|
David L. Grubb, Esq. John W. Barrett, Esq. Grubb Law Group Brian A. Glasser, Esq Bailey & Glasser Charleston, West Virginia Attorneys for Petitioner
|
P.
Michael Pleska, Esq. Fazal A. Share, Esq. Ronda L. Harvey, Esq. Bowles, Rice, McDavid, Graff & Love Charleston, West Virginia Attorneys for Respondent, Friedman's, Inc. |
|
Gregory R. Hanthorn, Esq Jones, Day, Reavis & Pogue Atlanta, Georgia Pro Hac Vice for Respondent, Friedman's, Inc. |
Charles
L. Woody, Esq. Spilman, Thomas & Battle Charleston, West Virginia Attorney for American Banks Ins. Co. and American Bankers Life Assurance Co.
|
| Harry Deitzler,
Esq. Hill, Peterson, Carper, Bee & Deitzler Charleston, West Virginia Michael J. Quirk, Esq. Khalid Elhassan, Esq. Trial Lawyers for Public Justice Washington, DC Attorneys for Amicus Curiae, Trial Lawyers for Public Justice |
Farrokh
Jhabvala, Esq. Jorden, Burt LLP Miami, Florida Pro Hac Vice for Respondent, American Banks Ins. Co. and American Bankers Life Assurance Co. |
3. The
Federal Arbitration Act, 9 U.S.C. Sec. 2 [1947] does not bar a state court that
is examining exculpatory provisions in a contract of adhesion that if applied
would prohibit or substantially limit a person from enforcing and vindicating
rights and protections or from seeking and obtaining statutory or common-law
relief and remedies that are afforded by or arise under state law that exists
for the benefit and protection of the public from considering whether the provisions
are unconscionable -- merely because the prohibiting or limiting provisions
are part of or tied to provisions in the contract relating to arbitration.
4. Provisions in a contract of adhesion that if applied would impose unreasonably burdensome costs upon or would have a substantial deterrent effect upon a person seeking to enforce and vindicate rights and protections or to obtain statutory or common-law relief and remedies that are afforded by or arise under state law that exists for the benefit and protection of the public, are unconscionable; unless the court determines that exceptional circumstances exist that make the provisions conscionable. In any challenge to such a provision, the responsibility of showing the costs likely to be imposed by the application of such a provision is upon the party challenging the provision; the issue of whether the costs would impose an unconscionably impermissible burden or deterrent is for the court.
Starcher, Justice:
In the instant case, Mr. James Dunlap, (See footnote 1) who is a plaintiff below and the petitioner before this Court, claims in a civil lawsuit filed in May of 2000 in the Circuit Court of Kanawha County that Friedman's, Inc., a jewelry store chain doing business in West Virginia (“Friedman's); Friedman's insurance company partners, American Bankers Insurance Company of Florida and American Bankers Life Assurance Company of Florida (together, “American Bankers”); and certain named individuals who are or were managerial employees of Friedman's -- all of whom are the defendants below and the respondents in the instant case before this Court (we shall refer to these respondents together as “Friedman's et al.”) -- have been carrying out a systematic, deceptive, and illegal “loan packing” scheme, with the purpose and effect of surreptitiously adding unrequested insurance charges to the cost of consumers' purchases from Friedman's. In Mr. Dunlap's case, allegedly illegal charges in the amounts of $1.48 for credit life insurance and $6.96 for property insurance were added when Mr. Dunlap bought a ring from Friedman's in 1999; we discuss the details of that purchase infra.
The circuit court concluded
that Mr. Dunlap could not go forward with his lawsuit against Friedman's et
al. in the circuit court because of certain language in Friedman's purchase
and financing agreement document, a form contract that Mr. Dunlap signed when
he bought the ring. The circuit court stayed the prosecution of Mr. Dunlap's
civil lawsuit against Friedman's et al., and directed Mr. Dunlap (over
his objection) to proceed to arbitration proceedings with Friedman's et al.,
pursuant to language in the purchase and financing agreement document. Challenging
the circuit court's order, Mr. Dunlap has petitioned this Court for a writ of
prohibition; we conclude that the circuit court's order was erroneous.
Mr. Dunlap specifically alleges
that Friedman's systematically and deliberately directed its employees to conceal
and lie about these added charges -- going so far as to discharge or threaten
to discharge employees who would not go along with the added charges/concealment scheme. Mr. Dunlap has supported his allegations of
a comprehensive scheme to defraud consumers with affidavits (filed with his
complaint) from former Friedman's employees and customers.
In one of these affidavits,
a former Friedman's manager attested:
I was advised by [a Friedman's
trainer] to sell property, life and disability insurance to customers who
financed their purchases. I was specifically told to just add the insurance
onto the sale. . . . I felt very uncomfortable following these orders. I believed
that Friedman's practice of charging consumers a premium for insurance without
disclosing it to the consumers was fraudulent, deceitful and wrong. . . .
