesses in the context of commercial such clauses is often to deprive or disputes involving entities with discourage consumers from enforcing relatively equal bargaining power and their and statutory rights working knowledge of the kinds of in judicial forums. As a result, disputes likely to arise in that context.8 consumers risk being bound by There is nothing in the FAA that unreviewable decisions reached indicates an intention that adhesive without most of the procedural and agreements between a business and a substantive safeguards that are consumer be included within the reach available in a court setting. of the Act.9 This article will examine the status of Some commentators are of the view arbitration clauses in general under that the Supreme Court has interpreted recent Supreme Court case law and in the FAA in such a way as to create a particular in consumer cases. It will national policy favoring arbitration then discuss a number of theories for agreements and giving them a special invalidating arbitration clauses in and protected status in the law of consumer cases so as to preserve the contract."° This preference for right to judicial redress for grievances. arbitration was announced by the Court in Moses H. Cone Memorial II. The Federal Arbitration Act Hospital v. Mercury ConstructionCorp." That case involved two business In 1925, Congress enacted the Federal entities, a contractor and a hospital, Arbitration Act ("FAA"). 5 The FAA and their broad binding arbitration represented an attempt to put agreement purporting to all arbitration agreements on an equal disputes arising from or relating to footing with, and make them just as construction of the hospital. Without enforceable as, other contracts. As providing any historical or policy Section 2 of the FAA states, written justification, the Court concluded that arbitration agreements "shall be valid, federal policy favored arbitration over irrevocable and enforceable, save upon litigation: "Courts of Appeal have ... such grounds as exist at law or in consistently concluded that questions equity for the revocation of any of arbitrability must be addressed with 6 contract. " a healthy regard for the federal policy Although lenders or other business favoring arbitration. We agree."12- Since entities are quick to cite to the FAA as Moses H. Cone, the Court and lower

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courts have repeated the notion that contract is for the arbitrator to decide, federal policy favors arbitration, but while such a claim directed at the have never explained the source of that arbitration clause itself is for a court to 13 policy. decide.20 Several courts have now More recently, however, the Supreme recognized that, since the assumption Court decided the case of First Options that an agreement to arbitrate was of Chicago, Inc. v. Kaplan.4 In First made voluntarily is essential to the Options, the Court held that the issue of First Options inquiry, the related and who (arbitrator or court) should decide antecedent question of whether the arbitrability is a question for the courts, agreement is the product of fraud, unless there is "clear and unmistakable or coercion must be " that the parties agreed an issue for the courts as well.2 otherwise.15 The Court emphasized This is especially true where the that the initial issue of the existence of a contract at issue involves a typical valid agreement is different from the consumer because the contract is subsequent question of "the scope of a generally one of adhesion. In such valid arbitration agreement."1 6 As to situations, arbitration clauses are the former issue, whether an subject to heightened judicial agreement to arbitrate exists, ordinary scrutiny.22 As the Court has state law principles that govern the emphasized, "arbitration is simply... a formation of contracts should control. 7 matter of contract between the It is only with respect to the latter parties."23 Arbitration is a matter of question, the scope of the agreement, informed consent, not hidden coercion that the law "reverses the or blind acquiescence. 24 When the presumption" so that the federal policy parties to a contract are fully informed, in favor of arbitration will apply to possess equal bargaining power and resolve any doubts about the issues to reasonably expect certain provisions or be arbitrated. 8 Accordingly, the Court terms, as is typically the case in has made it clear that the federal policy commercial transactions among favoring arbitration does not apply to merchants, arbitration agreements are issues concerning the validity, routinely enforced and, in fact, enjoy a revocability and enforceability of preferred status in the courts. But contracts containing arbitration when such clauses are buried in the clauses. fine print of complex legal documents The Court's holding in First Options that are offered on a take-it-or-leave-it has led other courts to question the basis to less sophisticated consumers continuing vitality of a thirty-one year who typically do not even understand old Supreme Court case, Prima Paint either the nature or the significance of Corp. v. Flood & Conklin Mfg. Co.19 In mandatory arbitration, general contract Prima Paint, the Court held that a claim principles require a closer scrutiny of of fraud in the inducement of the entire the process and the fairness of the

1998 Loyola Consumer Law Review * 271 purported bargain.2 Where there is an ACTION BY US (AS PROVIDED HEREIN). unreasonably high likelihood of The parties agree and understand that all disputes arising under case law, statutory misapprehension, unfairness or one- law, and all other laws including, but not sidedness, courts have not hesitated to limited to, all contract, , and property invalidate arbitration clauses based, for disputes, will be subject to binding arbitration in accord with this contract. example, on findings of fraud in The parties agree and understand that factum, fraud in the inducement, lack the arbitrator shall have all powers of mutuality and unconscionability.26 provided by the law and the contract. These powers include all legal and equitable remedies, including, but not III. Arbitration Clauses in limited to, money damages, declaratory relief, and injunctive relief. Consumer Cases Notwithstanding anything hereunto the contrary, we retain an option to use Arbitration clauses in consumer judicial or non-judicial relief to enforce a mortgage, deed of trust, or other security contracts reflect a wide variety of agreement relating to the real property substantive inequities. For one, the secured in a transaction underlying this clauses may be obscured in arbitration agreement, or to enforce the fine print monetary obligation secured by the real and buried deep in multi-copy property, or to foreclose on the real standard forms. For another, even property. Such judicial relief would take assuming that a consumer could find the form of a lawsuit. The institution and maintenance of an action for judicial relief the clause, it may be written in dense, in a court to foreclose upon any collateral, often contradictory and inconsistent to obtain a money judgment or to enforce language. The following is an example the mortgage or deed of trust, shall not constitute a waiver of the right of any of a typical arbitration clause found on party to compel arbitration regarding any the reverse side of a consumer loan other dispute or remedy subject to contract, printed here in slightly larger arbitration in this contract, including the filing of a counterclaim in a suit brought type than its actual size: by us pursuant to this provision. ARBITRATION - All disputes, claims or controversies arising from or relating The above clause illustrates many of to this contract or the relationships which result from this contract, or the validity the unfair, overreaching and deceptive of this arbitration clause or the entire characteristics of arbitration clauses. contract, shall be resolved by binding The clause is in fine print and located arbitration by one arbitrator selected by us with consent of you. * ** . The parties upside down on the reverse side of a agree and understand that they choose multi-copy standard form. arbitration instead of litigation to resolve Substantively, the clause is totally one- disputes. The parties understand that they have a right or opportunity to sided. While it begins by stating that all litigate disputes through a court, but that disputes are to be resolved by they prefer to resolve their disputes arbitration, well into the clause is a through arbitration, except as provided herein. THE PARTIES VOLUNTARILY AND provision allowing the lender, but not KNOWINGLY WAIVE ANY RIGHT THEY the consumer, the option to resort to a HAVE TO A JURY TRIAL, EITHER judicial forum for relief by filing a PURSUANT TO ARBITRATION UNDER THIS CLAUSE OR PURSUANT TO A COURT lawsuit. Further, the clause provides

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that even if the lender opts to enforce relevant documents may not be in the certain rights under an action for consumer's possession. Because the judicial relief, it does not waive its parties are generally limited to right to compel arbitration as to other subpoenas duces tecum in an disputes under the contract, including arbitration, the documents may be any counterclaim of the consumer in a difficult to obtain from the financial lawsuit initiated by the lender. Thus, institution in time to adequately the clause would permit the lender to prepare a case. Seeing documents at a file a lawsuit in court, but relegates the hearing for the first time does not consumer's counterclaims to permit a consumer the opportunity for arbitration. adequate analysis and presentation of The clause also allows the lender to his case. An arbitrator may be reluctant select the arbitrator.27 There is no to postpone the hearing to allow indication of what institution, if any, enough time to study the documents 32 would oversee or operate the because that would result in delay. arbitration process, no information Further, raising claims under concerning what kind of discovery consumer protection statutes rights, if any, are available, no presupposes an arbitrator qualified to information about the costs, what evaluate the claims. That may not be a deadlines might be applicable, how or correct assumption. Consumer with whom to initiate the arbitration, protection statutes are complex; where it might be held or even whether adequate evaluation requires the consumer has the opportunity to knowledge not only of the statute, but appear before the arbitrator. of regulations, official commentary and Beyond the inherent substantive case law, all of which may change unfairness of the clause, the limited periodically. Arbitrators may be more discovery permitted in most likely to rely on their own notions of makes a fair resolution fairness or justice, which will not even less likely for the average necessarily lead to results intended by consumer. As Professor Budnitz points the drafters of the consumer protection out, many consumers may wish to legislation.33 assert claims based on consumer A number of theories are available to protection statutes such as the Truth in challenge the enforceability of Lending Act,29 the Equal Credit arbitration clauses such as the one set Opportunity Act,3° the Fair Credit forth above. The following section will Billing Act,31 or state unfair and discuss some of those theories. deceptive acts or practices laws. Often, the consumer's claims will be based on IV. Theories for Invalidating the documents used in the transaction: Arbitration Clauses in Consumer disclosure statement, note, security Cases instrument, etc. Some or all of the

