Wednesday, April 28, 2010
The outcome in Rent-a-Center may hinge on the answer. In a nutshell, if unconscionability is truly a post-formation defense that strikes unfair provisions because, well, they're unfair, then it does not relate to the "making" of the arbitration agreement under section 4 of the Federal Arbitration Act. And if the unconscionability defense doesn't fall within section 4, then the FAA doesn't prohibit arbitrators from deciding whether all or part of an arbitration clause is unconscionable.
On the other hand, if unconscionability actually operates from the premise that a party never truly assented to a one-sided clause, then it may attack the "making" of the arbitration clause. Arguably, then section 4 requires a court to adjudicate an unconscionability challenge.
The traditional view is probably the former: that unconscionability assumes that a valid contract exists, but then hacks away at some (or all) of it. Indeed, Rent-a-Center's brief does a great job of collecting sources for that proposition. Recently, though, it's become more common (at least in the academic literature) to conceptualize unconscionability as applying when informational defects cause a party not to realize that a term sharply deviates from her informed ex ante preferences. (I've made that argument, albeit in the context of trust law, here). In other words, unconscionability kicks in when (1) a clause is buried in a take-it-or-leave-it contract (procedural unconscionability) and (2) the harsh nature of the clause reveals that the non-drafting party would have objected to the clause if she'd been aware of it (substantive unconscionability). Viewed this way, unconscionability does flow from an absence of voluntary, knowing assent.
[Posted, on David Horton's behalf, by Jeremy Telman]