On many occasions, my employees, per Friedman's orders, sold disability, life
and property insurance to customers who financed jewelry, and did not disclose
to the customer that the insurance was added to the sale.
Another former Friedman's manager attested:
The computers at our stores
were programmed to automatically add on charges for credit life, credit disability
and property insurance onto the customer's retail installment contract. In
order to remove these charges, the employee would have to manually delete
them. I felt very uncomfortable following these orders. I believed that Friedman's
practice of charging consumers a premium for insurance without disclosing
it to the consumers was fraudulent, deceitful and wrong.
Another former Friedman's employee attested:
. . . I was informed by .
. . the district manager, that we, as employees of Friedman's Jewelers, Inc.
were to add life, disability and property insurance to customer credit applications
without disclosing this information to the customer. If we did not do what
was requested, we would be fired. He informed me that two people had been
dismissed in Roanoke for refusing to do what they asked. . . . I was again
informed by . . . the store manager, during a staff meeting that we were to add life, disability and
property insurance to customer credit applications without disclosing this
information to the customer. . . . When I questioned what should we do if
a customer questions the insurance, I was told that we should tell the customer
that it was a computer error.
One Friedman's employee quit
working for Friedman's “after she was instructed to deceive customers,”
according to an administrative law judge who ruled that the employee was entitled
to receive unemployment compensation benefits. The judge's decision further
stated:
In this case, the employer
instructed its employees to use deceptive practices with regards to the sale
of property, disability and life insurance to customers. When a customer opened
an account to charge jewelry at the store, the employees were told to automatically
add a premium based upon the amount of the charge for life, disability and
property insurance. They were told not to give the customer a choice, that
they were to automatically add it to the cost of the merchandise. They were
further advised that if they did not add the insurance, that they would lose
their jobs.
Another former Friedman's employee attested:
Around May 1999, I was
informed by . . . the district manager, that we, as employees of Friedman's
Jewelers, Inc. were to add life, disability and property insurance to customer
credit applications without disclosing this information to the customer. If
we did not do what was requested, we would be fired.
In his circuit court lawsuit,
Mr. Dunlap seeks to enforce and vindicate his and other consumers' right not
to be victimized by such illegal schemes. Specifically, Mr. Dunlap seeks the
following relief and remedies from the circuit court: (1) a declaratory judgment declaring that Friedman's, et al.'s conduct violated the
West Virginia Consumer Credit & Protection Act, W.Va. Code, 46A-1-101
et seq. (“the Consumer Protection Act”), West Virginia insurance
laws, and the Uniform Commercial Code; (2) an injunction ordering Friedman's
et al. to cease their illegal conduct, to establish an employee training
program on consumer protection in West Virginia, and to revise its sales procedures
for insurance; (3) certification of a class of persons whose rights have been
violated by Friedman's et al. in the fashion that Mr. Dunlap's were;
(4) court-ordered cancellation of the plaintiffs' and class members' indebtedness
to Friedman's et al.; (5) judgment to each plaintiff and class member
for statutory damages under the Consumer Protection Act for each violation
of the Act; (6) judgment for actual, consequential and incidental damages
suffered by each plaintiff and member of the class, including damages for
emotional distress, annoyance and inconvenience; (6) judgment for punitive
damages to each plaintiff and class member; (7) an award of attorneys' fees;
(8) pre- and post-judgment interest; and (9) such other relief as the court
determines. Mr. Dunlap's causes of action allege violations of the Consumer
Protection Act and W.Va. Code, 33-12-1(a) [1957] (selling insurance
without a license); common law fraud; unconscionability; breach of duty of
good faith under W.Va. Code, 46-1- 203 [1963] (UCC); negligent and
wilful, wanton and intentional misconduct; and civil conspiracy. Mr. Dunlap
requested a jury trial.
On June 23, 2000, Friedman's
et al. moved the Circuit Court of Kanawha County to prohibit Mr. Dunlap
from going forward in circuit court with his claims against Friedman's et al. and to require Mr. Dunlap to bring any disputes
that he has with Friedman's et al. to arbitration. The basis of this
motion was language contained in the two-page purchase and financing agreement
document that Mr. Dunlap signed in connection with his purchase from Friedman's.
We shall review this specific language, after generally describing Friedman's
purchase and financing agreement document.
The front page of the purchase
and financing agreement document is a pre- printed form, containing a number
of boxed spaces with printed titles and explanatory language. For each sale
or other similar transaction, transaction-specific words and numbers are supposed
to be printed in the form's blank spaces (presumably by a computer-driven
printer attached to a cash register and ordinarily at the time of the transaction),
showing the date of the transaction, the item(s) purchased or returned, any
applicable credits or adjustments, and the financing terms, insurance charges,
purchase price, interest rate, credits, payment schedule, and other pertinent
information about the transaction.
