In re ad hoc arbitration (Claimants name here) v. (your name here) (File No.) Respondent’s Opposition to Arbitration Respondent opposes arbitration of the claims made by Claimant because the alleged arbitration agreement, which Claimant seeks to enforce, is void, voidable, or inapplicable. Alternatively, the terms of the arbitration writing are unconscionable and must not be enforced. I. Claimant has not proved the existence of a valid arbitration agreement The federal act dictates enforcement of an arbitration agreement upon proof that a written agreement to arbitrate exists and that the claims raised are within the scope of that agreement. Prima Paint v. Flood & Conklin, 388 U.S. 395 (1967). Claimant has failed to produce a copy of the Agreement, which purportedly contains the arbitration language quoted in its claim. Without competent evidence of this material fact, Claimant cannot prove that a valid arbitration agreement exists. Because there is no agreement in evidence, Claimant cannot force
Respondent to submit to arbitration. Claimant has produced nothing to show that Respondent agreed to arbitration under any circumstance. II. Terms of the Arbitration Clause are Unconscionable. A. “Lack of Notice of Arbitration Terms.” It is unconscionable to assume that an individual knows and understands the legal effect of consenting to an arbitration agreement. Claimant is in the business of financial contracting and has an unfair advantage over Respondent and persons similarly situated. Claimant has a duty to provide effective notice of all the terms in its credit card agreement to prospective credit card holders. Claimant’s agreement is a contract of adhesion, which is inherently unfair.
For that reason, Claimant should be required to advise applicants to seek legal counsel before entering into such an agreement. Furthermore, the arbitration clause should be conspicuous; it should be set forth in distinct type larger than the other terms of the agreement. Of course, the foregoing assumes that an arbitration agreement even exists. B. Designation of NAF Unconscionable An arbitration system like the one at issue here – in which arbitrators are compensated through a fee-per-case system and only one party to be ultimately affected selects the forum for resolution – is inherently biased on its face, making the facts concerning any individual subjected to such a system unnecessary to the ultimate question. But the practical importance of this legal question becomes clear from the factual record, which contains substantial evidence that the arbitration service provider at issue in this case – the for-profit National Arbitration Forum (“NAF”) - has been profoundly influenced by the market reality that its business depends upon referrals from and the good favor of lenders. NAF has written a series of inappropriate letters soliciting business from lenders, promising to conduct arbitration tailored to the needs of lenders. A number of these promises sharply favor the lenders’ interests and place consumers at an obvious disadvantage. NAF’s solicitation letters treat lenders as allies and consumers as its enemies. The letters counsel lenders how to defeat their consumers in this battle. NAF made good on its promises by repeatedly entering into litigation between lenders and against consumers as an amicus, always making arguments in support of the position of the defendant lenders against individual consumers. See, e.g., Brief of Amicus Curiae National Arbitration Forum, Marsh v. First USA Bank, N.A., No. 22-10648 (5th Cir Dec. 12, 2000).
NAF’s performance exemplifies the concerns expressed by the United States Supreme Court in Ward v Village of Monroeville, 409 U.S. 57, 935.S.Ct. 80 (1972)1 and establishes that the lender’s arbitration clause falls within the category of unconscionable clauses identified in Arnold v. United Cos. Lending Corp., 511 S.E.2d 854, 861-62 (1994); see also Ward v Village of Monroeville, 409 U.S. at 60-62 (1972). C. Arbitration System Shortchanges Credit Cardholder It is no surprise that Claimant sought to compel arbitration before NAF. The arbitration forum promised the financial service industry that arbitration before NAF will “make a positive impact on [their] bottom line.” NAF achieves what it promises in its advertisements through a decision-making system that has an inherent bias for lenders. Because NAF’s business is dependent upon continued referrals from the defendants and other lenders, there is a strong incentive for NAF to favor lenders over consumers and other parties in disputes referred to arbitration before it. The not-so-surprising result is that NAF arbitration nearly always provides a favorable result for lenders.
In Ward the United States Supreme Court considered facts where, under Ohio state law, the Mayor of Monroeville, Ohio was allowed to sit as a judge in cases of ordinance violations and certain traffic offenses. The Petitioner, tried by the Mayor was convicted of two traffic offenses and fined $50 on each. The facts revealed that the Mayor, in addition to his duties as a judge was responsible for village revenue production, law enforcement, and village management duties. Under the facts of the case, significant village revenues were derived from traffic fines. In Ward, the court held, under a 14th amendment due process analysis, that the constitution is violated when a defendant in a criminal case has his liberty or property subjected to the judgment of a court, the judge of which has a direct, personal, substantial, pecuniary interest in reaching a conclusion against him. Ward 409 U.S. at 60. The Supreme Court holding is easily applied in this instance. NAF attempts to subject Respondent property to the judgment of an arbitration panel that has a direct, personally substantial, pecuniary interest in reaching a conclusion against Respondent. Arbitration of this claim is unjust, and should be denied.
