IN THE WEST VIRGINIA SUPREME COURT OF APPEALS
STATE OF WEST VIRGINIA ex rel.
JAMES DUNLAP,
Petitioner,
vs. No. 30035
THE HONORABLE IRENE C. BERGER,
JUDGE OF THE CIRCUIT COURT OF
KANAWHA COUNTY, WEST VIRGINIA,
FRIEDMAN’S INC., d/b/a Friedman’s Jewelers,
et al.,
Respondents.
AMICUS CURIAE BRIEF OF TRIAL LAWYERS FOR PUBLIC JUSTICE
From the Circuit Court of Kanawha County, West Virginia
Civil Action No. 00-C-1155
Submitted by:
Harry Deitzler, Esq. (WVSB No. 981) Michael J. Quirk, Esq.
Hill, Peterson, Carper, Bee & Deitzler Khalid Elhassan, Esq.
500 Tracy Way Trial Lawyers for Public Justice
Charleston, WV 25311-1555 1717 Massachusetts Avenue NW
Telephone/(304) 345-5667 Suite 800
Washington, DC 20036
Telephone/(202) 797-8600
TABLE OF CONTENTS
Page(s)
STATEMENT OF FACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY OF ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
I. THE FEDERAL ARBITRATION ACT PERMITS THE
INVALIDATION OF AGREEMENTS TO ARBITRATE IF
THEIR TERMS ARE UNCONSCIONABLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
II. FRIEDMAN’S ARBITRATION CLAUSE SADDLES CONSUMERS
PROHIBITIVELY HIGH, AND THUS IMPERMISSIBLE, COSTS. . . . . . . . . . . . . . . . . 3
A. Arbitration Clauses Are Only Enforceable If They Permit Parties to
Vindicate Their Rights As Effectively As They Could In Court. . . . . . . . . . . . . . . .4
B. Many Courts Have Refused to Enforce Arbitration Clauses that
Impose Prohibitive Arbitration Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
C. AAA’s Rule Dealing with the Deferral and Waiver of Fees
Provides Little Protection to Claimants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
D. Friedman’s Unilateral Act of Tendering “Initial” AAA Arbitration
Fees Does Not Cure the Terminal Flaws in this Contract and
Arbitration Clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
1. Contracts Whose Terms are Clear and Unambiguous
Ought be Construed and Judged in Accordance With the
Plain Meaning of Such Terms, Without Resort to
Extraneous Material. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2. Having Drafted an Unconscionable and Unenforceable
Contract, the Drafting Party Ought not Receive this
Court’s Assistance in Re-Drafting the Contract so as to
Render it Enforceable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
TABLE OF CONTENTS (CONT.)
Page(s)
III. FRIEDMAN’S ARBITRATION CLAUSE IMPERMISSIBLY
LIMITS THE RIGHTS AND REMEDIES AVAILABLE TO
WRONGED CONSUMERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
A. Arbitration Must Offer the Relief Otherwise Available
in Court. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
B. Friedman’s Arbitration Clause Fails to Offer Relief Otherwise
Available in Court, and Instead Sharply Curtails Consumers’
Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
C. Friedman’s Attempt to Curtail Available Consumer Remedies
Renders the Contract’s Arbitration Clause an Unconscionable
Limitation of Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
D. Friedman’s Attempt to Curtail Available Consumer Remedies
Renders the Contract’s Arbitration Clause an Unenforceable
Exculpatory Clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
E. It Is For This Court To Decide Which West Virginia Statutory
Rights May Not Be Waived in A Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
F. Punitive Damages, in Particular, Ought not be Waivable. . . . . . . . . . . . . . . . . . . .19
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
TABLE OF AUTHORITIES
Page(s)
Cases