In Mr. Dunlap's case, it appears
(See footnote 2)
from the transaction-specific information printed on the front of the Friedman's
form that Mr. Dunlap signed, that on or about September 20, 1999, Mr. Dunlap
purchased a ring for about $150.00, and that Friedman's “added” to
the ring purchase price a $1.48 charge for credit life insurance and $6.96 for
property insurance. Mr. Dunlap's signature appears on a pre-printed line on
the front of the form, stating that he is “applying” for insurance,
and also on a line where he generally agrees to all terms and conditions on
both sides of the document. At the bottom of the front of the form is a pre-printed
notice that paragraph 14 of the other side of the form includes an alternate
dispute resolution procedure, including a requirement for arbitration or mediation.
A printed statement says not to sign the form without reading it, or if it contains
any blank spaces.
Mr. Dunlap specifically alleges
in his complaint that he did not ask for the insurance for which he was charged,
that it was not explained to him that there were insurance charges; that the
sales clerk simply showed him where to sign his name on the front of the form; and that the form was then placed in an Friedman's envelope,
where the information that was actually important to Mr. Dunlap -- his monthly
payment amount and the number of payments -- was written in a space provided
on the outside of the envelope. Additionally, Mr. Friedman states in an affidavit
that none of the language in the actual purchase and financing agreement document
was explained to him, including the language that purports to limit his remedies
against Friedman's. Mr. Dunlap's allegations in his complaint regarding how
insurance charges were automatically printed on the Friedman's form and added
to his purchase price without his request are consistent with the previously
discussed affidavits regarding the mechanism of Friedman's alleged “loan
packing” scheme.
The reverse side of the purchase
and financing agreement document form is titled “Additional Terms of
Purchase,” and contains 14 pre-printed numbered paragraphs, followed
by additional unnumbered language. Most of the numbered paragraphs in the
document contain standard “boilerplate” language relating to financing,
security in the goods purchased, etc., that is not germane to the issues in
the instant case. The following language in the document, however, is germane.
Paragraph 3 of the document,
titled “DEFAULT,” states in pertinent part that if the “Buyer”
(Mr. Dunlap) dies, becomes insolvent or goes into bankruptcy, or does not
make a timely payment, the “Seller” (Friedman's) may “at its
option and without notice, declare the entire unpaid balance immediately due
and payable” and “to the extent permitted by Applicable Law”
repossess the merchandise that Mr. Dunlap purchased. Additionally, Paragraph 3 says that Mr. Dunlap agrees to pay “all costs incurred
in collecting the indebtedness under this Agreement, including, without limitation,
reasonable attorney's fees and court costs in an amount not to exceed 15%
of the unpaid debt.”
Paragraph 14, titled “ALTERNATE
DISPUTE RESOLUTION,” states in pertinent part:
All disputes, controversies
or claims of any kind or nature between Buyer and Seller, arising out of or
in connection with the sale of goods financed or refinanced pursuant to the
terms of this Agreement . . . or with respect to negotiation of, inducement
to enter into, construction of, performance of, enforcement of, or breach
of, effort to collect the debt evidenced by, the applicability of the arbitration
clause in, or the validity of this Agreement or any earlier agreement (except
as specifically set forth in this paragraph 14 below), shall be resolved by
arbitration in the state in which this Agreement is entered into, at a location
reasonably near the place where you signed this Agreement, in accordance with
the Commercial Arbitration Rules of the American Arbitration Association,
and judgment upon the award rendered by the Arbitrator may be entered in any
court having jurisdiction thereof. . . . All arbitrators' or mediators' fees
shall be equally divided between the parties. Exception to arbitration and
mediation: The Seller may exercise its right upon default by Buyer as set
forth in the paragraph entitled “default” above, without resort
to arbitration or mediation. Nothing in this paragraph shall be construed
to prevent either party's use of bankruptcy or repossession, replevin, judicial
foreclosure, non judicial foreclosure or any other prejudgment or provisional
remedy relating to any collateral, security or property interests, for contractual
debts now or hereafter and by either party to the other under this Agreement.
No arbitrator may make an award of punitive damages.
Mr. Dunlap argued before
the circuit court that any and all provisions in the above-quoted language from
the purchase and financing agreement document that purport to limit or prohibit
his claims for relief and remedies against Friedman's et al., in
a fashion different from that which is provided in West Virginia constitutional,
statutory, and common law, are illegal and unconscionable. Mr. Dunlap also argued
that any prohibitions or limitations in these provisions do not apply to his
claims against American Bankers, because American Bankers is not mentioned in
the purchase and financing agreement document.
On April 19, 2001, the circuit
court entered an order that stayed all court proceedings on Mr. Dunlap's
claims in circuit court, and required Mr. Dunlap to pursue arbitration with
respect to his claims against all of the respondents, pursuant to language in
Paragraph 14 of Friedman's purchase and financing agreement document. Mr. Dunlap
thereafter sought a writ from this Court to prohibit the enforcement of the
circuit court's order, leading to the instant case.
Prohibition will lie to hear claims relating to a court's jurisdiction or to address non-jurisdictional issues where a court's challenged ruling or action is clearly contrary to law and an appeal would not be as adequate as review in prohibition. See Syllabus Point 1, Hinkle v. Black, 164 W.Va. 112, 262 S.E.2d 744 (1979); Syllabus Points 1, 2, and 3, State ex rel. Davidson v. Hoke, 532 S.E.2d 50, 207 W.Va. 332, (2000) (per curiam).