The Respondent argues that the Applicant’s arbitration clause, because it compels arbitration before the lender-designated arbitrator (NAF), is
unconscionable. The arbitration system is structured in such a way that it gives the arbitrator an incentive to favor the lender over the other parties to the litigation. The
Respondent submits that the NAF should declare it is unconscionable for one party to a dispute to deprive the remaining parties of their right to access a court of law and then compel the parties to submit to an arbitration system that has an inherent bias in favor of the party that has designated it. This case poses a question of great significance to the Respondent: whether an arbitration clause that designates arbitration before an arbitrator with a strong incentive to favor one side of the controversy---here the corporate lenders over the consumers---is the sort of arbitration clause that is so unfair and far-reaching as to be unconscionable and unenforceable. This question stands at the intersection of important and long-standing precedents of state courts and of the United States Supreme Court. See Arnold v. United Cos. Lending Corp., 511 S.E.2d 854, 861-62 (1994); see also Ward v Village of Monroeville, 409 U.S. 57 at 60-62 (1972). The resolution of this question requires a new application of important principles from these decisions. In Arnold, the Court held a one-sided, substantively unfair arbitration clause imposed by a large corporate lender upon an unsophisticated consumer in a contract of adhesion is unconscionable and unenforceable under the West Virginia Consumer and Credit Protection Act. See 511 S.E. 2d at 861-62. Though many of the circumstances of Arnold exist in this case, the instant question involves charges of inherent bias in an arbitration system, an issue not addressed in Arnold. The Respondent submits that this clause directing arbitration to such a system is indeed unconscionable. 4
D. NAF Rules Pursuant to NAF rules, arbitrators are paid on a fee-per-case basis. That is to say, arbitrators only get paid if they hear a case, and they get paid more if they handle more cases. Under the NAF Code of Procedure, parties must select an arbitrator from a list of individuals approved and pre-selected by NAF. NAF distinguishes itself from a court of law to lenders by announcing, quite astonishingly, that decisions by its arbitrators are not based on equity. NAF rules prohibit the recovery of damages based on new evidence discovered during the litigation. By forcing Claimant to place a dollar figure on their claim, not only must a consumer sacrifice her or his right to access the courts, the consumer also waives relief he or she would be entitled to under the law. NAF only permits consolidation with the agreement of all parties, making it impossible for consumers to band together to bring common claims. NAF also promoted the fact that under its rules, it is much easier to obtain a default. NAF also represented that these specific rules – limiting awards to amount of the claim, prohibiting consolidation of claims, and procedures that facilitate default – all make NAF arbitration more advantageous to lenders than competing arbitration provider services. Finally, the NAF rules provide for “[v]ery little, if any, discovery.” The consequence of this rule for consumers is obvious. The lender typically holds all pertinent paper and loan documents. By denying the consumer access to
discovery, NAF rules effectively prohibit consumers from proving their case. E. Unconscionable Costs The court of appeals was struck by the large disparity between the cost to arbitrate through NAF and the $200.00 filling fee in state court. The court noted that under NAF rules, “for virtually every piece of documentation requested by a party, a corresponding fee exists.” The court determined that such arbitration fees 5
for a single mother making $20,000.00 per year were “prohibitive, unreasonable, and unfair.”
F. Procedural Unconscionability The court noted that the arbitration clause was part of an adhesion contract, a huge disparity of bargaining power existed between the dealership and the consumer, the consumer’s education, economic background, age and sophistication make it unlikely that the consumer had a true understanding of the arbitration provisions. G. Clause Prohibits Class Actions and Proceedings as Private Attorney General The court held that the arbitration clause’s prohibition of the right to proceed as a class action or private attorney general was against the underlying purpose of the CSPA and therefore unenforceable. “Such a contract clause is injuries to the interest of the State, is against public policy, and accordingly cannot and will not be enforced.” The class action prohibition is the single most important issue in litigation relating to arbitration clauses, and the Ohio decisions a great development, the best in about a year. H. Secrecy of Proceedings Secrecy provision is against public policy. The court correctly inferred a secrecy provision from NAF’s intentionally opaque rules. “While for many businesses arbitration provides a confidential form of economical and speedy dispute resolution, this advantage ultimately serves to suppress the purpose of a remedial statue such as the CSPA. Court proceedings, by being open to the public and the media, advance the purpose of remedial consumer statues such as the CSPA. That is, public access to court proceedings helps society become aware of 6