Armendariz v. Foundation Health Psychcare Services, Inc.,
24 Cal. 4th 83 (Cal. 2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4-6, 18
Arnold v. United Companies Lending Corp., 204 W. Va. 229 (W. Va. 1998)
Art’s Flower Shop v. Chesapeake & Potomac Tel. Co., 186 W. Va. 613 (1991)
Ball v. SFX Broadcasting, 165 F.Supp.2d 230 (N.D.N.Y. 2001)
Bartles v. Hinkle, 196 W. Va. 381(1996)
Burgess v. Porterfield, 196 W. Va.178 (1996)
Camacho v. Holiday Homes, Inc., 167 F.Supp.2d 892 (W.D. Va. 2001)
Cavalier Manufacturing, Inc. v. Jackson, 2001 Ala. LEXIS 373 (Ala. 2001)
Cole v. Burns, 105 F.3d 1465, 1484 (D.C. Cir. 1996)
DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459 (S.D.N.Y. 1997)
Doctors’ Association Inc. v. Cassorotto, 517 US 681 (1996)
Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938)
Ex Parte Thicklin, 2001 Ala. LEXIS 380 (2001)
Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306 (6th Cir. 2000)
Flyer Printing Co. v. Hill, 2001 Fla. App. LEXIS 9761
(Fla. Dist. Ct. App. July 18, 2001)
FOP Lodge No. 69 v. City of Fairmont, 196 W. Va. 97 (1996)
Gilmer v. Interstate/Johnson Lane Corp., 500 US 20 (1991)
Giordano v. Pep Boys - Manny, Moe & Jack, Inc., 2001 WL 484360 (E.D. Pa. 2001)
Graham Oil Co. v. ARCO Products Co., 43 F.3d, 1244 (9th Cir. 1994)
Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Hopkins v. Wilkinson, 115 W. Va. 32, 36 (1935)
In re Managed Care Litigation, 132 F.Supp.2d 989 (S.D. Fla. 2000)
LaChance v. Northeast Publishing, Inc., 965 F. Supp. 177(D. Mass. 1997)
Martens v. Smith Barney, Inc., 181 F.R.D. 243 (S.D.N.Y. 1998)
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985)
Murphy v. North Am. River Runners, 186 W. Va. 310 (W. Va. 1991)
Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054 (11th Cir. 1998
Parrett v. City of Connersville, Ind., 737 F.2d 690 (7th Cir. 1984)
Perry v. Thomas, 482 U.S. 483 (1987)
Phillips v. Associates Home Equity Services, 2001 WL
Shankle v. B-G Maintenance Managagement, 163 F.3d 1230 (10th Cir. 1999)
Spain v. Brown & Williamson Tobacco Corp., 230 F.3d 1300 (11th Cir. 2000)
Travis v. Alcon Lab, Inc., 202 W. Va.. 369 (1998)
Troy Mining Corp. v. Itmann Coal Mining Co., 176 W. Va. 599 (W. Va. 1986)
Volt Info. Sciences, Inc. v. Bd. of Tr., 489 U.S. 468 (1989)
West v. AT&T, 311 U.S. 223 (1940)
Statutes and Legislative Materials
Federal Arbitration Act, 9 USC § 2
Miscellaneous
Commercial Rules of the American Arbitration Association
STATEMENT OF FACTS
Amicus adopt and incorporate Petitioner Dunlap’s statement of facts in the Petition for a Writ of Prohibition.
SUMMARY OF ARGUMENT
The arbitration clause in Respondent Friedman’s Inc’s (“Friedman’s”) consumer contract abuses the tool of private arbitration by imposing prohibitive forum costs on consumers - forum costs that far exceed what consumers would pay if they were able to litigate their disputes in Circuit Court, rather than before a private arbitrator. Such high forum costs would discourage most consumers from making any attempt to vindicate their rights. Such prohibitive costs render Friedman’s arbitration clause unenforceable.
Friedman’s compounds the oppressiveness of its arbitration clause by seeking the outright elimination of some of the consumer rights and remedies that the state of West Virginia, through its legislature and courts, has extended to its citizenry - rights and remedies intended to protect West Virginians from the very types of abuse that led to the filing of this class action. That curtailment of remedies renders the Friedman’s arbitration clause unenforceable.