The central issue in the instant
case is whether the circuit court should exercise the civil jurisdiction that
it would ordinarily have to consider de novo the merits of Mr. Dunlap's
claims against Friedman's et al. and to award all appropriate and legally
available relief -- or whether the circuit court must forego the exercise of
its ordinary civil jurisdiction, and play only the relatively deferential and
limited role that courts have when reviewing the results of arbitration, cf.
Syllabus Points 1 and 2, Boomer Coal and Coke Co. v. Osenton,
101 W.Va. 683, 133 S.E. 381 (1926).
In State ex rel. United,
Inc. v. Sanders, 204 W.Va. 23, 25-26, 511 S.E.2d 134, 136-37 (1998), we
recently granted a “a writ of prohibition to prevent enforcement of the
lower court's directive which required United Asphalt to resolve its claims
through arbitration.” Our use of the writ of prohibition to review the
circuit court's action in the instant case is appropriate; state court rules
of appellate jurisdiction and procedure are not preempted by the Federal Arbitration
Act, 9 U.S.C. Sec. 2 [1947]; see, e.g., Simmons Co. v. Deutsche
Financial Services Corp., 243 Ga.App. 85, 532 S.E.2d 436 (2000); Bush
v. Paragon Property, Inc., 165 Oregon App. 700, 997 P.2d 882 (2000) (en
banc).
In Syllabus Point 3, Troy
Min. Corp. v. Itmann Coal Co., 176 W.Va. 599, 346 S.E.2d 749 (1986), we
stated: “Unconscionability is an equitable principle, and the determination
of whether a contract or a provision therein is unconscionable should be made
by the court.” Additionally, in addressing a motion to compel arbitration
in the context of a civil action, it is for the court where the action is pending
to decide in the first instance as a matter of law whether a valid and enforceable arbitration agreement exists
between the parties. See Syllabus Points 1 and 2, Art's Flower Shop,
Inc. v. C & P Telephone Co., 186 W.Va. 613, 413 S.E.2d 670 (1991).
Thus we review the circuit court's legal determinations de novo.
The central
issue in this case is whether Mr. Dunlap is correct in asserting the unconscionability
of certain provisions in Friedman's purchase and financing agreement document.
In Arnold v. United Companies Lending Corp., 204 W.Va. 229, 511
S.E.2d 854 (1998), this Court discussed the concept of unconscionability in
a consumer transaction. We stated:
“Unconscionability”
is a general contract law principle, based in equity, which is deeply ingrained
in both the statutory and decisional law of West Virginia. Of particular importance
to this case are the provisions contained in the West Virginia Consumer Credit
and Protection Act, W. Va. Code § 46A-1-101 et seq. (hereinafter
“CCPA”), which were specifically designed to eradicate unconscionability
in consumer transactions. W.Va. Code § 46A-2-121 (1996) of the CCPA
provides, in relevant part:
(1)
With respect to a transaction which is or gives rise to a consumer credit sale,
consumer lease or consumer loan, if the court as a matter of law finds:
(a)
The agreement or transaction to have been unconscionable at the time it was
made, or to have been induced by unconscionable conduct, the court may refuse to enforce
the agreement, or
(b)
Any term or part of the agreement or transaction to have been unconscionable
at the time it was made, the court may refuse to enforce the agreement, or
may enforce the remainder of the agreement without the unconscionable term
or part, or may so limit the application of any unconscionable term or part
as to avoid any unconscionable result.
Guided by the foregoing principles, we shall proceed to examine Mr. Dunlap's claim that the provisions of Friedman's purchase and financing agreement document that the circuit court relied on are unconscionable. (See footnote 3)
In American Food Management,
Inc. v. Henson, 105 Ill.App.3d 141, 145, 434 N.E.2d 59, 62-63, 61 Ill.Dec.
122, 126 (1982), the court quoted Professor Corbin regarding contracts of adhesion:
“Adhesion
contracts” include all “form contracts” submitted by one party
on the basis of this or nothing [***] Since the bulk of contracts signed in
this country, if not every major Western nation, are adhesion contracts, a rule
automatically invalidating adhesion contracts would be completely unworkable.
Instead courts engage in a process of judicial review. . . . Finding that there
is an adhesion contract is the beginning point for analysis, not the end of
it; what courts aim at doing is distinguishing good adhesion contracts which
should be enforced from bad adhesion contracts which should not.
(See footnote 4)
Id.