1998 Loyola Consumer Law Review 0 273 A. Burdens of Proof rights of the weaker party does not Before reviewing the various legal result in oppression or unfair surprise. grounds on which arbitration clauses For example, Section 2-302(a) of the can be challenged, it might be helpful Uniform Commercial Code ("UCC") to emphasize that, under most state allows the court to refuse to enforce the laws,3 -the burden of demonstrating contract as a whole or any single clause the existence of an enforceable or group of clauses that is permeated arbitration agreement is on the party by unconscionabiity. 9 Similarly, the seeking to compel arbitration. There Restatement Second, Contracts, § 208 are two reasons that the burden should directs the court to determine as a rest on that party. matter of law whether a standardized contract or a term therein is 1. Risk shifting terms or exclusions must unconscionable and therefore be plain, clear and conspicuous. unenforceable. Both the Restatement and the UCC strongly suggest that the The drafters of a contract may have a court should hold an evidentiary substantial burden of proof due to the hearing before ruling on the validity of "take it or leave it" nature of the the arbitration clause.40 contract containing an arbitration clause.3 5 The burden is on the drafter 2. The proponent of a contractual of the to show provision that effects a waiver of the other that the consumer had knowledge of party's constitutional rights must prove any unusual, unexpected or the existence of the agreement and that inconsistent term; 36 risk-shifting terms there was a knowing, intelligent and or exclusions must be plain, clear and voluntary waiver. conspicuous.37 A significant factor is whether the consumer, in light of his or The proponent of an arbitration her sophistication, the nature of the clause will often proceed from the false agreement and the complexity of the premise that the consumer has the relationship, reasonably expected that initial burden of proof before a court they would be subjected to an on a motion to compel arbitration. In arbitration clause that would deprive fact, First Options makes it clear that it them of the ability to resolve any is the proponent of the clause that has disputes in an impartial, public forum the initial burden of proving the with all the due process rights and existence of a valid agreement. In First duties to follow the law as are available Options, the Court emphasized that in a court.38 "arbitration is simply a matter of Also, when scrutinizing adhesion contract between the parties; it is a way contracts, courts are empowered to to resolve those disputes - but only ensure that the enforcement of clauses those disputes - that the parties have that materially impinge on substantial agreed to submit to arbitration."41 Since

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ordinary state law principles governing payments. By contrast, the situation in the formation of contracts apply to the Fuentes- presented a waiver by a much question of whether a valid agreement weaker party to a contract: exists, those principles likewise assign There was no bargaining over 2 the burden of proof contractual terms between the Both federal law and ordinary parties who, in any event, were far contract principles establish that the from equal in bargaining power. proponent of any clause that effects a The purported waiver provision waiver of the other party's was a printed part of a form sales constitutional rights has the burden of contract and a necessary condition proving both the existence of a valid of the sale. The appellees made no agreement and that there was a showing whatever that the knowing, intelligent and voluntary appellants were actually aware or 43 waiver. Under federal law, courts made aware of the significance of must "indulge in every reasonable the fine print now relied upon as a presumption against waiver of waiver of constitutional rights. 9 fundamental constitutional rights and. . [may] not presume acquiescence in Supreme Court case law implicitly adopts a four-factor balancing test for the loss of such rights."44 Likewise, when courts should accept or reject a most state contract law specifically claim of waiver in the civil context.50 provides that any waiver of a right The courts should examine 1) "the must be knowing, intelligent, visibility and clarity of the waiver voluntary, unequivocal and clearly itself, 2) the relative knowledge and evinced.4 It is equally well settled that economic power possessed by the a party seeking to compel arbitration parties, 3) the degree of voluntariness bears the burden of showing that the of the purported agreement, and 4) the party opposing arbitration "knowingly, substantive fairness of the purported intelligently, and voluntarily" waived agreement." 51 his right to a trial in court by a jury of Proponents of arbitration may his or her peers. 6 contend that the case of Doctor's The Supreme Court has declared that Associates, Inc. v. Casarotto2 precludes "a waiver of constitutional rights in application of these principles to any context must, at the very least, be arbitration clauses. That contention is clear." 47 In Fuentes, the Court mistaken. While it is true that distinguished its earlier decision in D. arbitration clauses may not be H. Overmyer Co. v. Frick Co.;.48 D. H. Overmyer involved a corporate party subjected to positive state law requirements that are different from that had waived its rights by signing a general contract principles, there is confession of judgment in exchange for nothing in the Supreme Court's a release of mechanic's liens and jurisprudence, including Doctor's certain monetary benefits on future Associates, which exempts arbitration

1998 Loyola Consumer Law Review * 275 clauses that purport to waive A leading ground for attacking constitutional rights from the basic arbitration clauses in consumer waiver principles that apply to all contracts is their unconscionability. An contracts. arbitration clause must be viewed "in Doctor's Associates does not overrule the light of its setting, purpose and the general contract requirement of a effect," and invalidated or interpreted plain, clear and conspicuous statement to "avoid unconscionable results." 55 An for terms that are beyond the arbitration clause that is so one-sided reasonable expectations of the weaker as to be unconscionable should not be 6 party. In that case, the Supreme Court enforced.5 considered a state statute that singled Courts recognize that a term or a out arbitration clauses for special contract is unconscionable when there treatment. That statute was applicable is "an absence of meaningful choice on only to arbitration provisions, not to the part of one of the parties together enforcement of contracts generally and with contract terms which are thus ran afoul of the unreasonably FANs requirement favorable to the that arbitration Courts reco nize that a other party."5 7 In clauses not be placed term or a cc tract is determining whether on an unequal Wle when an agreement is footing.5 3 But the unconscion unconscionable, Court, while there is "an absence of courts focus not only invalidating the state meaningful on the on the process statute, reiterated ,hoice whereby the that generally part of one the parties agreement was applicable contract together wi 1contract made, to see whether defenses may be the parties lacked applied to invalidate terms whid are meaningful choice, the state statute, unreasonabP,favorable but also on the reiterated that substantive terms of generally applicable to the othe arty." the agreement, to see contract defenses whether the terms may be applied to invalidate unreasonably favor one party.m arbitration agreements without Arbitration clauses may be tainted both contravening the FAA.' because they result from an unfair process characterized by a massive B. Unconscionability - The Absence disparity in bargaining power in which of Meaningful Choice Together With the consumer had no meaningful Terms Unreasonably Favorable to choice and because the terms are Other Party unreasonably favorable to the company.9