ARGUMENT
I. THE FEDERAL ARBITRATION ACT PERMITS THE INVALIDATION OF AGREEMENTS TO ARBITRATE IF THEIR TERMS ARE UNCONSCIONABLE
The Federal Arbitration Act (FAA) provides that contracts to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 USC § 2 (emphasis added). In accordance with the italicized text, an arbitration clause may be struck down on grounds of law or equity, such as unconscionability, provided that such grounds apply the same standards to all contracts, without singling out arbitration. In construing § 2 and the utilization of state law to strike an arbitration clause, the United States Supreme Court has held that “state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.” Perry v. Thomas, 482 U.S. 483, 492 (1987) (emphasis in original).
The FAA thus permits courts applying state law to refuse to enforce agreements to arbitrate if the grounds for holding the arbitration clause invalid apply equally to all contracts, but does not permit courts to invalidate arbitration clauses on the basis of legal theories which “single out” arbitration clauses. In striking down an arbitration clause for containing unconscionable terms and contravening public policy, the Alabama Supreme Court recently announced one test for complying with the “general applicability” requirement of the FAA:
such a[n unconscionable arbitration] provision would have to be unenforceable regardless of whether the parties contemplated the resolution of disputes by arbitration or through judicial proceedings. To hold otherwise would run afoul of the rule stated in Doctors’ Association Inc. v. Cassorotto, 517 US 681 (1996), where the United States Supreme Court held that the FAA preempted a Montana statute that conditioned enforceability of an arbitration clause on compliance with special notice requirements not applicable to other contracts.
Ex Parte Thicklin, 2001 Ala. LEXIS 380 at *18. The Thicklin court added that
the absence of precedential authority does not prevent this Court from recognizing unconscionability as a defense to the enforcement of such a provision in an arbitration agreement so long as any such newly announced rule condemning a provision immunizing a party from liability for punitive damages applies to all contracts, regardless of the contemplated method of dispute resolution. In other words, such a provision would have to be unenforceable regardless of whether the parties contemplated the resolution of disputes by arbitration or through judicial proceedings.
Id. at 17-18.
The Supreme Court has squarely stated that the defense of unconscionability is available to a party challenging an arbitration agreement. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996) ( “generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements without contravening [the F.A.A.]”); Gilmer v. Interstate/Johnson Lane Corp., 500 US 20, 33 (1991) (“courts should remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds ‘for the revocation of any contract’”) (citation omitted).
West Virginia’s doctrine of unconscionability is discussed in detail in Petitioner’s briefs (Petition for a Writ of Prohibition, at 16-23), and this amicus curiae brief will not attempt to repeat that discussion. Instead, we seek to draw the Court’s attention to two elements of substantive unconscionability found in Friedman’s arbitration clause that render it unenforceable: the prohibitively high costs it imposes on consumers seeking to vindicate their statutory and common law rights and the outright elimination of some of those rights that it effects.
II. FRIEDMAN’S ARBITRATION CLAUSE SADDLES CONSUMERS WITH PROHIBITIVELY HIGH, AND THUS IMPERMISSIBLE, COSTS
Clause 14 of the Friedman’s consumer contract requires consumers to resolve disputes “[i]n accordance with the Commercial Rules of the American Arbitration Association,” and adds that “[a]ll arbitrators or mediators’ fees shall be equally divided between the parties.” By requiring consumers to use the American Arbitration Association’s (AAA’s) Commercial Rules and by mandating a division of arbitration fees, the Friedman’s arbitration clause places a high financial barrier in the path of consumers seeking to vindicate their rights that would discourage most from ever making the attempt.
A. Arbitration Clauses Are Only Enforceable If They Permit Parties to Vindicate Their Rights As Effectively As They Could In Court
The U.S. Supreme Court has stated that arbitration is acceptable as an alternative to litigation in court because it is simply a “different forum”—one with somewhat different and simplified rules—but nonetheless one in which the basic mechanisms for obtaining justice permit a party to “effectively vindicate” his or her rights. E.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991), Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985). The Friedman’s arbitration clause ignores this premise, and instead saddles consumers with prohibitive costs and fees that have no parallel in court. These costs and fees would make arbitration inaccessible to plaintiff Dunlap and similarly situated consumers, and would impede their ability to “effectively vindicate” their rights.