The author of this opinion recently
discussed contracts of adhesion in a separate concurring opinion in
Mitchell v. Broadnax, 208 W.Va. 36, 52, 537 S.E.2d 882, 898 (2000) (Starcher,
J., concurring):
The drafters of the Restatement
of Contracts Second, in their discussions regarding contracts of adhesion
like an insurance policy, recognized that:
A party
who makes regular use of a standardized form of agreement does not ordinarily
expect his customers to understand or even to read the standard terms. One of
the purposes of standardization is to eliminate bargaining over details of
individual transactions, and that purpose would not be served if a substantial
number of customers retained counsel and reviewed the standard terms. Employees
regularly using a form often have only a limited understanding of its terms
and limited authority to vary them. Customers do not in fact ordinarily understand
or even read the standard terms. They trust to the good faith of the party using
the form and to the tacit representation that like terms are being accepted
regularly by others similarly situated. But they understand that they are
assenting to the terms not read or not understood, subject to such limitations
as the law may impose [citation omitted, emphasis in original].
In a number of cases, this Court
has considered exculpatory provisions in such contracts of adhesion that would
if applied effectively limit a party's legal exposure, accountability, or liability
in a fashion that would otherwise not exist under general law. A review of these
cases shows that such exculpatory provisions in contracts of adhesion are given
close scrutiny, with respect to both their construction and their potential
for unconscionability, particularly where rights, remedies and protections that
exist for the public benefit are involved.
For example, we held in Murphy
v. North American River Runners, 186 W.Va. 310, 316, 412 S.E.2d 504, 510
(1991), reviewing a form waiver of liability, that “a general clause in
an exculpatory agreement or anticipatory release exempting the defendant from
all liability for any future negligence will not be construed to include intentional
or reckless misconduct or gross negligence, unless such intention clearly appears
from the circumstances.”
The courts of this State shall
be open, and every person, for an injury done to him, in his person, property
or reputation, shall have remedy by due course of law; and justice shall be
administered without sale, denial or delay.
And the West Virginia Constitution, Article III, § 13 states:
In suits at common law, where
the value in controversy exceeds twenty dollars exclusive of interest and costs,
the right of trial by jury, if required by either party, shall be preserved;
and in such suit in a court of limited jurisdiction a jury shall consist of
six persons. No fact tried by a jury shall be otherwise reexamined in any case
than according to rule of court or law.
These constitutional rights
-- of open access to the courts to seek justice, and to trial by jury -- are
fundamental in the State of West Virginia. Our constitutional founders wanted
the determinations of what is legally correct and just in our society, and the
enforcement of our criminal and civil laws -- to occur in a system of open,
accountable, affordable, publicly supported, and impartial tribunals -- tribunals
that involve, in the case of the jury, members of the general citizenry. These
fundamental rights do not exist just for the benefit of individuals who have
disputes, but for the benefit of all of us. The constitutional rights
to open courts and jury trial serve to sustain the existence of a core social
institution and mechanism upon which, it may be said without undue grandiosity,
our way of life itself depends.
We have recognized, of course,
that the constitutionally-enshrined and fundamental rights to assert one's claims
for justice before a jury in the public court system may be the subject of a
legally enforceable waiver. See, e.g., Stephenson v. Ashburn,
137 W.Va. 141, 70 S.E.2d 585 (1952). In Moon v. Michael Koslow Const., Inc.,
193 W.Va. 673, 676, 458 S.E.2d 610, 613 (1995), we said:
Koslow did not waive its right
to a trial by jury. In its answer to the Moons' complaint, a jury trial was
demanded. Furthermore, at the pretrial conference, Koslow made a timely objection
to the circuit court's decision to refer the case to a special commissioner.
Rule 38(a) of the Rules of Civil Procedure provides that “[t]he right
of trial by jury as declared by the Constitution or statutes of the State
shall be preserved to the parties inviolate.”
And of course, our cases involving arbitration recognize the waiver of the
right to go to court in the first instance that is inherent in consent to
an arbitral process, see Bd. of Ed. v. W. Harley Miller Inc., supra.
However, as we stated in Syllabus
Point 2 of State ex rel. May v. Boles, 149 W.Va. 155, 139
S.E.2d
177 (1964): “Courts indulge every reasonable presumption against waiver
of a fundamental constitutional right and will not presume acquiescence in
the loss of such fundamental right.” See also Woodruff v. Bd. of Tru.
of Cabell Huntington, 173 W.Va. 604, 611, 319 S.E.2d 372, 379 (1984),
holding that the West Virginia Constitution, Article III, § 1
is “more stringent in its limitation on waiver [of fundamental constitutional
rights] than is the federal constitution.”
In the instant case, Friedman's
et al. argue that the Federal Arbitration Act (“FAA”), 9
U.S.C. Sec. 2 (1947), categorically precludes Mr. Dunlap from invoking or
relying to any degree upon his West Virginia state constitutional rights to
seek justice in a public court and to have a jury trial on all issues so triable.
Interpreting the FAA, the Supreme
Court has held that states may not single out arbitration for disfavor or special
scrutiny simply because arbitration is a “different forum” than the
traditional public court system. See generally Doctor's Associates, Inc.
v. Casarotto, 517 U.S. 681, 116 S.Ct.1652, 134 L.Ed.2d 902 (1996) (holding
that the FAA invalidated a state statute that required contractual terms regarding
arbitration to be prominently displayed in the contract, but not requiring such
display for other language).