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compared with the circumstances of 1. Adhesion contracts are subject to a the other party, make his knowing higher level of judicial scrutiny assent to the fine-point terms fictional. "63 Adhesion contracts are subject to a When a sophisticated party has higher level of judicial scrutiny, and drafted a standard form fine print courts will deny enforcement if the contract and the weaker party lacks a contract or provision is outside the meaningful choice, courts have been reasonable expectations of the weaker especially vigilant in preventing any party.s0 As the Supreme Court has unconscionability resulting from explained: enforcement of the agreement.64 Courts Ordinarily, one who signs an have recognized, for example, that the "need for application agreement without full knowledge of this standard of its terms might be held to [unconscionability] is most acute when assume the risk that he has the professional seller is seeking the entered a one-sided bargain. But trade of those most subject to when a party of little bargaining exploitation-the uneducated, the power, and hence little real choice, inexperienced and the people of low " signs a commercially income. 6 unreasonable contract with little The requisite higher level of judicial or no knowledge of its terms, it is scrutiny is demonstrated by the factors hardly likely that his consent, or utilized by the court in John Deere 66 even an objective manifestation of Leasing Co. v. Blubaugh. First, the his consent, was ever given to all contracts were "printed form or boiler of the terms. In such a case the plate contracts drawn skillfully by the usual rule that the terms of the party in the strongest economic agreement are not to be position, which establish industry- questioned should be abandoned wide standards offered on a take it or and the court should consider leave it basis to the party in a weaker whether the terms of the contract economic position." Second, the are so unfair that enforcement circumstances surrounding the should be withheld.6' execution of the contract, its commercial setting, purpose and effect An adhesion contract that is based on showed that the plaintiffs were duped a lack of meaningful choice and into agreeing to the standard form contains terms that are so one-sided as contracts without any understanding to be oppressive is invalid. 62 Courts of their essential terms or character have frequently found "the absence of through the device of the two contract a meaningful bargain" in an adhesion deceit utilized by the defendants. contract because it "usually involves a Third, the arbitration clause deprived party whose circumstances, perhaps plaintiffs of their right to go to court, his unworldliness or ignorance, when

1998 Loyola Consumer Law Review * 277 preserves that right for defendants and suffered by the female employee who yet was hidden in "a mass of fine print sought to bring suit for sexual 6 7 trivia" and in an inconspicuous place. harassment were substantial because Fourth, the arbitration clause was she would be stripped of numerous phrased so as to be ambiguous and substantial remedies under Title VII, "incomprehensible to the layman or such as rights to compensatory [to] divert his attention from the damages, back pay relief, preemptory problems raised by [it] or the rights relief, punitive damages and attorney given up through [it]." Fifth, the fees. Further, she would be faced with arbitration clause manifested an numerous unfair procedural rules: overall imbalance in the obligations limitations on discovery, one-way and rights of defendants vis-a-vis witness disclosure and sequestration, plaintiffs. Sixth, the contracts employer control over the official containing the arbitration clause record and sharply curtailed judicial exemplified "exploitation of the review. As to the other factors, the underprivileged, unsophisticated and employee was obviously not a uneducated." And seventh, the "substantial business concern" and contracts rested on a gross inequality of there was clearly a marked disparity in bargaining or economic power, in that the parties' bargaining power and in plaintiffs did not have the resources to their relative sophistication. Finally, the bargain regarding any of the terms court considered that there was an relating to the arbitration clause. "extreme element of surprise to the A similar analysis led to a finding of harshness" of the arbitration unconscionability in an employment agreement because the procedural arbitration agreement in Hooters of rules governing arbitration were not America, Inc. v. Phillips.6 In that case, available to the employee at the initial the court applied the six factor analysis orientation meeting when the of unconscionability required by the agreement was signed.70 Fourth Circuit Court of Appeals:69 (1) the nature of the injuries suffered by 2. Arbitration clauses as procedurally the party sought to be held to the unconscionable contract; (2) whether that party is a substantial business concern; (3) The process by which a consumer disparity in the parties' bargaining enters into a contract may involve power; (4) the parties' relative elements that courts have identified as sophistication; (5) whether there is an demonstrating procedural element of surprise in the contract's unconscionability.7 First, due to the terms; and (6) the conspicuousness of gross disparity in the level of the terms. sophistication and business In applying that test, the court found understanding of a consumer as as to the first factor that the injuries compared with other parties, it may be

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clear that the consumer did not have a terms of the employment contract," reasonable opportunity to understand that were presented to him as standard, the terms and conditions of the non-negotiable terms after he accepted agreement. Second, there may be no employment. 74 The plaintiff in that case opportunity for meaningful was a business executive commanding negotiation over the terms of the an annual salary of $150,000, not an arbitration clause. Third, the agreement unsophisticated consumer. The containing the arbitration clause may plaintiff, who brought a wrongful be printed in fine print inconspicuously discharge action that his employer placed on the reverse side of a sought to stay on the basis of the boilerplate form drafted solely by the arbitration clause, said that the contract party in the strongest bargaining was presented to him on a "take-it-or- position. Fourth, the terms of the leave-it basis." The court found that the contract may not have been explained agreement to arbitrate was part of a to the consumer, and the arbitration contract of adhesion and was clause, in particular, may not have procedurally unconscionable. 7 even been pointed out to the consumer. Fifth, a consumer may not feel he or 3. Arbitrationclauses as substantively she has a meaningful choice, but unconscionable instead understands the agreement to be on a "take it or leave it" basis. Sixth, An arbitration clause may also be the stronger party may have used fatally flawed because its terms are deceptive practices to obscure not just substantively unconscionable. Such the terms of the contract, but also its clauses are often structured to be essential character.72 manifestly unfair to consumers, who In Sosa, for example, an arbitration are forced to irrevocably relinquish clause that was contained in an their right to a day in court while the agreement thrust upon a patient just stronger party retains the right to seek "minutes away" from surgery, on a a judicial remedy whenever it chooses. printed form drafted by the doctor As such, consumers are presented with seeking to enforce it, was signed by the a classic case of "heads I win, tails you patient when she was in a state of lose." 76 In Saika v. Gold, a medical anxiety and felt rushed to sign, and malpractice action, the court found an which was never discussed with the arbitration agreement invalid because patient at any time, was found to be it allowed the doctor to obtain a trial de procedurally unconscionable. 73 In novo if the patient won, but afforded Stirlen v. Supercuts, Inc., the court also no such right to the patient if the found that procedural doctor won. Therefore, according to the unconscionability invalidated an court, the agreement rendered an arbitration clause because the plaintiff illusory remedy to one party to the had no "realistic ability to modify the benefit of the other. A court of equity

1998 Loyola Consumer Law Review 0 279 would not enforce such a substantively term.. .which dispense[d] with the unconscionable agreement, which signer's day in court." The clause was "contravene[d] the strong public policy contained in a contract that the wife, in in favor of arbitration." 77 a weakened and emotionally depleted Similarly, in Fritz v. Nationwide Mut. condition, was misled into signing. Ins. Co., 78 the Delaware Chancery Court The substantive unconscionability of refused to enforce an arbitration clause an arbitration clause is magnified in in an insurance contract because its view of the wide disparity in the status terms were substantively and the business understanding of the unconscionable. In that case, an consumer as compared with the arbitration award automatically bound company representatives. In Wagner v. the insured but the insurer was bound Rummel,81 the plaintiff sought specific only if it gave its written consent. The performance of an agreement to buy court stated: land at a price that was roughly 100 The effect of this one-sided times less than its value. The consent to arbitration, therefore, agreement had been signed by a allows Nationwide to avoid any decedent who was "unsophisticated, at award it chooses not to consent to best, if not illiterate, regarding business while prohibiting [the insured] matters and legal documents," with 2 any discretion as to the acceptance "little or no schooling." The trial court of an award. Nationwide cannot had refused to consider the defense of have it both ways. It cannot unconscionability to the contract require compulsory binding because it had not been affirmatively arbitration then treat it as non- pleaded. The appellate court reversed, binding to it. In reality, under the remanding so that evidence regarding contract Nationwide had not the decedent's status could be agreed to binding arbitration at considered in light of the doctrine of 3 all, but merely provided that it unconscionability.1 might later require [the insured] to submit to binding arbitration. C. Fraud in Factum - Clause These terms unreasonably favor Unenforceable When Material Terms Nationwide and are therefore Misrepresented unconscionable. The compulsory arbitration clause in the insurance It is well settled that a contract policy is therefore void.9 procured by fraud in factum is void and cannot be enforced. Fraud in In Germantown ManufacturingCo. v. "where there is 8° factum occurs Rawlinson, the court found that a of the character or contract which caused a party to assent essential terms of a proposed to a confession of judgment clause was contract."8 When such essential terms unconscionable because the clause was are misrepresented, the other party's "the essence of a material, risk-shifting