If businesses could impose excessive arbitration costs on consumers, they could effectively shield themselves from liability for their wrongdoing. This would constitute an abuse of the arbitration process. “The existence of large arbitration costs could preclude a litigant ... from effectively vindicating her federal statutory rights in the arbitral forum.” Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 90 (2000). “It is not only the costs imposed on the claimant but the risk that the claimant may have to bear substantial costs that deters the exercise of the constitutional right of due process.” Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 110 (Cal. 2000). The specter of high arbitration costs being used to prevent claimants from access to justice also haunted the court in Shankle v. B-G Maintenance Managagement, 163 F.3d 1230 (10th Cir. 1999):
In order to invoke the procedure mandated by his employer, however, Mr. Shankle had to pay for one-half of the arbitrator's fees. Assuming Mr. Shankle's arbitration would have lasted an average length of time, he would have had to pay an arbitrator between $1,875 and $5,000 to resolve his claims. Mr. Shankle could not afford such a fee, and it is unlikely other similarly situated employees could either. The Agreement thus placed Mr. Shankle between the proverbial rock and a hard place - it prohibited use of the judicial forum, where a litigant is not required to pay for a judge's services, and the prohibitive cost substantially limited use of the arbitral forum.
Shankle, 163 F.3d at 1234-1235.
Gilmer, Armendarez, and Shankle could just as well have been opining on the bind that Mr. Dunlap and similarly situated West Virginia consumers find themselves in today as a result of Friedman’s arbitration clause, and its attendant high costs of arbitration - costs which “preclude,” “deter,” and place consumers “between the proverbial rock and a hard place.”
B. Many Courts Have Refused to Enforce Arbitration Clauses that Impose Prohibitive Arbitration Costs
Courts regularly refuse to enforce arbitration clauses which seek to saddle weaker parties with high costs that have no equivalent in traditional courts. In refusing to compel arbitration because of high costs imposed by an arbitration clause, the U.S. Court of Appeals for the D.C. Circuit held that “it is unacceptable to require Cole to pay arbitrators' fees, because such fees are unlike anything that he would have to pay to pursue his statutory claims in court.” Cole v. Burns, 105 F.3d 1465, 1484 (D.C. Cir. 1996). 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). Similarly, the California Supreme Court, in striking an arbitration clause which imposed high costs on statutory claims, emphasized:
we are unaware of any situation in American jurisprudence in which a beneficiary of a federal statute has been required to pay for the services of the judge assigned to hear her or his case. Under Gilmer, arbitration is supposed to be a reasonable substitute for a judicial forum. Therefore, it would undermine Congress's intent to prevent employees who are seeking to vindicate statutory rights from gaining access to a judicial forum and then require them to pay for the services of an arbitrator when they would never be required to pay for a judge in court.
Armendariz, 24 Cal. 4th, at 108.
The reasoning from Armendarez should apply equally to Mr. Dunlap’s statutory claims.
Mr. Dunlap, and similarly situated West Virginia consumers, are faced with the same predicament which led to the above opinions finding arbitration clauses unenforceable: they are being forced to bear prohibitive arbitration costs that detract from, if not outright destroy, their ability to vindicate their rights. The Friedman’s contract calls for resolution of disputes in accordance with the Commercial Arbitration Rules of the AAA. As plaintiffs set forth in the Petition for a Writ of Prohibition, AAA imposes substantial filing fees, and its arbitrators charge hundreds of dollars an hour for both in-hearing time and for “study” time. The fees include a $500 minimum, non refundable administrative fee; a $150 daily hearing fee; a $150 daily room rental fee; and $100 to $350 hourly arbitrator fee, for in-hearing, as well as “study” time. Then there are processing fees, reporting service fees, and possible postponement fees. Petition for a Writ of prohibition, at 21, and Exhibit O, attached thereto. Add those figures up, and the costs of arbitration could easily approach $1,000 per day.
Faced with similar evidence, the U.S. District Court for the Western District of Virginia recently denied a motion to compel arbitration before the AAA, having found that the plaintiff would have to “pay an initial filing fee of $ 1250 to initiate her claim and a $ 750 case fee shortly thereafter. Camacho could not recover those fees, unless she ultimately prevailed on her claim.” Camacho v. Holiday Homes, Inc., 167 F.Supp.2d 892, 897 (W.D. Va. 2001).