Because complex issues of federalism
are implicated, we do not believe that in deciding the instant case we should
unnecessarily reach the issue of to what extent, under the FAA, West Virginia's
constitutional policy giving her citizens the waiveable entitlement to seek
justice in the public court system may permissibly factor into judicial scrutiny
of the conscionability of a provision in a contract of adhesion purporting to
waive that entitlement.
(See footnote 7)
Rather, because other issues
are present in the instant case that permit us to rule without addressing this
issue, we will for purposes of our decision give no weight to Mr. Dunlap's state
constitutional rights to a jury trial in the public court system.
It is axiomatic that when consumers,
employees, etc. are the victims of illegal, wilfully and wantonly wrongful,
and/or fraudulent misconduct, the social remedy of punitive and penalty damages
may be a powerful tool -- for the benefit of the plaintiff and for the benefit
of society in general -- “to punish the wrongdoer and to deter the commission
of similar offenses in the future[,]” Burgess v. Porterfield, 196
W.Va. 178, 182, 469 S.E.2d 114-118 (1996).
In the instant case, the intended
effect of the “no punitive damages” provision that is included in
Paragraph 14 of Friedman's purchase and financing agreement document is that
every Friedman's customer is deprived of their right to invoke and employ
an important remedy provided by law to punish and deter illegal, willful, and
grossly negligent misconduct -- and that Friedman's would be categorically shielded
from any liability for such sanctions, regardless of Friedman's level of wrongdoing.
(See footnote 9)
Mr. Dunlap also argues that
his ability to fully pursue his legal rights and remedies is unconscionably
limited by the terms of Friedman's purchase and financing agreement document,
because Mr. Dunlap could not prosecute his claims for class action relief in
arbitration.
Class action relief -- including
the remedies of damages, rescission, restitution, penalties, and injunction
-- is often at the core of the effective prosecution of consumer, employment,
housing, environmental, and similar cases. In McFoy v. Amerigas, Inc.,
170 W.Va. 526, 533, 295 S.E.2d 16, 24 (1982), this Court stated that: “[i]n
general, class actions are a flexible vehicle for correcting wrongs committed
by large-scale enterprise upon individual consumers[;].” This apt and succinct
description of a principal value of class action litigation is directly applicable
to Mr. Dunlap's claims in the instant case.
In Mr. Dunlap's case, the total
of $8.46 in insurance charges that Friedman's added to his purchase price by
Friedman's is precisely the sort of small-dollar/high volume (alleged) illegality
that class action claims and remedies are effective at addressing. In many cases,
the availability of class action relief is a sine qua non to permit the
adequate vindication of consumer rights.
As the United States Supreme
Court stated in Amchem Products, Inc. v. Windsor, 521 U.S. 591, 617,
117 S.Ct. 2231, 2246, 138 L.Ed.2d 689, 709 (1997), “[t]he policy at the
very core of the class action mechanism is to overcome the problem that small
recoveries do not provide the incentive for any individual to bring a solo action
prosecuting his or her rights. A class action solves this problem by aggregating
the relatively paltry potential recoveries into something worth someone's (usually
an attorney's) labor (citations omitted).” See also Riverside v. Rivera,
477 U.S. 561, 575, 106 S.Ct. 2686, 2694, 91 L.Ed.2d 466, 480 (1986): “'If
the citizen does not have the resources, his day in court is denied him; the . . . policy which he seeks to assert and vindicate goes unvindicated;
and the entire Nation, not just the individual citizen, suffers.' 122 Cong.Rec.
33313 (1976) (remarks of Sen. Tunney).”
Thus, in the contracts of
adhesion that are so commonly involved in consumer and employment transactions,
permitting the proponent of such a contract to include a provision that prevents
an aggrieved party from pursuing class action relief would go a long way toward
allowing those who commit illegal activity to go unpunished, undeterred, and
unaccountable.
Friedman's et al. do
not dispute Mr. Dunlap's assertion that he would not be able to obtain punitive
or penalty damages, or assert class action claims and obtain class relief,
in an arbitration proceeding. Friedman's et al. claim, however, that
the FAA's policy prohibiting states from disfavoring the arbitral forum prohibits
Mr. Dunlap from asserting a claim that the arbitral forum is inadequate because
of a lack of punitive damages or class action relief in that forum.
Friedman's points to the case
of Gilmer v. Interstate Johnson Lane Corp., 500 U.S.