unfair business acts and practices, educating consumers and thereby discouraging such activities. Conversely, arbitration proceedings, which are private, prevent the public from discovering such collative act and practices.” Eagle v. Fred Martin Motor Co. (Feb 25, 2004), Summit App. No. 21522 Ninth District Court Appeals (Ohio), unreported. I. Loser Pays Rules Arbitration clauses that require non-prevailing plaintiffs to pay the defendants’ attorneys fees (a “Loser Pays Rule”) may conflict with certain consumer protection statutes. These rules are suprisingly common, and the Executive Director of the National Arbitration Forum (“NAF”) told a corporate counsel magazine that NAF has adopted a loser pays rule as a means of achieving tort reform. J. Inconvenient Arbitration Venue The arbitration clause or arbitration rules may specify where the arbitration is to take place. Inconvenience of the venue is another grounds for finding an arbitration clause unconscionable. 112 See Lifecare Int’l, Inc. v. CD Med., Inc., 68 F3d 429, 433 (11th Cir. 1995) 113 E.g., Malone v Bechtel Int’l, Inc., 2002 U.S. Dist. LEXIS 1112 (D. V.I. Jan. 22, 2002) 114 Rosenberg v Merrill Lynch, Pierce, Fenner & Smith Inc., 170 F.3d 1 (1st Cir. 1999) 115 Patterson v. ITT Consumer Fin. Corp., 14 Cal. App. 4th 1659, 18 Cal. Rptr. 2d 563 (1993) 116 Patterson v. ITT Consumer Fin. Corp., 14 Cal. App. 4th 1659, 18 Cal. Rptr. 2d 563 (1993) 117 Philyaw v. Platinum Enters., 2001 Va. Cir. LEXIS 10, at *6-*7 (VA. Cir. Ct. Jan.9, 2001) 118 Bolter v. Superior Court, 87 Cal. App. 4 th 900, 104 Cal. Rptr. 2d 888 (2001
K. Arbitration Clause Cannot Limit Federal Statutory Right It is axiomatic that an arbitration agreement that prevents a consumer from obtaining relief under a federal statutory claim is unenforceable because it conflicts with the legislature’s purpose in enacting the statue. 122 See In re Serv. Marine Indus., Inc., 200 U.S. Dist. LEXIS 16580 (E.D. La. Nov.3, 2000) 123 See In re Cavanaugh, 271 B.R. 414 (Bankr D. Mass. 2001) 124 See In re Cavanaugh, 271 B.R. 414 (Bankr D. Mass. 2001) 125 Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1161 (3d Cir. 1989) 126 In Re Crysen/Montenay Energy co., 226 F.3d 160, 166 (2d Cir.2000) 127 In Re Crysen/Montenay Energy Co., 226 F. 3d 160 (2d Cir. 2000) L. Limitation on Attorney Fees A limitation on statutory attorney fees and costs has also been found to be unconscionable or against public policy. 122 2001 Ala. LEXIS 373 ( Ala. Oct. 5, 2001) 123 Ex Parte Thicklin, 2002 Ala. LEXIS 11 (Ala. Jan. 11, 2002) 124 See Powertel, Inc. v. Bexeley, 743 So. 2d 570 (Fla. Dist. Ct. App. 1999) 125 Stehli v. Action Custom Homes, Inc., 1999 Ohio App. LEXIS 4464 (Ohio Ct. App. Sept. 24, 1999) 126 Perez v Globe Airport Sec. Services, Inc., 253 F.3d 1280 (11 th Cir. 2001) 127 Stehli v. Action Custom Homes, Inc., 1999 Ohio App. LEXIS 4464 M. Limitation on Damages One factor in determining whether a clause is unconscionable is whether it requires consumers to give up legal remedies. For example, an arbitration clause that expressly limits the merchant’s liability to actual damages can lead to a finding of substantive unconscionability, because it shields the merchant from punitive damages. 119 Martin Bank v. Worldcom, Inc., 2002 N.Y. Misc. LEXIS 33 (N.Y. Sup. Ct. Jan. 24, 2002) 120 See Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 60 Cal. Rptr. 2d 138 (1997) 121 See Circuit City Stores, Inc. v. Adams, 279 f.3d 889 (9th Cir. 2002) 8
N. Bias of Arbitrator or Arbitration Mechanism A contractual party may not act in the capacity of arbitrator, and a contractual provision, which designates him to serve in that capacity is to be denied enforcement on the grounds of unconscionability. 93 Zak v. Prudential Prop. & Cas. Ins. Co., 713 A.2d 681, 684 (PA. Super. Ct. 1998) 100 See Hudson v. Chicago Teachers Union Local No. 1, 743 F.2d 1187 (7th Cir. 1984) 101 Hooters of AM., Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999)
O. Lack of Mutuality as a Contract Defense A number of courts have held that lack of mutuality is enough to void the arbitration clause and render it unenforceable as a matter of contract law. 220 Palm Harbor Homes, Inc. v. McCoy, 944 S.W.2d 716 (Tex. App. 1997) 221 Harris v. Green Tree Fin. Corp, 183 F.3d 173 (3d Cir. 1999) 222 Hull v. Norcom, Inc., 750 F2d 1547 (11th Cir. 1985)
P. Conclusion Respondent opposes arbitration for lack of a valid agreement and opposes designation of NAF as the arbitral forum.
______________________ In Propria Persona