Tuesday, July 15, 2008

consumer - arbitration clause - duress, unconscionability - discovery

Hopkins v. Newday Financial, LLC - ED Pa. - June 30, 2008


This memorandum order is meant to clarify a previous "limited discovery" order concerning "whether the arbitration agreements at issue are valid."

stay of legal actions if arbitration agreement is valid and binding
Under the Federal Arbitration Act, 9 U.S.C. § 3, federal courts are instructed to stay any suit in which an issue in dispute is properly referable to an arbitrator under a valid written arbitration agreement.

Before doing so, however, the court is obliged to satisfy itself that the arbitration agreement is valid and binding. Great W. Mortgage Corp. v. Peacock, 110 F.3d 222, 228 (3d Cir. 1997) (“Under the FAA the district court must be satisfied that the parties entered into a valid arbitration agreement.”). In making that determination, “generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements.” Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).

challenge to validity based on allegations of duress and unconscionability
In this case, plaintiffs seek to invalidate the arbitrations agreements on the grounds of duress and unconscionability. To consider these defenses, the court looks primarily to the law of Pennsylvania, because it is the forum state and appears to have a strong relationship with the agreements at issue. Gay v. CreditInform, 511 F.3d 369, 388 n.13 (3d Cir. 2007)

a) duress - Under Pennsylvania law, “[d]uress is defined as ‘that degree of restraint or danger, either actually inflicted or threatened and impending, which is sufficient in severity or apprehension to overcome the mind of a person of ordinary firmness’”....

When the nature of the threat is economic, rather than physical, the doctrine of economic duress applies. “The important elements in the applicability of the doctrine of economic duress or business compulsion are that (1) there exists such pressure of circumstances which compels the injured party to involuntarily or against his will execute an agreement which results in economic loss, and (2) the injured party does not have an immediate legal remedy”....Duress will not lie where the aggrieved party had the opportunity to consult with counsel before entering into the allegedly coercive contract.

According to the named plaintiffs, they were forced to sign arbitration agreements in a compressed span of time under threat that their employment would terminate if they did not agree....[T]hey attest that, because the time for signing was so short, they were accorded no opportunity to seek the review of counsel. Id. Plaintiffs’ affidavits appear to present a set of circumstances that are at least arguably coercive enough to constitute duress under Pennsylvania law.

b) unconscionability - In Pennsylvania, “a contract or term is unconscionable, and therefore avoidable, where there was a lack of meaningful choice in the acceptance of the challenged provision and the provision unreasonably favors the party asserting it.” Salley v. Option One Mortgage Corp., 925 A.2d 115, 119 (Pa. 2007). Unconscion- ability, then, has procedural and substantive aspects.

As to procedural unconscionability, the touchstone is whether the party challenging the agreement had any meaningful choice regarding acceptance of its provisions. Thibodeau v. Comcast Corp., 912 A.2d 874, 886 (Pa. Super. Ct. 2006). Here, the plaintiffs have averred that they were presented with a contract of adhesion, and were given no opportunity to negotiate. An agreement is substantively unconscionable if it is “unreasonably favorable to the drafter”....

Plaintiffs argue that the arbitration agreement is unreasonably favorable to [defendant] NewDay, inter alia, because the arbitral forum’s rule prohibiting plaintiffs from proceeding as a class action, and forcing them instead to proceed individually. A series of Pennsylvania cases have held that limiting the use of the class-action vehicle, if it raises costs to the point of effectively preventing individual redress, is substantively unconscionable. See, e.g., Thibodeau, 912 A.2d at 883-84. The open question here is whether the forum’s rules raise costs to that level.

In addition, plaintiffs allege systemic bias on the part of the arbitral forum. If proved, such bias could potentially render the arbitration agreement fundamentally unfair to plaintiffs. But, as plaintiffs admit, they cannot prove that claim without discovery.

c) discovery - It is the court’s view that plaintiffs’ submissions, at the very least, highlight several questions of fact relevant to the validity of the arbitration agreements. When faced with a fact-intensive question regarding the arbitrability of a dispute, it is within the court’s discretion to allow for limited discovery into whether the arbitration agreements at issue are valid....That was the intent of this court’s order....It was not the court’s intent to limit discovery only to the question of the arbitral forum’s alleged bias, but to allow discovery more broadly into all of the defenses to arbitration raised by plaintiffs, as all appear to call for the resolution of factual questions.