20, 111 S.CT. 1647, 114 L.Ed.2d 26 (1991) supra, where the Supreme
Court upheld the enforced arbitration of a claim brought under the Federal
Age Discrimination in Employment Act (ADEA). In Gilmer, the
plaintiff had agreed when he registered as a securities dealer to use a specialized
New York Stock Exchange (NYSE) arbitration forum for all disputes arising
out of his employment. Before the Supreme Court, the plaintiff in Gilmer
asserted as one of several generalized criticisms of the adequacy of arbitration
in his case that class action relief was not available in arbitration. The
Court's opinion in Gilmer principally focused on whether the FAA could
cover statutory ADEA claims at all; the opinion also held in a brief discussion
that a possible lack of class action relief in the NYSE arbitral forum
would not itself necessarily render that forum inadequate to vindicate the
particular ADEA claim made by the plaintiff in Gilmer. (The Court also
referred to the NYSE forum as “conciliation.” Gilmer v. Interstate
Johnson Lane Corp., 500 U.S. at 32,111 S.Ct. at ____, 114 L.Ed.2d
at ___ (1991)).
We do not think that Gilmer
is controlling in support of Friedman's et al.'s argument. The plaintiff
in Gilmer raised an alleged lack of class action remedies in arbitration
as part of a facial and generalized challenge to the applicability of the
FAA to any and all claims arising under the ADEA. The Court in Gilmer did
not rule out the possibility that “collective [class action] relief”
could be available in the specialized NYSE arbitration proceedings. Gilmer,
500 U.S. at 32, 111 S.Ct. at 16__, 114 L.Ed.2d at ___ (1991). Additionally,
the Court in Gilmer was interpreting a federal statute that the Court
held would “continue to serve both its remedial and deterrent function”
in the possible absence of class action relief. 500 U.S. at 28, 111 S.Ct.
at 1653, L.Ed.2d at 38 (1991). It does not appear that the plaintiff in Gilmer
was, like Mr. Dunlap, an ordinary consumer or employee who had simply signed
a boilerplate form; rather, the plaintiff in Gilmer was enrolling in
a distinctive profession and actually agreed to use a specialized tribunal
established to govern the conduct of that profession. The Court in Gilmer did not address the issue
of whether preclusion of class action relief would have the effect of broadly
shielding wrongdoers from full and effective accountability for their misconduct
_ which is the situation in the instant case. Moreover, a host of federal
cases decided both prior to and following Gilmer, see note 3
supra, have recognized that if an arbitral forum substantially denies
a party the rights and remedies that are provided by laws designed to protect
and benefit the public, the FAA does not operate to require that those rights
be surrendered. This rule must particularly apply to purported waivers of
such rights and protections that are contained in a form contract of adhesion.
In the instant case, in contrast
to Gilmer, a consumer is seeking to use well- settled principles of
state law to challenge and remedy an allegedly widespread and illegal practice
of defrauding thousands of consumers. The consumer signed a contract of adhesion
containing provisions that would bar him from utilizing two remedies -- punitive
damages and class action relief -- that are essential to the enforcement and
effective vindication of the public purposes and protections of underlying
the law.
(See footnote 10) For these reasons, we do not accept the
argument that the Gilmer case prohibits Mr. Dunlap in the instant case
from asserting a lack of class action relief as an unconscionable limitation of his remedies
against Friedman's et al.
(See footnote 11)
Based on all of the foregoing,
we hold that the Federal Arbitration Act, 9 U.S.C. Sec. 2 [1947] does not
bar a state court that is examining exculpatory provisions in a contract of
adhesion that if applied would prohibit or substantially limit a person from
enforcing and vindicating rights and protections or from seeking and obtaining
statutory or common-law relief and remedies that are afforded by or arise
under state law that exists for the benefit and protection of the public from
considering whether the provisions are unconscionable -- merely because the
prohibiting or limiting provisions are part of or tied to provisions in the
contract relating to arbitration.
In the instant case, we conclude
that the prohibitions on punitive damages and class action relief that would
be the result of the application of the provisions of Friedman's purchase
and finance agreement are clearly unconscionable.
(See footnote 12)
Security Services, 105 F.3d 1465, 1484 (D.C. Cir. 1997). Following
Cole, the Eleventh Circuit found an arbitration clause unenforceable
based on cost provisions similar to the ones in this case, requiring statutory
claimants to pay AAA a $2,000 filing, plus a share of the arbitrator's fees.
“[C]osts of this magnitude [are] a legitimate basis for a conclusion
that the clause does not comport with statutory policy [enabling claimants
to vindicate their statutory rights].” Paladino v. Avnet Computer
Technologies, Inc., 134 F.3d 1054, 1062 (11th Cir. 1998) (Cox, J., concurring
for majority of court).
(See footnote 13) Additionally, the burden
of showing the costs that would be imposed by
an arbitral forum falls upon the party challenging the forum.
Based on the principles enunciated
in the foregoing cases, we hold that provisions in a contract of adhesion
that if applied would impose unreasonably burdensome costs upon or would have
a substantial deterrent effect upon a person seeking to enforce and vindicate
rights and protections or to obtain statutory or common-law relief and remedies
that are afforded by or arise under state law that exists for the benefit
and protection of the public are unconscionable; unless the court determines
that exceptional circumstances exist that make the provisions conscionable.
In any challenge to such a provision, the responsibility of showing the costs
likely to be imposed by the application of such a provision is upon the party
challenging the provision; the issue of whether the costs would impose an
unconscionably impermissible burden or deterrent is for the court.
