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The Continuing Perils of (Potentially) Uneforceable Arbitration Agreements

Fellow State Bar Convention panelist Brian Reider recently alerted our panel */ to the Fourth Appellate District's August 26, 2009, decision Parada v. Superior Court (.pdf)  which creates a slippery slope of questionable enforceability for Courts presented with motions to compel arbitration. 

The arbitration provisions at issue in Parada were contained in a form contract between individual investors and a company called Monex which dealt in precious metals.  After suffering investment losses, three customers brought suit in a single consolidated proceeding.  The arbitration clause required each party to individually bring a claim against Monex before a panel of three JAMS arbitrators. 

The trial court granted Monex's motion to compel arbitration and the Fourth District vacated that Order in response to the Plaintiffs' petition for a writ of mandate.  In granting the writ, the appellate court held that the cost of a three-Judge JAMS arbitration panel together with a prohibition against consolidating or joining claims rendered the provisions both procedurally and substantively unconscionable. 

The factors upon which the Court premised its unconscionability decision included the following:  (1)  because Plaintiffs had no meaningful opportunity to negotiate the terms of the agreement, it was an adhesion contract; (2) assuming the arbitration of Plaintiffs' individual claims would require four days of hearing time, JAMS arbitrator and administrative fees would have amounted to a minimum of $20,800 per party; (3) the prohibitions against joinder or consolidation unnecessarily increased the cost to each party of bringing their claims against Monex; (4) the parties demonstrated their inability to afford the JAMS proceeding; and, (5) the provisions requiring arbitration according to JAMS rules -- which provided for sanctions in the event of a party's inability to pay, were not attached to the contract.  

As the Court concluded:

Having determined the presence and degree of procedural and substantive unconscionability, we return to the sliding scale measurement to determine whether the Arbitration Panel paragraphs and No Consolidation paragraphs of the . . . Agreements are enforceable. (Morris, supra, 128 Cal.App.4th at pp. 1318–1319.) 

We concluded the [arbitration provisions] fall in the low to middle range of the procedural unconscionability scale. Without considering each Petitioner’s ability to pay, the unjustified requirement of a panel of three arbitrators from JAMS and the prohibition on consolidation or joinder of claims render the Arbitration Panel paragraphs and No Consolidation paragraphs substantively unconscionable to a high degree. Consideration of Petitioners’ ability to pay pushes those paragraphs even further into substantive unconscionability territory.

On the sliding scale, this low- to mid–range amount of procedural unconscionability and the high degree of substantive unconscionability render the Arbitration Panel paragraphs and No Consolidation paragraphs of the [arbitration provisions] unconscionable and, hence, unenforceable.

This decision, resting as heavily as it does upon the inability of parties to pay arbitration fees and the failure to disclose the arbitration rules that would govern the resolution of the parties' claims, should give every litigator and transactional lawyer pause when advising their clients concerning the enforceability of arbitration clauses.

In my own mediation practice, I have seen many consumer fraud cases ordered into arbitration based on adhesion contracts requiring arbitration according to the rules of the AAA.  None of these contracts included the rules that would bind the parties and in many cases the Plaintiffs would be unable to afford to fees charged by AAA arbitrators.  Attorneys resisting the enforcement of such agreements would do well to study Parada as would those who advise clients about the enforceability of standardized form arbitration provisions included in contracts which have not been reviewed for unconscionability under recent court rulings. 

For those businesses dealing with consumers, particularly those not given the option of negotiating the terms of an arbitration provision, a possible safety net is the AAA's Expedited Commercial Arbitration Panel, which charges a modest fee for a single day of arbitration before a AAA arbitrator.  Be sure to attach the AAA Expedited Commercial Rules to your contract and avoid the uncertainties created by Parada.



*/  In What Every Litigator Should Know About Enforcing or Avoiding ADR Clauses, panelists Rebecca Callahan, Brian Reider, Commissioner Michele Flurer and Victoria Pynchon will "explain the most commonly-used ADR proceedings, contractual ADR clauses and ADR enforcement mechanisms and discuss significant issues lawyers must “consider or avoid” when dealing with those ADR provisions" at the State Bar Convention in San Diego on Saturday, September 12, 2009 at 2:15 p.m.  CLE: 1.5 Hour

Comments (2)

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Joe Markowitz - September 3, 2009 1:12 PM

Lawyers will of course be interested in the question of how do you draft an enforceable arbitration clause. But I think the more interesting question is how do you justify pre-dispute arbitration clauses, especially in consumer cases, in the first place. You cannot justify them by arguing for all the supposed benefits of arbitration (speed, efficiency, etc.), because if both parties really buy into all of those benefits, they can always agree to arbitrate after a dispute arises. You can only justify pre-dispute arbitration clauses because they lower costs for business, and thereby may benefit consumers in the form of lower prices. Of course that benefit does not accrue to the consumers who actually get into a dispute. Those consumers are almost always better off if they do not waive their rights in advance. I wrote an article about this in the newsletter for the American Bar Association Committee on Alternative Dispute Resolution for Spring 2008, a shorter version of which appeared on my law firm blog (http://www.jcmarkowitz.com/2007_12_01_archive.html). I also got the Sixth District to strike down an arbitration clause as unconscionable in Abramson v. Juniper Networs. (http://findarticles.com/p/articles/mi_pwwi/is_20050229/ai_mark979978371/)

Vickie Pynchon - September 3, 2009 2:03 PM


Thanks for dropping by and congratulations on your victory. I do in fact agree with you in everything you say about consumer arbitration agreements. I am a strong believer in the right of access to the Courts and find it distressing that the "little people" are being shuttled into arbitration proceedings (primarily presided over by old white men & some old white women like me) at a time when the Bench has been diversified so that it is representative of both genders and most American cultures and nationalities. There are people who see this as both diabolical and as undermining the Constitutional right to a jury trial by "the people" rather than by a certain segment of the society who live and work at the top of the social and political system and who are often blind to their own biases (and I do include myself among those people). Thanks for dropping by to take the conversation to a much deeper level than I was.

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