RECENT ARBITRATION DECISIONS
Three recent decisions in which state supreme courts have refused to enforce mandatory arbitration clauses in consumer contracts indicate an increasing judicial hostility such provisions and may foreshadow heightened scrutiny of all arbitration clauses in consumer contracts.
The West Virginia Supreme Court of Appeals has issued two decisions regarding mandatory arbitration clauses. In State ex rel Dunlap v. Berger, No. 30035 (W. Va. June 13, 2002), the court held that (i) arbitration clauses that exclude class actions or punitive damages are void as unconscionable and (ii) the Federal Arbitration Act does not prohibit state courts from invalidating exculpatory provisions in contracts of adhesion. The Dunlap court invalidated the arbitration clause in question in its entirety, rejecting the creditor’s argument that the court should compel arbitration under “conscionable” standards. The Dunlap court left open the questions of whether (i) waiver of jury trial rights or (ii) allocation of costs of arbitration to the customer could invalidate an arbitration clause. In the second case, Toppings v. Meritech Mortgage Services, Inc., No. 30108 (W. Va. June 19, 2002) (per curiam), the court confirmed that a compulsory arbitration clause mandating that all disputes arising out of consumer transactions be submitted to a lender-designated decision-maker compensated through a case-volume fee system whereby the decision-maker’s income as an arbitrator is dependent on continued referrals from the creditor is unconscionable and unenforceable under West Virginia law. The Toppings court supported its ruling by reference to footnote 12 of Dunlap, which approvingly quoted from an earlier case to the effect that the court would not countenance an arbitration provision by which the parties agree that all disputes will be arbitrated by a panel chosen exclusively by one of the parties.
Also, the Supreme Court of Montana in Kloss v. Edward D. Jones & Co., No. 00-507 (Mont. June 13, 2002) struck down an arbitration clause on grounds of contract law ( i.e., that the arbitration clause (which included a waiver of the right to a jury trial) was not within the reasonable expectation of the plaintiff and the defendant was under a fiduciary duty to explain the consequences of the arbitration provision to that plaintiff). In a concurring opinion signed by three other justices, one justice advanced an additional rationale for invalidating the arbitration clause: that an arbitration clause in an adhesive contract containing a jury trial waiver may violate the state constitutional right to a jury trial if the parties are not of equivalent sophistication and bargaining power.
If we can be of any assistance in reviewing or drafting arbitration provisions or if you would like more information or copies of decisions, please contact Jeff Langer at (614) 628-1602 or [email protected] .