(See footnote 14)
Applying
the foregoing to the instant case, Friedman's et al. are correct that
Mr. Dunlap's contentions as to the cost of arbitration to Mr. Dunlap are at
best speculative and not well-supported in the record. Certainly the circuit
court made no determination about the likely costs of arbitration. Consequently
Mr. Dunlap's “excessive costs” argument for reversal of the circuit
court's order regarding arbitration is not persuasive.
(See footnote 15)
Based on all of the foregoing,
we have concluded that as a matter of law that the provisions in Friedman's
purchase and financing agreement document that severely limited Mr. Dunlap's
rights and remedies were unconscionable.
Friedman's et al. argue
that if this Court finds that any provisions of Friedman's purchase and financing
agreement unconscionably limit Mr. Dunlap's rights and remedies, this Court should remand the case to the circuit court with instructions
to compel Mr. Dunlap to go to arbitration on his claims against Friedman's
et al. under altered terms and conditions in which Mr. Dunlap could
fully and effectively vindicate his rights in the arbitral forum. Presumably
this would mean that the circuit court would order arbitration where Mr. Dunlap
could obtain class action relief, and where the full range of statutory and
common-law damages, penalties, and other legal and equitable remedies could
be imposed on Friedman's et al.
(See footnote 16)
A recent court opinion rejected
a defendant's offer to trim the unconscionable provisions of an arbitration
clause:
In an effort to compel arbitration
and dismiss the instant action against Drs. Porth and Kelly, United has expressed
a willingness to waive the arbitration clauses' limitations that prevent an
arbitrator from awarding extra contractual damages and punitive or exemplary
damages. Principles of justice and fair play, however, lead to the conclusion
that one party unilaterally cannot alter post litem motam terms of
an agreement so that a case is dismissed . . . . The Court rejects United's
attempted waiver.
In re Managed Care Litigation, 132 F.Supp.2d 989, 1001 (S.D. Fla. 2000)
(footnote and citations omitted). Another recent decision rejected a drafting
party's attempt to rewrite an unconscionable arbitration clause, stating:
Flyer Printing points out
that it offered to pay all the costs of arbitration notwithstanding the language
of the agreement. Hill rejected this unilateral offer to amend the agreement, however, and we are
not authorized to remake the parties' contract.
Flyer Printing Co. Inc. v. Hill, 805 So.2d 829, 833 (Fla.App. 2001).
In Armendariz, supra,
6 P.3d at 697, the California Supreme Court stated:
Moreover, whether an employer
is willing, now that the employment relationship has ended, to allow the arbitration
provision to be mutually applicable, or to encompass the full range of remedies,
does not change the fact that the arbitration agreement as written is unconscionable
and contrary to public policy. Such a willingness “can be seen, at most,
as an offer to modify the contract; an offer that was never accepted. No existing
rule of contract law permits a party to resuscitate a legally defective contract
merely by offering to change it.” [citations omitted].
In evaluating Friedman's et
al.'s argument that we should order the circuit court to compel
arbitration, but under “conscionable” standards, we must again recognize
the nature of the contract that is at issue -- and the substance of the use
to which Friedman's et al. have sought to put arbitration in the context
of that contract.
Friedman's et al. are
not asking this court to re-write a business contract that was knowingly entered
into by two sophisticated parties -- where a court doing equity might seek
to put the parties where they really intended to be, by correcting a provision
in the contract that has become unconscionable because of a mistake or changed
circumstances.
Rather, Friedman's et al.,
by tying substantively unconscionable exculpatory and limitation of liability
provisions to an arbitration provision in a form contract of adhesion, has
sought to unilaterally use (one could say “misuse”) the honorable
mechanism of arbitration -- that has found a respected place in the commercial life
of our nation -- as a scheme or mechanism to shield itself from legal accountability
for misconduct.
Under such circumstances,
we think a court doing equity should not undertake to sanitize any aspect
of the unconscionable contractual attempt.
Consequently, we conclude
that the circuit court erred in refusing to exercise its ordinary jurisdiction
over the claims made by Mr. Dunlap, and in instead requiring Mr. Dunlap to
bring any disputes he has with Friedman's et al. to arbitration.
This lawsuit is not about arbitration
(See footnote 17)
. . . [Under the guise of requiring arbitration, the company] was actually
rewriting substantially the legal landscape on which its customers must contend
. . . [the company] sought to shield itself from liability . . . by imposing
Legal Remedies Provisions that eliminate class actions, sharply curtail damages
in cases of misrepresentation, fraud, and other intentional torts, cloak the
arbitration process with secrecy and place significant financial hurdles in
the path of a potential litigant. It is not just that [the company] wants to
litigate in the forum of its choice -- arbitration; it is that [the company]
wants to make it very difficult for anyone to effectively vindicate her rights,
even in that forum. That is illegal and unconscionable[.]
The requested writ of prohibition
is granted and this case is remanded for further proceedings consistent with
this opinion.
(See footnote 18)