Some parties have suggested that AAA costs are not so high because the AAA has a rule that permits it to waive or defer administrative fees in certain circumstances. The Camacho court, however, noted the stark limitation on this rule -- it does not apply to the most significant types of arbitral fees:
even if the initial $ 2000 in administrative fees were waived or deferred, Mrs. Camacho has demonstrated that the additional costs of the arbitration process itself amount to an insurmountable financial barrier to her. To proceed in arbitration, Camacho would be responsible for paying one-half of the anticipated fee and expenses of the arbitrator. Since there is only one qualified arbitrator in the Roanoke area, it is possible that another arbitrator would have to travel to the Roanoke area to hear the parties' dispute. Camacho has shown that an arbitrator would require payment ranging from $ 600 (one-half the cost of the cheapest arbitrator for 12 hours and no expenses) to $ 4100 (one-half the cost of the most expensive arbitrator for 24 hours and $ 1000 travel and accommodation expenses).
Id. at 897.
Numerous other courts have made similar findings regarding AAA arbitration costs. For example, the federal district court for the Northern District of Illinois recently found that AAA arbitration costs were a basis for denying a motion to compel arbitration, noting that:
Phillips offers evidence from the AAA that she will be forced to pay upwards of $4,000 simply to file her claim. ... Furthermore, the initial filing fee is far from the only cost involved in the arbitration. The AAA's Commercial Rules provide that the arbitrator's fees (which range from $750 to $5,000 per day, with an average of $1800 per day in the Chicago area), travel expenses, rental of a hearing room, and other costs are borne equally by the parties, absent some agreement between the parties.
Phillips v. Associates Home Equity Services, 2001 WL 1159216, at 4 (N.D. Ill. Sep 28, 2001).
The Camancho and Phillips courts’ recent findings on AAA’s high arbitration costs are not isolated. At least two other courts have also recently found high AAA arbitration costs to be sufficient grounds for denying a motion to compel arbitration:
[plaintiff] Christopher has submitted an affidavit in support of her opposition detailing the various costs which she can reasonably be expected to incur if she is compelled to submit her claims to arbitration. These include a $ 1,000 per day arbitrator's fee, a $ 500 counterclaim fee, $150 per day hearing fees, and $ 150 per day postponement fees.
Ball v. SFX Broadcasting, 165 F.Supp.2d 230, 240 (N.D.N.Y. Aug 21, 2001) (citations omitted).
A similar finding about high AAA arbitration costs also led to the denial of a motion to compel arbitration, earlier this year:
Giordano has submitted a fee schedule from the AAA that establishes that the initial filing fee would likely amount to $2,000. While he has not established the arbitrator's likely charges with exacting precision, it is clear that an up-front responsibility for one half of daily fees anywhere near the range of $600 to $900, in conjunction with responsibility for the filing fee, would function as a barrier to plaintiff's pursuit of arbitration of his claims.
Giordano v. Pep Boys - Manny, Moe & Jack, Inc., 2001 WL 484360 (E.D. Pa. Mar 29, 2001).
Four different federal district courts reached the same conclusion: that the high costs of one arbitration provider, AAA, provide sufficient grounds for denial of a motion to compel arbitration. Friedman’s seeks to impose the same high AAA arbitration costs on Mr. Dunlap and similarly situated West Virginia consumers. This Court ought reach the same conclusion about the ill effects of such prohibitive costs, and prevent Friedman’s from compelling arbitration in this case.
In comparison with the high costs imposed by the AAA Commercial Rules, the case filing
fee in the Kanawaha County Circuit Court is $85.
Unlike the AAA, with its multiple fees for
every aspect of a proceeding, the $85 filing fee in court covers the plaintiff’s bill for the entire
lawsuit - including room, reporter, and a disinterested arbiter who does not bill disputants by the
hour. Contrasting those dollar amounts makes it clear that Friedman’s arbitration clause will have
the effect of pricing consumers out of access to justice. The FAA was not intended to facilitate
such an abuse in a consumer contract.
