July 10, 2006
Another good decision on arbitration comes out of our Court in Schwartz v. Alltel Corp., following up on one I'd mentioned a couple months ago. In this one, the plaintiff had responded to a cell phone service ad by Alltel promising "Unlimited Anytime Minutes only $49.99 for life." He went to one of the little kiosks that clutter our malls and signed a contract which indeed provided for "$49.95 unlimited local air time for life as long as customer remains on rate plan with Alltel."
Apparently, Alltel was working from a dictionary which defined "for life" as meaning "four months," because that's the point at which the plaintiff received a letter from them, announcing that his rate would be going up ten bucks a month because of the "increased cost of doing business." The plaintiff decided to increase their costs of doing business even more by suing them, at which point Alltel pointed to the language in 3 1/2 point type on the back of the contract stating that all disputes had to be submitted to arbitration.
The trial court didn't buy it, and neither did the court of appeals. Writing for a unanimous court, Judge Kilbane (with Judges Sweeney and Karpinski concurring) found the agreement both substantively and procedurally unconscionable. The court found substantive unconscionability because the arbitration provision prohibited class actions and and awards of attorney fees, both of which are allowed under Ohio's Consumer Sales Practices Act.
The disposition of the procedural unconscionability factor was even more surprising. In Olah, decided less than five months ago, the plaintiffs had argued that they were rushed into signing the agreement, and that it was never explained to them. The court held that because "we do not know plaintiffs' age, education, intelligence, business acumen, etc.," a remand to the trial court for determination of procedural unconscionability was in order.
Here, though, the plaintiff had presented no evidence of procedural unconscionability -- nothing about his "education" or "business acumen." The court nonetheless found the provision procedurally unconscionable, because it was adhesionary in nature, the arbitration provision was in small print at the back of the document, there was a gross disparity in bargaining power and familiarity with such provisions between the consumer and a "multi-billion dollar corporation," and "Schwartz was not represented by counsel when he signed the agreement."
I have a real hard time reading Schwartz and trying to imagine a scenario in which an arbitration provision will be upheld in an ordinary consumer transaction. Keep in mind that while you don't have to prove both substantive and procedural unconscionability, you have to provide some quantum of evidence on both points. That quantum isn't specified in any of the case law -- in fact, it comes from a treatise on consumer law -- but it seems safe to say that as long as you satisfy the court on one and produce some evidence on the other, you'll satisfy that burden.
And Schwartz's holding makes it almost impossible not to do that. An arbitration provision rarely provides for attorney fee awards, and the very nature of arbitration makes them incapable of handling class actions, yet the failure to provide those two automatically makes such a provision substantively unconscionable. Unless you're Warren Buffett or take a lawyer along with you to sign the contract, procedural unconscionability is going to be more or less inferred from the disparity in bargaining power between corporation and consumer, and the adhesionary nature of the contract.
That's about as pro-consumer as it gets.
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