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manifestation of assent is ineffective has no meaning because the consumer because that party believed he was did not assent to those contracts.90 agreeing to something different from Federal courts have refused to what was presented.8 A material enforce arbitration clauses included in misrepresentation is one that "would contracts obtained by fraud in factum. be likely to induce a reasonable person For example, in Cancanon,91 the to manifest his assent, or the maker plaintiffs, unsophisticated and trusting knows that it would be likely to induce consumers who lacked familiarity with the recipient to do sO."I86 A failure to financial matters, signed what was disclose material terms is tantamount represented to be a money market to a misrepresentation.87 Courts have account but turned out to be a general noted that fraud in factum includes securities account with a binding instances in which a party is told one arbitration clause. Their stockbroker thing but the actual written contract then engaged in high volume, says something else and where there is speculative trades that resulted in "a surreptitious substitution of one substantial losses. The court held that document for another and the innocent where the allegation "is one of fraud in party sign[s] it without knowledge or a the factum, i.e., ineffective assent to the reasonable opportunity to know the contract, the issue is not subject to character or essential terms of the resolution pursuant to an arbitration 92 substituted document."8 clause contained in the documents." One example of fraud in factum is the In another case, the plaintiff spoke a classic two-contract deceit where a bare minimum of English, but was contractor, for example, will first have required to sign documents in English a consumer agree to the repair work - for a commodities account that in the form of a work contract - and contained a binding arbitration then later force him or her to agree to clause.93 Her account sustained serious the financing in the standard form losses. The defendant sought to compel contract under the guise that the two arbitration pursuant to the arbitration agreements were essentially the same. clause. The plaintiff resisted, alleging However, the second contract, the defendant knew she could not read containing the arbitration clause, not English and that the agreement was only was not the same, but it bore no presented for her "signature as a mere 'administrative' relation to the agreement the consumer document." She also had been promised. Because of the contended that the fact that the contractor's document was a "contract setting forth regarding the essential character and the terms of a binding agreement" was terms of the standard form contracts, affirmatively concealed from her. The the consumer's assent is ineffective, court held that arbitration could not be and the contracts should be void.89 The compelled because fraud in the factum consumer's signature on the contracts as to the entire agreement voided the

1998 Loyola Consumer Law Review 0 281 contract. Further, the court said, the superior party has reserved to majority of courts "confronting this itself the choice of arbitration or question directly have held that a bona litigation, a court may deny the fide claim of fraud in the factum as to superior party's motion to compel the entire contract takes a case outside arbitration based on the doctrines 94 the rule of Prima Paint." of mutuality and unconscionability. The court also based its conclusion on D. Lack of Mutuality - One-Sided the doctrine that a court of equity Agreements Subject To Nullification should not compel of an arbitration 1. Lack of mutuality of remedy agreement in the context of a consumer contract of adhesion where "the party Arbitration clauses may also be in the superior bargaining position has unenforceable where they are given itself a choice of arbitration or unilateral and lack mutuality. While litigation, but has reserved a right to such a clause binds unsophisticated, compel the weaker party to submit to trusting consumers and commits them arbitration. "96 to an irrevocable waiver of their day in The court in Lopez v. Plaza Finance 97 court, it leaves powerful and more Co. faced an analogous situation and sophisticated businesses completely invalidated an arbitration clause in a free to choose a judicial forum for the consumer finance contract on the enforcement of the contracts. Courts grounds that it lacked mutuality. Lopez have routinely invalidated such one- was a class action challenging the sided agreements that bind one party terms of an installment loan to the arbitral forum while leaving the agreement. Though the clause other free to pursue judicial remedies. appeared to require the parties to For example, in Northcom, Ltd. v. submit to arbitration any claim "arising James,95 the Alabama Supreme Court out of the contract," in fact the clause directly confronted the issue whether exempted the finance company from an arbitration clause contained in an arbitration with respect to "whether or adhesion contract that binds one party not the Debtor has committed an act of to arbitration while leaving the other default."9 8 The court said that the party free to choose litigation should creditor defendant had "failed to be enforced. That court concluded that identify any class of legitimate claims it such a clause should not be enforced: might bring which would not relate to ... we hold that, in a case involving plaintiff's breach or default," thus a contract of adhesion, if it is not rendering the creditor's promise to shown that the party in an inferior arbitrate illusory.99 The court then bargaining position had a denied the motion to compel meaningful choice of agreeing to arbitration, stating that "where only arbitration or not, and if the one party is bound to arbitrate, the

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agreement is unenforceable."1 00 would be prejudiced by arbitration, or In Hull v. Norcom,'0 a terminated unable to get the same relief available former employee challenged an in a judicial setting. The court believed employment contract containing a it was required to defer to the binding arbitration clause. The clause legislative policy behind the FAA and one-sidedly permitted the employer to not "view arbitration as an inherently seek injunctive relief and damages in less beneficial form of dispute ' °4 any court for a breach of the non- resolution. 1 compete covenant. The defendant Several days before the Lackey employer sought to compel arbitration. decision, a federal court sitting in the The employee resisted, claiming that same state invalidated an employment the clause was invalid because the arbitration agreement because, among parties lacked a mutual agreement to other things, the clause lacked arbitrate. The court agreed, stating that mutuality in the "bindingness" of the the employer's obligation to arbitrate arbitration award: the award was fully was illusory, and that an arbitration appealable by the employer, but not by agreement "is not mutually binding the employee. 1° An even more recent where one party reserves the option to decision by the Pennsylvania Superior raise and resolve any and all disputes Court, Zak v. PrudentialProperty & 10 6 that it may have against the other party CasualtyInsurance Company, in a court of law rather than through invalidated an arbitration clause in an arbitration. "102 insurance contract because it gave the Some courts do not find lack of insurer more rights than the insured: mutuality in and of itself sufficient to "It is fundamentally unfair for an preclude arbitration. For example, in insurer to obtain a trial any time an Lackey v. Green Tree FinancialCorp., 103 award it does not like is made while the South Carolina Court of Appeals the claimant or insured is not afforded reversed an order finding a similar right. The procedure offends unconscionable and unenforceable an notions of due process and equal 7 arbitration clause in an admittedly protection. " 10 adhesive contract. The clause at issue A related issue is whether there was allowed the lender to choose a judicial mutual underlying the forum while denying the borrower the contract that made the less right to raise a counterclaim in any sophisticated party's promise to submit such legal action. The court reasoned, claims for arbitration enforceable. In however, that nothing in the clause the case of Gibson v. Neighborhood Health prevented the borrower from asserting Clinics, Inc.,08 an employee sued her the counterclaim, only that the former employer for discrimination in counterclaim would be subject to violation of Title VI'1109 and the arbitration. The court relied on the Americans with Disabilities Act.10 The absence of proof that the borrower district court had dismissed the

1998 Loyola Consumer Law Review 0 283 employee's claims on the grounds that consideration where a consumer has she had contractually agreed to submit given up such rights in an adhesion her claims for arbitration. On appeal, contract. the Seventh Circuit Court of Appeals The starting point for this analysis is reversed. The court reviewed the the case of D.H. Overmyer Co. v. Frick 112 enforceability of the employment Co., a case that did not involve a contract under Indiana law, the site of contract of adhesion. In that case, the the relevant events in the dispute, and Court held that a contractor, who concluded that there was no repeatedly failed to make payments consideration supporting the employee's due for installation of a refrigeration promise to arbitrate. Consideration system and then negotiated and agreed was not supplied by the employer's to a confession of judgment clause in promise to hire the employee or to order to continue the contractual continue to employ her because the relationship, received sufficient offer of the employment was not made consideration for abandoning the due in exchange for the promise to process right it would otherwise have arbitrate; the employee had already to a prejudgment notice and hearing. been hired at the time of the promise. The Court pointedly observed, Also relevant to the court's analysis however, that: was that the contractual language at Our holding, of course, is not issue reserved to the employer the controlling precedent for other right to modify, defend or otherwise facts of other cases. For example, change any or all terms of the where the contract is one of employment contract at any time, adhesion, where there is great without notice. As pointed out by the disparity in bargaining power, and concurring opinion, whatever where the debtor receives nothing "promise" was made by the employer for the cognovit provision, other 113 was illusory because it was subject to legal consequences may ensue. the disclaimer language contained in On the the employee manual."' same day that Overmyer was decided, the Court issued a ruling in a companion 2. Lack of considerationfor giving up case that involved low- income consumers giving up the same constitutionalrights rights.14 In Swarb v. Lennox, the Court affirmed a lower court Arbitration clauses, by their nature, ruling that the require consumers to give up certain consumers did not knowingly and intentionally give up their constitutional basic constitutional rights, including rights. The Court suggested that this the right to a jury trial and the right to was the type of case it had alluded to adequate notice and opportunity to be in the Overmyer decision where "other heard. The Supreme Court has clearly legal consequences may ensue" as a held that there must be bargained-for result of the contract being one of

