Car title lender's arbitration agreement unenforceable as unconscionable

Brewer v. Missouri Title Loans, --- S.W.3d ----, 2012 WL 716878 (Mo.)

The state supreme court found that a class arbitration waiver in its contract was unconscionable and held that the remedy was to strike the entire arbitration agreement.  The Supreme Court vacated that opinion and remanded in light of Concepcion.  On remand, the court found that the presence and enforcement of the class arbitration waiver didn’t make the arbitration clause unconscionable, but, applying traditional Missouri contract law and looking at the agreement as a whole, the court found that Brewer demonstrated unconscionability in the formation of the agreement, appropriately remedied by revoking the arbitration clause.

Brewer borrowed $2215, secured by the title to her car, at an APR of 300%.  The contract, whose terms no consumer had ever successfully renegotiated, provided for resolution of any claim against the title company through binding individual arbitration.  The title company, however, reserved the right to go to court to repossess the car, or to use self-help.  Unlike the agreement in Concepcion, the agreement barred fee-shifting and didn’t provide a fee multiplier or guaranteed minimum recovery if the consumer were awarded more than the title company’s last offer.  “The cumulative real-world effect of the arbitration provisions in this case is that a consumer's minimum and maximum recovery from the title company are identical—$0.00—for no consumer ever has filed an individual claim for arbitration against the title company.”

Brewer made two payments of more than $1000, which reduced her loan principal by 6 cents.  She filed suit alleging violations of numerous statutes, including the state merchandising practices act.  The case then made its way through the courts solely on the class arbitration issue. 

On remand, the title company argued that the FAA wholly preempted Missouri’s common law of unconscionability, and that the availability of statutory attorney’s fees prevented a finding of unconscionability. The state supreme court summarized Concepcion as standing for the proposition that the FAA “generally does not permit a state to bar class action waivers by finding an arbitration agreement unconscionable on the basis of a class action waiver alone.”  Justice Scalia’s opinion for four Justices doesn’t say that the FAA preempts traditional state law defenses to contract formation, and Justice Thomas said that those defenses would still apply.  However, the rule of Concepcion is that they can’t be used in a way that would “hold otherwise valid arbitration agreements unenforceable for the sole reason that they bar class relief.”

Concepcion did not hold that all state law unconscionability defenses were preempted, only California’s essentially automatic Discover Bank rule, which conditioned the enforceability of consumer arbitration agreements on the availability of classwide arbitration, no matter how favorable the terms of the individual arbitration provisions were for consumers.  The majority specifically acknowledged that agreements to arbitrate could be invalidated by the saving clause for generally applicable contract defenses such as unconscionability, though not by defenses that apply only to arbitration.  Concepcion’s discussion of the fairness of AT&T’s arbitration provisions would have been superfluous if all state law unconscionability defenses had been preempted; its result is instead a case-by-case approach.  Justice Thomas’s concurrence said that the saving clause only saved defenses that result in “revocation” of a contract, instead of “invalidation” or “nonenforcement.”  Defenses that go to contract formation are fine, but public policy against arbitration isn’t a valid ground for declining to enforce an arbitration agreement.  But both the majority and the concurrence endorse a case by case analysis, asking whether state law defenses apply to the formation of the particular contract at issue.  After Concepcion, analysis no longer focuses on procedural and substantive unconscionability, but only goes to facts relating to unconscionability affecting the formation of a contract.

Here, the evidence supported the determination that the arbitration clause was unconscionable.  The entire agreement was non-negotiable and difficult for the average consumer to understand, and the title company was in a superior bargaining position.  The terms were extremely one-sided.  While AT&T shouldered the costs of arbitration and would double the attorneys’ fees if the customer recovered more than AT&T offered before arbitration, here the parties were to bear their own costs.  AT&T waived its right to seek reimbursement for attorneys’ fees accrued in defending a claim, but the title company here didn’t.  “The fact that no consumer ever has arbitrated a claim against the title company under these terms makes it clear that the agreement stands as a substantial obstacle not just to arbitration but also to the resolution of any consumer disputes against the title company.”

In addition, unlike the Concepcion plaintiffs, “Brewer presented expert testimony from three consumer lawyers who testified it was unlikely that a consumer could retain counsel to pursue individual claims.”  A claim like hers “would require significant expertise and discovery, and it would not be financially viable for an attorney because of the complicated nature of the case and the small damages at issue.”  The title company presented no contrary evidence from attorneys willing to take such cases other than on a rare pro bono/voluntary basis.  Concepcion makes clear that the unavailability of counsel isn’t alone sufficient to invalidate an individual arbitration requirement, but it’s still relevant.  California’s Discover Bank rule was flawed because it required class arbitration even if that disadvantaged consumers or was unnecessary to a consumer remedy, contrary to the purpose of the FAA.  “Because the purpose of the act is to ensure efficient dispute resolution, the analysis in Concepcion assumes the availability of a practical, viable means of individualized dispute resolution through arbitration.”  Here, the totality of the evidence demonstrated that no such means was available.

The title company argued that the availability of attorneys’ fees and punitive damages under the state merchandising act would make lawyers willing to handle claims like Brewer’s.  There are reported cases indicating that some lawyers are willing to handle cases brought under the federal truth in lending and fair debt collection practices acts.  But this was a totally theoretical position, and the specific and uncontradicted evidence was that lawyers were unlikely to take claims like Brewer’s on an individual basis.

