In its important 2011 decision AT&T Mobility v. Concepcion,
the United States Supreme Court sharply limited the grounds on which a
court may invalidate an arbitration agreement. A recent ruling by the
United States Court of Appeals for the Eleventh Circuit, In re Checking Account Overdraft Litigation MDL No. 2036,
illustrates how lower courts are starting to find ways around the
Supreme Court’s strict enforcement of arbitration agreements. This is
the first published, post-Concepcion case where a federal court
of appeals has rejected an element of an arbitration agreement as
unconscionable under state law. The decision also suggests how the
drafters of arbitration agreements might avoid such judicial rejection.
Lacy Barras, a customer of BB&T, a commercial bank, sued the bank
as part of a putative class of plaintiffs alleging the improper
charging of overdraft fees. Page one of the customer agreement between
Ms. Barras and the bank contained an arbitration clause providing for
arbitration of any disputes under the AAA rules. Page fourteen of the
agreement also had a separate provision stating the following:
COSTS, DAMAGES, AND ATTORNEYS’ FEES. You agree to be liable to the Bank for any loss, costs, or expenses, including, without limitation, reasonable attorneys’ fees, the costs of litigation, and the costs to prepare or respond to subpoenas, depositions, child support enforcement matters, or other discovery that the Bank incurs as a result of any dispute involving your account.
Thus, strictly read, the customer was responsible for all of
BB&T’s costs and fees in any litigation or arbitration against the
bank, regardless of the outcome of the dispute. Even if Ms. Barras sued BB&T and won, she still would have to reimburse the bank for its costs of defending the suit.
The case was consolidated into a larger multidistrict litigation
based in the United States District Court for the Southern District of
Florida. BB&T moved to compel arbitration of Ms. Barras’s claims.
Perhaps realizing that the cost-shifting provision was difficult to
defend on the merits, the bank argued that the provision did not apply
to proceedings brought under the arbitration clause and effectively
promised not to try to enforce it. The bank also argued that the case
should be submitted to arbitration even if the cost-shifting provision
was invalidated.
The district court twice denied BB&T’s motion to compel
arbitration, holding the arbitration agreement was unconscionable under
South Carolina state law, which governed the dispute. BB&T appealed
to the United States Court of Appeals for the Eleventh Circuit, which
considered the district court’s ruling in light of the Supreme Court’s Concepcion decision.
In Concepcion, the Supreme Court considered the “saving
clause” in section 2 of the Federal Arbitration Act, which permits a
court to refuse to enforce an arbitration agreement “upon such grounds
as exist at law or in equity for the revocation of any contract.” The
Supreme Court explained that this clause leaves the door open to
allowing arbitration agreements to be “invalidated by generally
applicable contract defenses, such as fraud, duress, or
unconscionability.” But the Court effectively narrowed the potential
grounds for invalidation, holding that a state rule against class action
waivers in customer agreements was preempted by the FAA, because the
rule “interferes with fundamental attributes of arbitration” – even
though, on its face, the rule was generally applicable to both
arbitration and litigation.
Reviewing Ms. Barras’s case, the Eleventh Circuit reversed the lower
court’s ruling, but only insofar as it had denied effect to the
arbitration clause in the customer contract. The Eleventh Circuit
agreed with the district court that the cost-shifting provision in
particular was unconscionable under state law, and held that Concepcion
did not change this result. At the same time, the court of appeals
ruled that the invalid provision could be severed from the arbitration
clause, and therefore ordered arbitration of the claims.
The fact that BB&T’s cost-shifting provision was buried in the
middle of a long agreement of adhesion, coupled with its egregiously
one-sided content, made this case a relatively straightforward
application of state common law unconscionability. Left unanswered was
what would have happened had BB&T’s customer agreement been slightly
different.
In particular, if BB&T had been a bit more careful in drafting its cost-shifting provision, Concepcion might have saved it. Specifically, a provision that required the customer to pay the arbitrator’s fees and administrative costs, but not BB&T’s attorney’s fees, would have been an arbitration-specific clause that state law might not be able to touch.
Central to the Eleventh Circuit’s ruling was its articulation of a
longstanding principle – equally applicable to both litigation and
arbitration – “that attorney’s fees and costs generally are not
recoverable by a non-prevailing party.” Under Concepcion, the
FAA preempts state rules against enforcement “that apply only to
arbitration or that derive their meaning from the fact that an agreement
to arbitrate is at issue.” A state rule that singled out as invalid a
provision that focused on arbitrator’s fees would arguably have
been just such a rule. After all, there is no analogue to such a rule
in litigation; litigants do not (legally) pay the judge or jury.
True, a court might get out of this conundrum by arguing that a rule
against requiring the customer to pay the arbitrator’s fees is subsumed
into the more general principle that a winning party should not be
forced to pay the losing party’s costs. But this might be hard to
defend where the Supreme Court in Concepcion made clear that
the FAA preempts any state law that “interferes with fundamental
attributes of arbitration.” The principle that the parties are
responsible for paying an arbitrator is, if anything, more of a
fundamental attribute of arbitration than the individual-action
principles that led the Court to strike down the state rule against
class-action waivers in Concepcion. And perhaps an even more
fundamental attribute of arbitration is the notion that the terms of the
parties’ agreement to arbitrate – including any agreement on allocation
of costs – will be given effect.
An aggrieved customer might also complain that the arbitrator’s costs
could exceed the value of the potential award, particularly for a
small-scale consumer claim. However, again Concepcion forecloses this very argument. In striking down the state rule against class-action waivers, the Concepcion
Court rejected the contention that class proceedings were “necessary to
prosecute small-dollar claims that might otherwise slip through the
legal system.” Rather, the Court held that the FAA preempted such a
rule “even if it is desirable for unrelated reasons.”
Another variation on the facts here could also have led to a
different result. The Eleventh Circuit observed that while the
arbitration clause was prominently displayed on the first page of
BB&T’s customer agreement, the cost-shifting provision was far down
in the fine print. The inconspicuous appearance of this provision
“weigh[ed] heavily” in the court’s finding that the provision was procedurally
unconscionable. The court also separately found that the content of
the provision was substantively unconscionable. Under the law of South
Carolina and many other states, a contractual provision is invalid only
if it is both procedurally and substantively unconscionable.
The logical implication, then, is that a customer-pays provision,
however one-sided it might appear, would still be legal under state law
if it were adequately disclosed. Indeed, the Eleventh Circuit observed
in a footnote that “[b]ecause arbitration is a matter of private
contract, parties are of course free to agree that one party will bear
the other party’s costs and attorneys’ fees, and, as in any contract,
the parties are bound to this agreement so long as it is enforceable.”
If BB&T’s cost-shifting provision had been – like the arbitration
clause – displayed in bold writing, on the first page of the customer
agreement, it might not have contained the “element of surprise” that
led the court to find that “Barras lacked a meaningful choice in
agreeing to the provision.” Can an egregious cost-shifting provision
survive judicial scrutiny, so long as it is prominent enough in the
agreement? Eventually, perhaps an audacious company will put it to the
test.
Source: KluwerArb.
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