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adhesion, the disparity in bargaining the maker that the recipient will power and the absence of any thereby be induced to act, (4) justifiable consideration received in return for the reliance by the recipient upon the relinquishment of due process rights."5 misrepresentation and (5) damage to Later in the same term, the Court the recipient as the proximate result." 9 issued the decision in Fuentes v. A key element of fraudulent Shevin."6 In that case, the consumer inducement is to induce a party to had signed a conditional sales contract enter into a contract by means of fraud that allowed the seller, Firestone Tire or a material misrepresentation, when and Rubber Co., to immediately the party was under no duty to enter 120 repossess the merchandise in the event into the contract. of default. After a dispute over Further, where a contract is a servicing a gas stove, Mrs. Fuentes standard form adhesion contract, the allegedly failed to make some of the argument should be made that the payments and Firestone seized the stronger party is obligated to point out disputed goods. The Court rejected terms which were unusual or Firestone's argument that Mrs. Fuentes surprising, such as a unilateral waived her due process rights by arbitration clause.'2 ' The failure to signing the sales agreement, observing affirmatively disclose the arbitration that the facts of the case were a "far cry clause amounts to a material 7 from those of Overmyer." 1 misrepresentation, which serves to 122 Thus, in appropriate cases, consumer nullify it. advocates should highlight the lack of In CBS Employees Federal Credit Union consideration flowing to their clients v. Donaldson, Lufkin and Jenrette,123 the where those clients are compelled by court relied on the Supreme Court's one-sided arbitration clauses to decision in Prima Paint'24 to hold that abandon constitutional rights. arbitration is not to be compelled where the agreement itself has been E. Fraudulent Inducement - Inducing fraudulently induced. The plaintiffs the Consumer Into an Arbitration alleged that their assent to a margin Agreement Through Material agreement and the arbitration Misrepresentations agreement it contained was fraudulently induced to coerce plaintiffs into It is well settled that an arbitration ratifying the unauthorized trading in agreement that was fraudulently their accounts, which had suffered induced may not be enforced." 8 Under serious losses.22 The court said that Pennsylvania law, for example, because plaintiff's fraud claim fraudulent inducement to a contract or involved the arbitration clause, Prima term thereof is shown when there is (1) Paint mandated that a court, not an a misrepresentation, (2) a fraudulent arbitrator, should determine whether utterance thereof, (3) an intention by the clause was used to further a

1998 Loyola Consumer Law Review 0 285 fraudulent scheme. 126 knowledge and financial resources as More recently, the California between the parties, an application of Supreme Court ruled that an the FAA is contrary to the intent of arbitration clause in a health plan Congress and does not further the agreement between a hospital and a federal policy of favoring arbitration. patient could be unenforceable due to Many states recognize public policy fraud in the inducement. 27 Evidence violation as a defense to contract supported the patient's claims that the enforcement. The Delaware Supreme hospital misrepresented the speed of Court in Worldwide Ins. Group v. its arbitration program, a Klopp,'3 ' refused to enforce an misrepresentation on which the arbitration agreement so unfairly patient's employer relied by selecting structured that the insurer could the hospital's plan for its employees appeal and get a trial de novo if the and that the patient suffered delay in arbitrator's award exceeded the state the resolution of his malpractice financial responsibility limits but the dispute as a result of that reliance insured had no corresponding right to despite the patient's own diligence. appeal an award below those limits. The court remanded the case to the The court said that though the trial court to resolve conflicting factual agreement permitted either party to evidence.128 appeal if the award was greater than the state financial responsibility limits, F. Arbitration Clauses Contravene and both parties were bound by a low Public Policy award, in reality, the agreement gave the insurer an "escape hatch" for the In analyzing arbitration clauses, the avoidance of high arbitration awards, consumer advocate should keep in whether or not the award was fair and mind that the FAA was not intended reasonable. 32 As such, the court by Congress to force consumers who refused to enforce the arbitration are at a decided disadvantage when agreement as unconscionable and dealing with sophisticated and contrary to public policy, stating that experienced business entities to "the policy provision at issue here surrender their right to a jury trial. promotes litigation, circumvents the Rather, Congress intended the FAA to arbitration process and provides an apply to ordinary contract disputes arbitration escape device in favor of the "between merchants." 29 The FAA's insurance company."" 3 legislative history evinces an "implicit More recently, in the Hooters of assumption that it would be invoked America, Inc. v. Phillips case, the court by commercial actors having relatively found that the employer's arbitral equal bargaining power."3 ° In scheme was void as a matter of public circumstances where there is a marked policy because it supplanted imbalance in sophistication, numerous, well-defined dominant Title

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VII policies. T' The court noted that the title or under a written warranty, Supreme Court, in Gilmer v. Interstate! implied warranty, or service contract, Johnson Lane Corporation,'-5 had may bring suit for damages and other recognized that statutory claims could legal and equitable relief." 40 The only be effectively vindicated in an arbitral exception recognized to the entitlement forum. However, where the arbitration to seek relief in a judicial forum is process would preclude such where the Act provides for the vindication, the clause was void as a establishment of "informal dispute 136 4 matter of public policy. settlement mechanisms " 1 or "informal dispute settlement procedures." 1 2 The G. The Magnuson-Moss Act - Act states that warrantors may Preserving Judicial Forum for establish such informal dispute Consumer Warranty Claims settlement procedures and that such procedures must comply with certain Congress enacted the Magnuson- minimum requirements to be Moss Act (the "Act") in 1974 "in order promulgated by the Federal Trade to improve the adequacy of Commission. 43 Further, the Act makes information available to consumers, clear that such dispute resolution [and] present deception." 137 The Act procedures and mechanisms are non- specified clear and comprehensive binding on the consumer and must be requirements regarding disclosures, resorted to before the consumer may duties and remedies associated with resort to a legal remedy, such as going warranties on consumer products. The to court. As such, the Act provides for products covered by the Act include informal settlement procedures as a any "tangible personal property which prerequisite, not a bar, to seeking relief is distributed in commerce and which in a judicial forum. 44 And, thus, where is not only used for personal, family or arbitration clauses contained in such household purposes."'3 contracts are binding, rather than non- Courts that have considered the binding, such clauses conflict with the application of the Act to arbitration Act and are unenforceable.21 clauses in consumer contracts have ruled that where such contracts V. Conclusion provide for binding arbitration, consumers cannot be compelled to While the trend to insert unfair and arbitrate their claims under the Act.139 overreaching arbitration clauses into The intent of the Act was to preserve a standard form consumer contracts judicial forum for consumers, appears to be on the rise, there do providing that "a consumer who is remain a number of grounds for damaged by the failure of a supplier, invalidating such clauses, particularly warrantor, or service contractor to when consumers' claims are based comply with an obligation under this upon violations of statutory rights.

1998 Loyola Consumer Law Review 0 287 Attempts to prevent consumers from Small Print to Protect Big Business: Employee asserting those rights in court should and Consumer Rights Claims in an Age of be vigorously resisted. Compelled Arbitration,90 Wis. L. REv. 33, 75-78 (1997).

Endnotes See id.

