Arbitration clauses: sorting through the clutter
What a difference a quarter-century makes. A few months back, I wrote about Fortune v. Castle Nursing, the 9th District decision upholding an arbitration provision in a nursing home contract. The 70-year-old resident in that case had filed an action against the nursing home for negligence in allowing her to fall, but the court decided she hadn't submitted sufficient evidence to show that the arbitration provision was procedurally unconscionable. After all, the court noted, she was 70 years old, had a high school education, and had purchased two cars and a home during the three-score and ten years she spent shuffling along this mortal coil , thereby demonstrating her business acumen. Plus, she'd had the agreement for two whole days before signing it.
A couple weeks back the 8th District evened things out in Hayes v. Oakridge Home, holding that the arbitration provision there was both substantively and procedurally unconscionable, and reversing the lower court's decision to enforce it. Hayes presented the exact same type of situation -- nursing home resident sues home for negligence in allowing her to fall -- except for one thing: Hayes was 94.
Actually, there were more differences than that; indeed, the facts in Hayes were substantially more favorable to the nursing home than the facts in Fortune. As the dissent in Hayes points out, the arbitration terms were a good bit fairer than is usually the case: the plaintiff could have modified any of the terms, and even could have refused to agree to the provision altogether -- her admission to the home wasn't conditioned on consenting to arbitrate disputes. She even had a full sixty days after leaving the home to rescind the arbitration agreement. What's more, the arbitration clause was clearly and separately set forth, rather than being buried in the small print.
As for substantive unconscionability -- in other words, the fairness of the terms of the agreement, as opposed to the respective bargaining powers of the parties -- in Fortune the court had found the arbitration provision unconscionable because it required the loser to pay the winners' attorney fees. The court noted, correctly, that this would have a chilling effect on a resident's willingness to make a claim. In Hayes, the arbitration clause had no such provision. The court nonetheless found the clause unfair because it contained no provision for punitive damages, attorney fees, and jury trial, as a civil action would.
That's setting the bar pretty high, don't you think? This was an ordinary negligence case, which made punitive damages and attorney fees unlikely, and there was nothing in the opinion to indicate that Hayes was seeking them. And if the failure to provide for a jury trial renders an arbitration provision unfair, well, that's pretty much the end of that, because the very purpose of arbitration is to provide an alternative to jury trials.
The Ohio Supreme Court has reiterated on numerous occasions the "strong public policy in favor of arbitration." That's well and good when we're talking about commercial leases or franchise agreements that involve parties of relatively equal power and skill. When those provisions find their way into ordinary consumer contracts, though, the courts have been increasingly reluctant to uphold them. As might be expected from a test which focuses on unconscionability, a sense of what's fair is the driving factor.
Unfortunately, as appears to be the case in Hayes, courts often come to a gut conclusion about what's fair, and then try to construct a rationale around it. The result is that the law in this area is a mess. As I pointed out in my earlier post about the Fortune case, there's no explanation as to why an agreement must be determined to be both substantively and procedurally unconscionable; the net result in the Fortune case was that the court in the first appeal found the agreement so unfair that it was substantively unconscionable, but in the second appeal held that it should be enforced anyway because the plaintiff hadn't proved that it was procedurally unconscionable.
What's worse, the decisions on what constitutes substantive or procedural unconscionability are all over the map. You can find decisions saying that if the arbitration doesn't provide for class actions or remedies like those provided under the Consumer Sales Practices Act -- attorney fees and treble damages -- it can't be enforced; you can find decisions that say that's irrelevant. Cases have been reversed because the trial judge didn't take evidence on the plaintiff's age, education, business experience, and other factors which go to the issue of procedural unconscionability; you can find cases where the courts have found procedural unconscionability without any evidence on those factors whatsoever, just on the basis of the inherent disparate bargaining power between a consumer and a corporation.
I think the courts' heart is in the right place: there is an inherent disparity in bargaining power between a consumer and a corporation, and that needs to be recognized. The problem I have with the slapdash approach of coming to a conclusion and then developing the rationale to support it is that eventually this is all going to wind up in the Ohio Supreme Court's lap, and if that court has to go looking for a rationale, it's likely to look no farther than a pro-business reiteration of the "strong presumption in favor of arbitration."
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