consumer - arbitration clause - unconscionability - waiver
Zimmer v. CooperNeff Advisors, Inc. - 3d Circuit - April 14, 2008
The employer/federal defendant sued plaintiff in state court seeking injunctive relief under 6 different legal theories, asking the court to enjoin Zimmer from disclosing or using a stock trading model he had developed.
Six months later, plaintiff/employee, a Harvard Ph.D. in economics, sued the former employer for copyright infringement and other matters concerning the model. Defendant answered the complaint on September 7 and asserted two counterclaims seeking declaratory judgments. In an amended answer, filed two weeks later, defendant asserted a right to arbitration and then filed a motion to compel.
There had been extensive job negotiations before Plaintiff Zimmer became employed at CooperNeff. The contract included a clause requiring plaintiff to submit any disputes about intellectual property to arbitration but allowed the employer to retain the right to bring any action "directly in a court of competent jurisdiction and [without the need] to arbitrate any such claims."
The district court found the arbitration clause unconscionable and that the defendant had waived its enforcement. The appellate court reversed on the unconscionability issue and remanded for further fact-finding about waiver.
Under Pennsylvania law, a party challenging an arbitration agreement has the burden to demonstrate that the agreement is both procedurally and substantively unconscionable. Salley v. Option One Mortgage Corp., 925 A.2d 115, 119-120 (Pa. 2007).
Procedural unconscionability refers specifically to “the process by which an agreement is reached and the form of an agreement, including the use therein of fine print and convoluted or unclear language.” Harris v. Green Tree Fin. Corp., 183 F.3d 173, 181 (3d Cir. 1999). The trial court had found the agreement was procedurally unconscionable. The appellate court overruled, contrasting the case of Alexander v. Anthony International, 341 F.3d 256 (3d Cir. 2003), in which the workers were uneducated crane operators to whom the contract was offered on a take-it-or-leave-it basis. Here, plaintiff was very educated and bargained about the contract terms. Plaintiff "did not lack a meaningful choice in accepting the challenged arbitration provision."
Even though the lack of procedural unconscionability decided the case, the court said that it was going to "take the occasion" to register its "concern about the District Court's holding on substantive unconscionability," which looks to whether the arbitration provision “unreasonably favors the party asserting it.” Salley, 925 A.2d 115 at 119.
The court noted that the Salley court had expressly abrogated the holding in Lytle v. Citifinancial Servs., Inc., 810 A.2d 643, 665 (Pa. Super. Ct. 2002), that “under Pennsylvania law, the reservation by [one party] of access to the courts for itself to the exclusion of [another] creates a presumption of unconscionability, which in the absence of ‘business realities’ that compel inclusion of such a provision in an arbitration provision, renders the arbitration provision unconscionable and unenforceable under Pennsylvania law." Rather, it held that "there is no presumption of unconscionability associated with an arbitration agreement merely on the basis that the agreement reserves judicial remedies associated with foreclosure” for lenders, to the exclusion of borrowers." Salley at 129.
Salley did not hold that an arbitration clause reserving remedies could never be unconscionable; rather, it held that there “is a facially apparent business justification for such an exception [in the context of mortgage lending], as the safeguards thereby preserved assure regularity and consistency for the benefit of both lender and borrower, and accordingly, there are sound pragmatic and policy reasons why foreclosure proceedings should be pursued in a court of law.” Salley at 128.
The instant court went on to say, however, that it did "not hold, and we believe the Pennsylvania Supreme Court did not hold, that unequal access to the courts can never be the basis for finding an arbitration agreement unconscionable. The conclusion in each case will depend on the circumstances."
The district court held that the company had waived its right to compel arbitration solely on the basis of its initiation and pursuit of judicial enforcement of its rights in state court. On appeal the court held, initially, that the waiver issue was a judicial question, not one for an arbitrator. Ehleiter v. Grapetree Stores, 482 F.3d 207, 221 (3d Cir. 2007).
It went on, however, to reject the notion that litigation by itself constitute a waiver. It said that "prejudice [to the opposing party] is the touchstone for determining whether the right to arbitrate has been waived by litigation conduct" and cited a "nonexclusive list of factors" including the length and the breadth of the judicial action, and the assert of the arbitration right, and other factors tending to show that the party "too unfair advantage of the litigation process to the detriment of the other party" and availed itself of litigation procedures (discovery, etc.) not available in arbitration. It remanded on this issue for relevant fact-finding.