1 Although proponents of arbitration 9 See id. at 36. clauses often benevolently describe the supposed advantages of arbitration, they 10 See id; see also, Jean R. Sternlight, also harbor another agenda: the erection of Rethinking the Constitutionalityof the Supreme hurdles to meritorious consumer claims, Court's Preferencefor Binding Arbitration:A especially class actions. See Alan Kaplinsky, Fresh Assessment of Jury Trial, Separation of Banks Can Use Arbitration Clauses as a Defense, Powers, and Due Process Concerns, 72 TuLANE Busrqss LAW TODAY, May-June 1998, at 24: L.REv. 1, 9 (1997) ("The Court, far from ("Consumers have been ganging up on engaging in neutral legal analysis that banks. But now the institutions have found a simply allows parties to contract for way to defend themselves.... [LIenders have arbitration that is mutually advantageous, discovered that the potential for class action has in recent decisions stretched and twisted litigation is significantly reduced if the traditional canons of construction to favor consumers have agreed to arbitrate their arbitration over litigation."). The author disputes with the lenders. Arbitration is a opines that the application of a federal method of dispute resolution in which a preference to establish the existence of a neutral third party is chosen to hear both valid arbitration agreement constitutes state sides of a case and then resolve it by action that results in the deprivation of rendering an award. Arbitration is a constitutional rights. See Id., at 40-47, 78-100. powerful deterrent to class action lawsuits. ... Stripped of the threat of a class action, 11 460 U.S. 1 (1983). plaintiffs' lawyers have much less incentive to sue.") 12 See id. at 24, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 2 See Lopez v. Plaza Finance Co., 1996 (1967). The appellate cases cited by the Court U.S. Dist. LEXIS 5566 (N.D. Ill. 1996). offer little support for a policy of preference for arbitration. See Sternlight, supra, n. 10, at 3 See Hooters of America, Inc. v. 18, n. 57. Phillips, 1998 U.S. Dist. LEXIS 3962 (D.S.C. 1998). 13 Sternlight, supra n.10, at 18.

4 See Beynon v. Garden Grove Medical 14 514 U.S. 938 (1995). Group, 100 Cal. App. 3d 698 (Cal. App. 1980). 15 See id. at 947.

9 U.S.C. §§ 1-16 (1994). 16 See id. at 944-45 (emphasis added).

6 9 U.S.C. § 2 (1994). 17 See id. at 944; see also Allied-Bruce Terminix Cos.v. Dobson, 513 U.S. 265,281 7 See David S. Schwartz, Enforcing (1995) (arbitration clauses are regulated

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"under general contract law principles"). Par-Knit Mills, Inc. v. Stockbridge Fabrics Co, Ltd., 636 F.2d 51 (3d Cir. 1980); John is Id. at 944. Deere Leasing Co. v. Blubaugh, 636 F. Supp. 1569 (D. Kan. 1986); Stirlen v. Supercuts, Inc., 19 388 U.S. 395 (1967). 51 Cal. App. 4th 1519 (Cal. App. 1997); Worldwide Ins. Group v. Klopp, 603 A.2d 20 See id. at 403-404. 788 (Del. 1992).

21 See Aviall, Inc. v. Ryder System, Inc., 27 The clause does pay lip service to the 913 F. Supp. 826, 831 (S.D.N.Y. 1996). See also consumer's role in the selection by stating Berger v. Cantor Fitzgerald Sec., 942 F. Supp. that one arbitrator "selected by us with 963, 965 (S.D.N.Y. 1996); Maye v. Smith consent of you" shall resolve disputes It is Barney, Inc., 897 E Supp. 100, 106 n.3 exceedingly doubtful that the "consent" of (S.D.N.Y. 1995); Investment Management & the borrower would be real or informed. Research, Inc. v. Douglas Hamilton, 1998 Ala. Most consumers are not in a position to LEXIS 92 (Ala. March 20, 1998) (invalidating adequately evaluate the individual arbitration clause on grounds of fraudulent arbitrators that the financial institution inducement); Allstar Homes, Inc. v. Rex would offer. See e.g., Rosenberg v. Merrill, Waters, 1997 Ala. LEXIS 454 (Ala. Nov. 21, Lynch, Pierce, Fenner & Smith, 1998 U.S. 1997) (ordering judicial proceedings to Dist. LEXIS 877 (D. Mass. 1998) (defendant's determine validity of arbitration clause in structural dominance of the New York Stock mobile home purchase contract). Exchange arbitration rendered it an inadequate forum for the vindication of civil 22 See Carnival Cruise Lines, Inc. v. rights claims). Consumer contracts do not Shute, 499 U.S. 585, 599 (1991) ("the common generally involve evenly matched law...subjects terms in contracts of adhesion commercial entities both of whom are privy to scrutiny for reasonableness"). to the same information about potential arbitrators and could make informed 23 First Options of Chicago, Inc. v. decisions. Further, the clause does not Kaplan, 514 U.S. 938 (1995). provide for a non-profit, neutral arbitrator; it is quite likely that the arbitrator chosen by 24 See Volt Information Sciences, Inc. v. the lender would be predisposed towards Board of Trustees of Leland Stanford Junior that party by reason of his or her natural Univ., 489 U.S. 468,479 (1989). inclination to want more business in the future. See Moore v. Conliffe, 871 P.2d 204, 25 See In re Elkins-Dell Mfg. Co., 253 F. 222-23 (Cal. 1994) (Baxter, J., dissenting) Supp. 864 (E.D. Pa. 1966); Moscatiello v. ("Institutional litigants whose contracts Pittsburgh Contractors Equipt. Co., 595 A.2d relegate all disputes to arbitration are the 1190 (Pa. Super. 1991); Germantown Mfg. major source of income for many arbitrators. Co. v. Rawlinson, 491 A.2d 138 (Pa. Super. Many serve repeatedly as arbitrators for 1985); Graham v. Scissor- Tail, Inc., 28 Cal. 3d institutional clients. Neutral decisionmaking 807 (Cal. 1981). is not, and cannot be, guaranteed under these circumstances.") (citations omitted); 26 See C.B.S. Employees Federal Credit Richard C. Reuben, The Dark Side of ADR, 14 Union v. Donaldson, Lufkin and Jenrette CAL. L. REv. 53, 54 (1996) ("For-profit Securities Corp., 912 F.2d 1563 (611,Cir. 1990); arbitrations ...generate inherent conflicts of Hull v. Norcom, 750 F.2d 1547 (11th Cir. 1985); interest, including the ADR provider's

1998 Loyola Consumer Law Review 0 289 pursuit of repeat business from high-volume absence of "plain and clear notification" and customers.") "an understanding consent" (citations omitted.)). See also, Keblish v. Thomas 2S See Mark E. Budnitz, Arbitration of Equipment Ltd., 628 A.2d 840, 846 (Pa. Disputes Between Consumers and Financial Super. 1993) (disclaimer not conspicuous Institutions:A Serious Threat to Consumer where language embedded within body of Protection, 10 OEo ST. J.ON DISP. RESOL. 267, contract and was same size and color as 283, 313-314 (1995). remainder of contract, citing 13 Pa. C.S.A. § 1201), rev'd on other grounds, 660 A.2d 38 (Pa. 29 15 U.S.C. §§ 1601 et seq (1996). 1995).

30 15 U.S.C. §§ 1691-169(1)(f) (1996). 38 See A&M Produce Co. v. FMC Corp., 135 Cal. App. 3d at 490. 31 15 U.S.C. §§ 1666-16660) (1996). 39 See e.g., Moscatiello, 595 A.2d at 1195; 32 See Budnitz, supra, n. 28. Standard Venetian Blind Co. v. American Empire Ins. Co., 469 A.2d 563, 566 (Pa. 1983). 33 See id.at n. 28, at 315-318. For example, a claim made under the Truth in 40 See RESTATEMENT (SEcoND) OF Lending Act is based less on fairness or CoNTRAcrs § 208 (1981); U.C.C. § 2-302(b) justice than whether the creditor has (1995). complied with disclosure requirements. 41 514 U.S. at 943. 34 See e.g., Wilson Fertilizer & Grain v. ADM Milling Co., 654 N.E. 2d 848,849 (Ind. 42 The likely argument from the Ct. App. 1995). proponent of an arbitration clause that -the FAA establishes a presumption that a valid 35 See Barajas v. PHP,No. 97-0954 (D. arbitration agreement exists is incorrect. The Ariz. Nov. 13, 1997) (arbitration clause in FAA only favors arbitration after it has been home financing pyramid scheme adhesion established, or it is undisputed, that the contract declared invalid). parties intended to enter into a valid arbitration agreement. See First Options, 514 36 See Tonkovic v. StateFarm Mutual U.S. at 943-44. Auto Ins. Co., 521 A.2d 920, 926 (Pa. 1987) (the burden is on the drafeter to point out C3 See Fuentes v. Shevin, 407 U.S. 67, 94- unusual or changed provisions in contracts 95 (1972); Erie Telecom. v. Erie, 853 F.2d 1084, of adhesion); A&M Produce Co. v. FMC 1094-1096 (3d Cir. 1988). Corp., 135 Cal. App. 3d 473,490 (Cal. App. 1982). Erie Telecom., 853 F.2d at 1095 (3d Cir. 1988) (quoting Johnson v. Zerbst, 304 U.S. 37 See Moscatiello 595 A.2d at 1193-95 458,468-69 (1938)). "[Tlhe Supreme Court (Pa. Super. 1991) (an inconspicuous risk- has stated that whether a constitutional right shifting provision is unconscionable); has been waived 'depends in each case upon Graham v. Scissor-Tail, Inc., 28 Cal. 3d 807, the particular facts and circumstances 820 (Cal. 1981) (provisions contrary to the surrounding that case, including the reasonable expectations of the adhering background, experience and conduct' of the party will be denied enforcement in the waiving party." Id. quoting Edwards v.