C. AAA’s Rule Dealing with the Deferral and Waiver of Fees Provides Little Protection to Claimants
Friedman’s attempts to minimize the question of arbitral fees by pointing out that AAA “may, in the event of extreme hardship on the part of any party, defer or reduce the administrative fees.” (Respondents’ Joint Response at 26, citing from the AAA Commercial Dispute Resolution Procedures). Friedman’s however omitted to mention that “deferment or reduction of fees from AAA” applies solely to AAA administrative fees, and does not extend to any of the other arbitration costs. Friedman’s also omitted to mention that “deferral” simply means that Petitioner would have to pay AAA later (as opposed to up front), but pay nonetheless. In addition, “may” connotes a lack of certainty, which in turn is compounded by the silence as to what constitutes “extreme hardship” in the eyes of AAA. Nor did Friedman’s mention whether AAA has a streamlined system in which a disinterested decision maker makes the determination of “extreme hardship.” Finally, Friedman’s mentioned nothing about the frequency and degree to which AAA tends to “reduce” its fees.
In the recent Camacho decision, however, the court addressed the preceding points, and had the following to say about AAA “deferral” or “reduction” of fees: “Though Camacho may apply for fee deferral or reduction due to ‘extreme hardship,’ the parties stipulate that waiver of fees is extremely rare in practice. The AAA does not provide formal standards for granting hardship, and its accounting department actually determines who is afforded "extreme hardship" status.” Camacho v. Holiday Homes, Inc., 167 F.Supp.2d 892, 897 (W.D. Va. 2001). In short, AAA administrative fees, while certainly prohibitive and exorbitant when compared to the costs of seeking justice in court, are but a small portion of the heavy financial burden which makes Friedman’s brand of arbitration unbearable for the average consumer.
The burden of steep AAA administration fees is undoubtedly onerous, but those fees are relatively light when compared to arbitrator fees - the biggest potential cost in arbitration. Disputants may be charged $100 to $350 per hour whether during a hearing or during “study time” (Exhibit O, attached to plaintiff’s Petition for a Writ of Prohibition). Friedman’s makes the naked assertion that “it is almost a certainty that the appointed arbitrator will serve without compensation.” Respondents’ Joint Response at 27. There is no basis for this claim, however, as arbitrators themselves generally serve on a paid-fee basis and there is nothing in the record to support this claim. Friedman’s also argues that AAA arbitrators “will customarily” hear the first day of arbitration for no additional fee. Id. This “custom” is not required by AAA’s rules, however, and provides no relief to claimants whose claims will go beyond the first day. In addition, this “custom” does not extend to the preparation time which an arbitrator must put in prior to beginning the first day of hearings. Friedman’s provides no indication of how often AAA arbitrators in Kanawha County, or anywhere else in West Virginia, tend to arbitrate for free. Nor did Friedman’s mention whether such altruistic arbitrators, if found, would also foot the bill for the sundry other fees that would make arbitration a prohibitively expensive endeavor for Mr. Dunlap and other West Virginia consumers, such as room rental, processing fees, or reporting services - or even the AAA administrative fees, should AAA’s accounting department determine that a consumer does not meet its criterion of “extreme hardship.”
D. Friedman’s Unilateral Act of Tendering “Initial” AAA Arbitration Fees Does Not Cure the Terminal Flaws in this Contract and Arbitration Clause
The text of the arbitration clause states that “All arbitrators or mediators’ fees shall be equally divided between the parties” - and the eagerness of Friedman’s to mend that fatal flaw in what it had wrought/ drafted is evinced by its unilateral step of tendering to AAA the “initial fees.” Respondents’ Joint Response, at 26. Leaving aside whether “initial fees” are the entire AAA fees, and whether Mr. Dunlap would remain liable for any portion of AAA’s administrative fees at some future point in time, it should be noted that Friedman’s failed to mention where in West Virginia’s law of contract there is found support for the notion that a flawed contract, unenforceable because of unconscionable terms that contravene public policy, could be saved or cured through a subsequent unilateral act by the drafting party.
