Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—WashSupCt: Arbitration Clause Held Unconscionable, Unenforceable Under Washington Law, (Feb 14, 2013)

By Jody Coultas, J.D.

A trial court did not err in denying a debt collection company’s motion to compel arbitration of a debtor’s Washington Consumer Protection Act (CPA) claim, the Washington Supreme Court has held (Gandee v. LDL Freedom Enterprises, Inc., February 7, 2013, Johnson, C.).

After the debtor entered into a debt adjustment contract with the company, the debtor filed a CPA claim for charging excessive fees for debt adjusting. The company moved for arbitration based on the arbitration clause contained in the contract. A trial court found the arbitration clause to be unconscionable and unenforceable.

A venue provision included in the arbitration clause was substantively unconscionable, according to the court. An arbitration clause is substantively unconscionable where it is one-sided or overly harsh, shocking to the conscience, or exceedingly calloused. The debtor argued that the venue provision, which required arbitration in California, effectively denied her the ability to vindicate her rights because the cost would be prohibitive. A party seeking to avoid arbitration must present evidence showing that arbitration would impose prohibitive costs while the party seeking arbitration can then present offsetting evidence as to the likelihood of bearing those costs. Because the costs of arbitrating in California would exceed her claim, sufficient evidence was presented to make a prima facie case for a prohibitive-cost defense. The company failed to present offsetting evidence.

The arbitration clause term entitling the prevailing party to recover reasonable legal fees and costs was substantively unconscionable, according to the court. The debtor argued that the provision was one-sided and harsh because if she prevails she was already entitled to costs and fees under the CPA but was forced to bear the risk of a negative outcome, despite the legislature’s intent to encourage consumers to vindicate their rights. This provision only benefitted the company and was contrary to the legislature’s intent.

The statute of limitations provision in the arbitration clause was substantively unconscionable, according to the court. The provision shortened the statute of limitations from the four years provided by the CPA to 30 days.

The court held that the arbitration clause could not be severed. The clause was four-sentences containing three unconscionable provisions. Severing all three provisions would significantly change the tone and the nature of the arbitration agreed to by the parties. Although the company offered to waive the unconscionable provisions, the court was not required to accept the offer. Accepting the waiver would not benefit the debtor.

Federal law, specifically the Federal Arbitration Act, did not preempt the court’s holding. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court overruled a decisional rule that invalidated most class action waivers in arbitration clauses. However, in this case, the arbitration clause contained numerous unconscionable provisions and Concepcion did not require the court to find that the FAA preempted the relevant case law or the enforcement of the arbitration clause.

The case is No. 87674-6.

Attorneys: Darrell W. Scott (The Scott Law Group PS) for Patty Gandee. Milton G. Rowland (Foster Pepper PLLC) for LDL Freedom Enterprises, Inc.

Cases: StateUnfairTradePractices WashingtonNews