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Arizona, 451 U.S. 477,482 (1981). clauses in consumer credit contracts did not constitute a waiver of the right to notice and 45 See Botsko v. Donegal Mut. Ins. Co., a hearing). 620 A.2d 30, 33 (Pa. Super. 1993); Motorists 50 See Sternlight, supra n. 10 at 57; see Ins. Cos. v. Emig, 664 A.2d 559, 564 (Pa. Super. 1995). also Erie Telecom., 853 F.2d at 1095-96.

46 See Gibson v. Neighborhood Health 51 See id. at 57-58 (citations omitted). Clincis, 121 F.3d 1126 (71h Cir. 1997) (applying Indiana law); enforceability requires a clear 52 517 U.S. 681 (1996). recitation when the parties knowingly waive their right to a jury trial"); cf. Howard v. See Doctor'sAssociates, 517 U.S. at Bank, 433 S.E. 2d 625 (Ga. Ct. App. 1993), aff'd on other grounds, 444 S.E. 2d 799 (Ga. 1994); Broemmer v. Abortion Services of 54 See id. Phoenix, Ltd., 840 P.2d 1013 (Ariz. 1992) (noting that "the issues of knowing consent 55 RESTATEMENT (SEcoND), OF CoNTRcrs § and reasonable expectations are closely 208 1981), Comment a; See also Standard related and intertwined" and holding that a Venetian 469 A.2d at 566 (Pa. 1983) (when consumer of medical services did not there is "manifest inequality of bargaining reasonably expect to be subjected to an power," the court may refuse to enforce a arbitration clause); Titan Group, Inc. v. contract or a term as a matter of law if it Sonoma Valley County Sanitation Dist., 164 deems it to have been unconscionable when Cal. App. 3d 1122, 1129 (Cal. App. 1985) (an made). arbitration clause that waives fundamental rights must appear in "clear and unmistakable 56 See Stirlen v. Supercuts, Inc., 51 Cal. form"); Roberts v. McNamara, 360 N.W.2d App. 41h 1519, 1541, 60 Cal. Rptr.2d 138, (Cal. 279, 281 (Mich. App. 1984) (proponent of App. 1997). arbitration bears burden of proof). See also National Equipment Rental Ltd. v. Hendrix, 57 Williams v. Walker-Thomas 565 F.2d 255, 258 (2d Cir. 1977) (holding that Furniture Co., 350 F.2d 445,449 (D.C. Cir. clause waiving right to jury was invalid 1965). because it was "set deeply and inconspicuously" in a form contract). 5 See Ferguson v. Lakeland Mutual Ins. Co., 596 A.2d 883, 885 (Pa. Super. 1987); 47 Fuentes, 407 U. S. 67, 95 (1972) A&M Produce Co. v. FMC Corp., 135 Cal. (holding that consumers did not waive due App. 3d 473, 489 186 Cal. Rptr. 114, 121(Cal. process rights by signing a conditional sales App. 1982). contract). 9 See Moscatiello, 595 A.2d at 1195; 4 5 U.S. 174 (1972). Germantown Mfg., 491 A.2d at 144. 60 See Carnival Cruise Lines, Inc. v. 49 Fuentes, 407 U.S. at 95; see also Swarb v. Lennox, 405 U.S. 191 (1972) (companion Shute, 499 U.S. 585, 599 (1991). case to D.H. Overmyer in which the Court affirmed a three-judge district court decision 61 Id. which had held that confession of judgment

1998 Loyola Consumer Law Review 0 291 62 See Strange v. Nationwide Mutual 71 See e.g., Sosa v. Paulos, 924 P.2d 357, Ins. Co., 867 F. Supp. 1209, 1220 (E.D. Pa. 362 (Utah 1996). 1994). 72 See id. ' In Re Elkins-Dell Manufacturing Co., 253 F Supp. 864, 871 (E.D. Pa. 1966). 73 See id.

64 See Moscatiello 595 A.2d at 1194-96; 74 See Stirlen, 51 Cal. App. 4th at 1534. see also Stirlen, 51 Cal. App.4th at 1532 (procedural unconscionability focuses on See id. oppression, which arises from an inequality of bargaining power resulting in absence of 76 Saika v. Gold, 49 Cal. App. 4th 1074, meaningful choice, and surprise, which is 1080, 56 Cal. Rptr. 2d 922 (Cal. App. 1996); manifested when the "supposedly agreed See also, Beynon v. Garden Grove Medical upon terms of the bargain are hidden in the Group, 100 Cal. App. 3d 698, 704-6, 161 Cal. prolix printed form drafted by the party Rptr. 146, 149 (1980) (provision in arbitration seeking to enforce the disputed terms"); see clause allowing health care plan to also Sarchett v. Blue Shield of California, 729 unilaterally reject arbitration award weighed P.2d 267, 275, 277 (Cal. 1987) (failure to in favor of health care plan and against inform insured of an arbitration clause members, transforming arbitration into amounts to "implied misrepresentation" "heads I win, tails you lose" proposition). which is a breach of the duty of good faith th and of fair dealing). 77 Saika, 49 Cal. App. 4 1074, 56 Cal. Rptr. 2d 922 (1996). 65 Germantown Mfg., 491 A.2d at 145. 78 1990 Del. Ch. LEXIS 193 (Del. Ch. 66 636 F. Supp. 156, 1572-1573 (D. Kan. Nov. 26, 1990). 1986). 79 Id. at *12. 67 See id.; see also Keblish v. Thomas Equipment, Ltd., 628 A.2d 840,846 (Pa. 80 Germantown Mfg., 491 A.2d, at 145. Super. 1993) (disclaimer not conspicuous where language was embedded within body 81 571 A.2d 1055, 1059 (Pa. Super. 1990). of contract and was same size and color as remainder of contract, rev'd on other grounds, 82 Id. 660 A.2d 38 (Pa. 1995). 83 See id. 68 1998 U.S. Dist. LEXIS 3962 (D.S.C. 1998). 84 Cancanon v. Smith, Barney, Harris, 69 Carlson v. General Motors Corp., 883 Upham & Co., 805 F.2d 998, 999 (11th Cir. F.2d 287 (4t Cir. 1989). 1986). as See RFSATEMEN (SEcoND) OF 70 Hooters, 1998 U.S. Dist. LEXIS 3962 at *89-93. See also, U.C.C. § 2-302, Comment 1 CoNTRAcrs § 163, Comment a (1981). (1995). 86 RESrATEmNT (SECOND) OF CoN1Rcrs §

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162(2) (1981); see also, Germantown Mfg., Supp. 177, 181 (S.D.N.Y. 1994). 491 A.2d at 142; First Fed. Sav.& Loan Ass'n of Pittston v. Reggie, 546 A.2d 62, 66 (Pa. 95 1997 Ala. LEXIS 133 (Ala. May 9, Super. 1988) (material misrepresentation 1997). voids contract). 96 See id. at *13. Applying those 87 RESTATEMENT (SECOND) OF CONTRACS principles, the court declined to stay §160 (1981); see also, Wilson v. Donegal Mut. arbitration between two business interests Ins. Co., 598 A.2d 1310, 1315 (Pa. Super. because a contract of adhesion was not 1991) (the elements of misrepresentation are involved, and because both of the parties a fraudulent misrepresentation, an intention had been represented by counsel and had to induce action thereby, justifiable reliance, the opportunity to negotiate the terms of the and damages). contract.

