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Wednesday, October 16, 2013

Arbitration Agreement Found Unconscionable

Just when you start to lose faith in the judiciary, a couple of cases come along that suggest that some judges are willing to exercise common sense.  I blogged about Judge Koh’s opinion regarding consent in a case involving Google and email scanning in a previous post.  Today, I want to talk about a case that was even more delightful because it bucked the wave of arbitration clause cases ruling against consumers.  In Clark v. Renaissance West, LLC, the Superior Court of Maricopa County found an arbitration clause substantively unconscionable and therefore unenforceable -- and the Court of Appeals affirmed!

The plaintiff was John H. Clark, an eighty-eight year old man who was admitted into a nursing facility owned by Renaissance West.  After checking in, he signed an arbitration agreement which required him to arbitrate all disputes with Renaissance West.  After he was discharged, he filed a complained alleging that while he was at the nursing facility, he had been neglected and consequently, suffered a severe pressure ulcer that required medical treatment and long term case.  Renaissance West moved to dismiss and compel arbitration.  The trial court held an evidentiary hearing at which Clark’s expert witness testified that it would cost Clark approximately $22,800 in arbitrator’s fees to arbitrate the case.  The trial court ruled that based upon Clark’s limited income (he was retired and living on a fixed income), the arbitration agreement was substantively unconscionable.  The Court of Appeals agreed.

There were several noteworthy aspects to this case.  First, the trial court found that the arbitration agreement was not procedurally unconscionable.  The Agreement was a separate document from other paperwork signed at the time of admission, it was conspicuous and in bold font and large print.  It was also not offered on a take-it-or-leave-it basis and it could have been rescinded within thirty days of signature.  But, as Maxwell v. Fidelity held, you don’t need both procedural and substantive unconscionability in Arizona.  Substantive unconscionability will do.

The Court of Appeals noted that an arbitration agreement “may be substantively unconscionable if the fees and costs to arbitrate are so excessive as to ‘deny a potential litigant the opportunity to vindicate his or her rights.’”  The question of whether arbitration is prohibitively expensive depends “on the unique circumstances of each case” and courts consider the following factors.

The first is “the party seeking to invalidate the arbitration agreement must present evidence concerning the cost to arbitrate.”  This evidence “cannot be speculative,” and must be based upon “specific facts showing with reasonable certainty the likely costs of arbitration.”  The court found that the expert testimony was adequate to establish the estimate cost of $22,800 in arbitrators’ fees alone.

The second factor is that a party must make  a “specific individualized showing as to why he or she would be financially unable to bear the costs of arbitration” based upon his or her specific income/assets.  Here, the plaintiff testified that he was retired, living on a fixed income, and did not have any financial resources such as savings or stocks.  His total monthly income of $4,630, consisted of social security benefits, a pension and veteran’s assistance payments.  The court deferred to the trial court’s finding that in light of these facts, arbitration would be cost-prohibitive. 

The third factor is “whether the arbitration agreement or the applicable arbitration rules references in the arbitration agreement permit a party to waive or reduce the costs of arbitration based on financial hardship.”  In this case, the arbitration agreement did not provide for a reduction or waiver of fees based upon financial hardship.  Strike three.

Based upon an analysis of the three above factors, the court concluded that there was reasonable evidence to support the trial court’s finding that plaintiff would be unable to afford to arbitrate his claims. Consequently, the arbitration agreement “effectively precludes Plaintiff from obtaining redress for any of his claims, and is therefore substantively unconscionable and unenforceable.”

[Nancy Kim]

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