1. Contracts Whose Terms are Clear and Unambiguous Ought be Construed and Judged in Accordance With the Plain Meaning of Such Terms, Without Resort to Extraneous Material
Friedman’s contract is unenforceable, not because of what Friedman’s might or might not do to alleviate some of the more unconscionable terms, but because of the unconscionable terms themselves, as contained within the four corners of the instrument. It has long been a basic tenet of West Virginia law of contract that the meaning of a contract is to be found on its face. See, e.g.; FOP Lodge No. 69 v. City of Fairmont, 196 W. Va. 97, 100 (1996) (“contracts containing unambiguous language must be construed according to their plain and natural meaning”); and Hopkins v. Wilkinson, 115 W. Va. 32, 36 (1935) (seeking the meaning of a contract within its four corners). Here, the language of Friedman’s arbitration clause is clear and the meaning is unambiguous: consumers wishing to vindicate there are forced to bear prohibitive fees that far exceed those required by court, and important consumer statutory and common law rights and remedies are outright abolished.
Each of these terms is so oppressive and so one sided as to be substantively unconscionable - each is a term “unreasonably favorable to the stronger party,” as substantive unconscionability was defined in Troy Mining Corp. v. Itmann Coal Mining Co., 176 W. Va. 599, 604 (W. Va. 1986). Combined with the procedural unconscionability discussed in Mr. Dunlap’s Petition, each of those terms is sufficient to render the agreement unconscionable, on grounds applicable to all contracts in West Virginia, and thus sufficient for the “generally applicable” requirement of 9 USC § 2 on grounds for striking an arbitration clause.
The U.S. Supreme Court has said that “the primary purpose” of the FAA is to ensure “that private agreements to arbitrate are enforced according to their terms.” Volt Info. Sciences, Inc. v. Bd. of Tr., 489 U.S. 468, 479 (1989). Accordingly, if an agreement to arbitrate, such as Friedman’s, cannot be enforced according to its terms, a court should refuse to enforce it.
2. Having Drafted an Unconscionable and Unenforceable Contract, the Drafting Party Ought not Receive this Court’s Assistance in Re-Drafting the Contract so as to Render it Enforceable
Friedman’s, by contending that its unilateral act of tendering “initial” filing fees to AAA is a cure for the unconscionability of the arbitration clause’s high costs is asking this Court to re-draft the arbitration clause. This request should be denied because a corporate defendant who has drafted an unconscionable clause, and who faces court scrutiny of that clause, ought not receive judicial assistance in re-drafting the clause so it will be enforceable. As a comment to the Restatement (Second) of Contracts states: “a court will not aid a party who has taken advantage of his dominant bargaining power to extract from the other party a promise that is clearly so broad as to offend public policy by redrafting the agreement so as to make a part of the promise enforceable.” Restatement (Second) of Contracts § 184 cmt. b.
A recent federal court opinion flatly rejected a defendant’s offer to trim the more blatantly 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 opinion rejected a drafting party’s attempt to rewrite an unconscionable arbitration clause - an attempt even more similar to that of Friedman’s, albeit also more “generous” in that it sought to pay the full costs of arbitration, as opposed to Friedman’s somewhat ambiguous tender of “initial” fees:
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. v. Hill, 2001 Fla. App. LEXIS 9761, 10 (Fla. Dist. Ct. App. July 18, 2001). In like vein, this Court should decline to “remake the parties’ contract.” In short, when a corporation such as Friedman’s drafts an unconscionable, and thus unenforceable, arbitration clause, it is not the responsibility of a court to re-write the terms of the agreement in order to find a legal way for the drafter to enjoy the otherwise unobtainable results it sought.
III. FRIEDMAN’S ARBITRATION CLAUSE IMPERMISSIBLY LIMITS THE RIGHTS AND REMEDIES AVAILABLE TO WRONGED CONSUMERS
In real life we can envisage arbitration provisions being imposed upon consumers in contract situations where consumers are totally ignorant of the implications of what they are signing, and where consumers bargain away many of the protections which have been secured for them with such difficulty at common law.
Arnold v. United Companies Lending Corp., 204 W. Va. 229, 236 (W. Va. 1998).