8 Germantown Mfg., 491 A.2d at 141. 97 1996 U.S. Dist. LEXIS 5566 (N.D. Ill. 1996). 89 RESTATEMENT (SECOND) OF CONTRAS

§163 (1981) ("if a misrepresentation as to the 98 Id. at *11. character or essential terms of a proposed contracts induces conduct that appears to be 99 Id. at *14. a manifestation of assent by one who neither knows nor has reasonable opportunity to 100 Id., citing Hull v. Norcom, 750 F.2d at know of the character or essential terms of 1549. the proposed contact, his conduct is not effective as a manifestation of assent"). 101 750 F.2d 1547 (11t Cir. 1985).

90 See Langley v. Federal Deposit Ins. 102 Id. at 1549; The Eleventh Circuit in Corp., 484 U.S. 86, 108 S.Ct. 396, 402, (1987) Hull applied New York law. Thereafter, the (fraud in factum is "the sort of fraud that New York Court of Appeals held that procures a party's signature to an mutuality of remedy is not required in instrument without knowledge of its true arbitration contracts. See Sablosky v. Edward nature or contents"); Par-Knit Mills, Inc. v. S. Gordon Co., 73 N.Y. 2d 133,535 N.E. 2d Stockbridge, 636 F.2d at 54 (mere execution 643, 646 (1989). of a document does not negate factual assertion that such signature was not 103 1998 WL 131396, (S.C. App. March intended to be contractual undertaking). 16, 1998).

91 See Cancanon, 805 F.2d at 998. 104 Id., slip op. at 9.

92 Id at 1000. 105 Hooters, 1998 U.S. Dist. LEXIS at *106.

93 See Kyung in Lee v. Pacific Bullion 106 No. 3678 (Pa. Super. June 8, 1998). (New York), Inc., 788 F. Supp. 155 (E.D.N.Y 1992). 107 Id., slip. op. at 6.

94 Id. at 157, citing cases; see also PMC, 108 121 F.3d 1126 (7th Cir. 1997). Inc. v. Atomergic Chemetals Corp., 844 F.

1998 Loyola Consumer Law Review 0 293 109 42 U.S.C. § 2000(e) (1994), et. seq. law and voiding antenuptial agreement as fraudulently induced due to nondisclosure). 110 42 U.S.C. § 12130 (1994), et. seq. 123 912 F.2d 1563 (61 Cir. 1990). ill Gibson, 121 F.3d at 1133. 124 Prima Paint v. Flood & Conklin Mfg., 112 405 U.S. 174 (1972) Co., 388 U.S. 395, 403-04 (1967). See also, supra Section II, (for a discussion of the current 113 Id. at 188 (emphasis added). vitality of Prima Paint).

114 See Swarb v. Lennox, 405 U.S. 191 125 See CBS Employees, 912 F.2d at 1568. (1972). 126 See id. See also Hooters, 1998 U.S. Dist. 115 See id. at 201. LEXIS 3962 at *85 (claim of fraud in the inducement is a matter for federal court to 116 407 U.S. 67 (1972). decide, not the arbitrator, where the agreement to arbitrate constituted the entire 117 Id. at 95. agreement between the parties).

118 See Mitsubishi Motors, Inc. v. Soler 127 See Engalla v. Permanente Medical Chrysler Plymouth, 473 U.S. 614, 627 (1985) Group, Inc. 97 C.D.O.S. 5206 (Cal. July 1, ("courts should remain attuned to well- 1997). supported claims that the agreement to arbitrate resulted from the sort of fraud or 128 Id. at 5213. overwhelming economic power that would provide grounds for the revocation of any 129 Julius H. Cohen & Kenneth Dayton, contract,"' citing FAA); Southland Corp. v. The New FederalArbitration Law, 12 VA. L. REv. Keating, 465 U.S. 1, 16 n.11 (1984). 265, 281 (1926); Jean R. Sternlight, Panacea or Corporate Tool?: Debunking the Supreme Court's 119 See Moffatt Enterprises, Inc. v. Preferencefor Binding Arbitration, 74 WAsH. U. Borden, Inc., 807 F.2d 1169, 1174 (3d Cir. L. Q. 637, 645, n. 43 (1996) ("most 1990), citing Scaife v. Rockwell Standard commentators have concluded that the FAA Corp., 446 Pa. 280, 285 A.2d 451, 454 (Pa. was envisioned as applying to consensual 1971). transactions between two merchants of roughly equal bargaining power, and not n2o See In re Allegheny Int'l, Inc., 954 F.2d necessarily to transactions between a large 167, 178 (3d Cir. 1992). merchant and a much weaker and less knowledgeable consumer," citing Prima 121 See Section IV.A.1., supra. Paint,388 U.S. at 409 (Black, J., dissenting)).

M See Roadmaster Ind., Inc. v. 130 Jeffrey W. Stempel, A Better Approach Columbia Mfg. Co., 893 F Supp. 1162, 1172- to Arbitratability,65 TuL. L. REv. 1377, 1380 73 (D. Mass. 1995) (rescission of contract (1991). warranted due to material nondisclosure at time of formation of contract); In re Joseph 131 603 A.2d 788 (Del. 1992). M. Masselo, 1997 Del. Ch. LEXIS 23 (Del. Ch. Feb. 24, 1997) (applying Pennsylvania 132 See id. at 790.

294 e Loyola Consumer Law Review Volume 10, number 4 PreservingJudicial Recourse for Consumers

133 Id. at 791. See also Zak v. Prudential 141 15 U.S.C.A. § 2310(a)(1) (1994). Property & Casualty Insurance Company, No. 3678 (Pa. Super. June 8, 1998) (voiding 142 15 U.S.C.A. § 2310(a)(3) (1994). similar arbitration clause on grounds that it was unconscionable and violated public 143 See id. policy); O'Neill v. Berkshire Mutual Ins. Co., 786 F. Supp. 397, 398 (D. Vt. 1992) 1" Section 2310(a)(3)(A) provides that if (invalidating "escape hatch" arbitration a warrantor establishes such a procedure, clause in insurance policy, noting that courts and if the procedure meets the commission's in several other states have invalidated such rules under Section 2310(a)(3)(B), and if the clauses on public policy grounds). warrantor requires in the written warranty that the consumer resort to such procedure Hooters,1998 U.S. Dist. LEXIS at *93- before pursuing any legal remedy, under Section 2310(a)(3)(C), then a consumer is precluded from commencing a civil action 135 500 U.S. 20, 28 (1991). unless he first resorts to the informal procedures. 136 Hooters, 1998 U.S. Dist. LEXIS at *93- 98. See also Duffield v. Robertson, Stephens & 145 See Wilson v. Waverlee Homes, Inc., Co., 1998 U.S. App. LEXIS 9284 (9th Cir. May 954 F. Supp. at 1538. The Wilson court later 8, 1998) (employers may not require had occasion to consider the enforceability of employees to waive right to judicial forum arbitration clauses in the context of for Title VII claims); but see, Seus v. John consumer claims for breach of implied or Nuveen & Co., 1998 U.S. App. LEXIS 11907 statutory, that is non-written, warranties. See (3d. Cir. June 8, 1998). Boyd v. Homes of Legend, Inc., 981 F. Supp. 1423 (M.D. Ala. 1997). In Boyd, the court 137 15 U.S.C.A. § 2302(a) (1994). drew a distinction between written and non- written warranties, holding that, while 138 15 U.S.C.A. § 2301(1) (1994). Congress did intend to preclude binding arbitration in the context of written 139 See Wilson v. Waverlee Homes, Inc., warranties, it stopped short of doing so with 954 F. Supp. 1530, 1537 (N.D. Ala. 1997), aff'd. respect to implied, non-written warranties. 127 F.3d 40 (11thCir. 1997). See Boyd 981 F. Supp. at 1436-37.

140 15 U.S.C.A. § 2310(d) (1994).

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