Finally, the agreement didn’t provide for bilateral arbitration: the title company preserved its own right to go to court or use self-help.  “In the context of a title loan transaction, this is a particularly onerous provision because among the lender's chief remedies in the event of default is either judicial or self-help repossession.   The title company reserves its right to obtain its primary remedies through the court system while requiring Brewer to obtain her only meaningful remedy—monetary compensation for the alleged violation of consumer protection laws—through individual arbitration.”  This was in the context of an extremely high interest rate that also protected the company’s interests.  Though Brewer didn’t allege that the interest rate was itself illegal, it plainly showed that the agreement was “drafted to limit substantially the remedial options of often financially distressed consumers while allowing the title company substantial latitude in protecting its financial interests.”  Disparity in bargaining power plus disparity in remedial options constituted strong evidence of unconscionability.  “The title company requires Brewer to arbitrate all of her claims in the interests of efficient, streamlined dispute resolution.   However, when the title company's interests are at stake, the title company is free to discard the efficiencies of arbitration in favor of litigating a claim against Brewer.”

The court observed that average consumers are unlikely to understand the implications of such provisions, or reasonably expect the results.  The process here was very different from that in Concepcion, which provided an informal dispute resolution procedure and then easily obtainable arbitration, for which AT&T would pay all costs for any nonfrivolous claim.  There were relatively consumer-friendly procedures, allowing consumers almost a guarantee that they’d be made whole.  Nothing like that was offered here.  In terms of the purpose of the FAA of providing a prompt and informal dispute resolution method, the arbitration clause here itself was an obstacle to accomplishing that objective.  This is a contract no sensible person would make. 

Thus, the judgment finding the class arbitration waiver unconscionable was affirmed because the entire arbitration agreement is unconscionable and unenforceable.   It was reversed to the extent that it severed the class arbitration waiver and required an arbitrator to determine the propriety of class arbitration.

There were two dissents (one of which attracted the vote of a third justice).  The first dissent argued that, after Concepcion, only a contract that was as a whole unconscionable could be invalidated, not an unconscionable arbitration provision, and that a remand for further findings on this point was required.  The second dissent argued that Concepcion prohibited states from using contract defenses to inhibit the enforcement of agreements to arbitrate.  The majority wrongly struck down an arbitration clause “in an attempt to balance the scales between poor consumers and businesses,” a goal forbidden by the FAA.  The dissent argued that the majority used Justice Thomas’s concurrence “to combine the issues of substantive and procedural unconscionability and do away with the requirement that the contract be procedurally unconscionable.”  But, the dissent continued, the majority failed to show that Brewer’s defense went to the formation of the agreement; Missouri requires both procedural and substantive unconscionability.  There was no procedural unconscionability because Brewer didn’t prove the contract was non-negotiable: she didn’t testify that she personally tried to negotiate and failed, and she didn’t prove that she couldn’t go to some other lender and get a different contract.  Just because no consumer had ever negotiated a different contract didn’t prove it couldn’t be done.  And there was no evidence of coercive tactics.  Nor did Brewer prove she didn’t understand the contract.  Failure to read the whole thing is no defense; a reasonable consumer may expect an arbitration agreement. If she’d read it, she would have seen the class arbitration waiver in bold, capital letters, and notice of the arbitration provision in bold, capital letters immediately above the signature line.  (That consumers just don’t read contracts, especially not when there are explicit claims made by other material/salespeople, is one reason consumer protection laws generally don’t allow disclaimers/waivers in contracts to override false advertising claims; even given the FAA, I find it hard to justify ignoring this truism in assessing what was really happening between the parties.)

The dissent also argued that Brewer didn’t prove that the contract resulted from disparity in bargaining power.  She could have gone to competing companies offering the same service, and anyway an imbalance of power alone doesn’t support an unconscionability finding after Concepcion.  (When you say that A alone doesn’t support a finding of X, and B alone doesn’t support a finding of X, and C alone doesn’t, is that really an answer to the claim that A, B, and C together do support a finding of X?  Still, I understand why the dissent is saying this—“even if I’m wrong and A is present, if I’m right that B and C aren’t present then the title company still wins.”)

In addition, finding substantive unconscionability interferes with the parties’ right to contract for those terms.  It wasn’t fair to fault the title company for the need to use judicial process for repossessing cars, since arbitration can’t provide for a replevin right.  (It can’t?  Why not, in the same way that any arbitration must ultimately be backed by the possibility of judicial enforcement in case of defiance?)  “Allowing creditors to utilize the court process for repossession is intended to protect the consumer,” and consumer protection advocates criticize nonjudicial process.

The title company’s right to seek attorneys’ fees and high interest rate weren’t unconscionable; Brewer could have gone to at least 20 other companies to find better terms, and she did know she had alternatives.  Concepcion didn’t require consumer-favorable provisions or even equality of terms to avoid unconscionability. 

Courts can’t invalidate arbitration agreements even if, as a practical matter, that suppresses claims.  By resting its finding on the idea that consumers won’t pursue claims under the agreement as written, the majority created a contract defense that attacked only arbitration clauses and created a new “common law right” to an attorney.  This was inconsistent with the FAA, even if that result was bad for consumers.

Anyway, Missouri already had effective alternative remedies: the Missouri merchandising practices act allows a court to award a consumer attorneys' fees and punitive damages if appropriate.  (For this argument to work at all, the arbitration agreement has to allow the arbitrator to do the same things.  But the dissent doesn’t indicate that the agreement did so, though perhaps it did.)  Also, the fact that Brewer got counsel proved that she could get an attorney to handle her case.  (I believe this counts as equivocation about the meaning of “her case.”)

In the end, the dissent condemned the “newly created right to an attorney for consumer claims” and its additional “right to class arbitration proceedings,” resulting in a “right to void individual arbitration agreements altogether” as an open defiance of the FAA and Concepcion.  Brewer chose the title company from many other companies she could have approached, didn’t read the contract, and should be stuck with the terms.