A. Arbitration Must Offer the Relief Otherwise Available in Court
Arbitration must offer “all of the types of relief that would otherwise be available in court” before a court will compel arbitration. Cole, 105 F.3d at 1482. As the U.S. Court of Appeals for the Sixth Circuit has held:
[E]ven if arbitration is generally a suitable forum for resolving a particular statutory claim, the specific arbitral forum provided under an arbitration agreement must nevertheless allow for the effective vindication of that claim. Otherwise, arbitration of the claim conflicts with the statute’s purpose of both providing individual relief and generally deterring unlawful conduct through the enforcement of its provisions.
Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306, 313 (6th Cir. 2000). See also Paladino v. Avnet Computer Tech., Inc., 134 F.3d 1054, 1062 (11th Cir. 1998) (Cox, J. concurring, for a majority of the court) (the arbitrability of claims “rests on the assumption that the arbitration clause permits relief equivalent to court remedies. . . . When an arbitration clause has provisions that defeat the remedial purpose of the statute . . . the arbitration clause is not enforceable.”) (citing Cole); Graham Oil Co. v. ARCO Products Co., 43 F.3d 1244, 1247-48 (9th Cir. 1994) (invalidating an arbitration agreement that required a claimant to forfeit rights and benefits guaranteed by the Petroleum Marketing Practices Act, including imposing a limit on the recovery of punitive damages and attorneys’ fees and a one-year statute of limitations); Parrett v. City of Connersville, Ind., 737 F.2d 690, 697 (7th Cir. 1984) (holding that arbitration offended due process where arbitrator could not award full common law damages nor prevent harm to plaintiff before it occurred), cert. dismissed, 469 U.S. 1145 (1985); Martens v. Smith Barney, Inc., 181 F.R.D. 243, 256 (S.D.N.Y. 1998) (“arbitration must allow remedies central to the statutory scheme . . . [and] sufficient to satisfy statutory purposes”); DeGaetano v. Smith Barney, Inc., 983 F. Supp. 459, 469 (S.D.N.Y. 1997) (voiding provision of arbitration agreement that disallowed attorneys’ fees to prevailing plaintiff in Title VII claim after concluding that “contractual clauses purporting to mandate arbitration of statutory claims . . . are enforceable only to the extent that the arbitration preserves the substantive protections and remedies afforded by the statute.”); LaChance v. Northeast Publishing, Inc., 965 F. Supp. 177, 185 (D. Mass. 1997) (allowing plaintiff to pursue judicial claim under the Americans with Disabilities Act where arbitration agreement did not authorize arbitrator to provide remedy of ‘reasonable accommodation’ which plaintiff was entitled to pursue under the Act).
Taken together, the preceding cases stand for the following proposition: courts should not compel arbitration unless the arbitrator has the power to provide a claimant with all of the relief to which he or she is entitled.
B. Friedman’s Arbitration Clause Fails to Offer Relief Otherwise Available in Court, and Instead Sharply Curtails Consumers’ Remedies
Friedman’s arbitration clause contains sweeping limitations on the damages remedies available to consumers in dispute with the company. First, it provides that “No arbitrator may make an award of punitive damages.” Second, it goes on to limit damages to restitution and nothing else: “RECOVERY HEREUNDER BY THE BUYER SHALL NOT EXCEED AMOUNTS PAID BY THE BUYER HEREUNDER.” Friedman-Dunlap Contract, clause 14. The clause thus purports to displace the remedial provisions of West Virginia’s Uniform Commercial Code, consumer protection, credit protection, and insurance statutes, as well as the common law.
In short, Friedman’s arbitration clause does not merely shift litigation from courts to another forum, it seeks to re-write West Virginia’s consumer protection laws in its own favor. This should not be permitted because, “by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” Gilmer v. Interstate/ Johnson Lane Corp, 500 U.S. 20, 26 (1991). “This is so because ‘the beneficiaries of public statutes are entitled to the rights and protections provided by the law,’ including ‘all of the types of relief that would otherwise be available in court.’” Paladino v. Avnet Computer Techs., 134 F.3d 1054, 1059 (11th Cir. 1998) (citations omitted).
C. Friedman’s Attempt to Curtail Available Consumer Remedies Renders the Contract’s Arbitration Clause an Unconscionable Limitation of Liability
The attempt by to curtail its customers’ available legal remedies amounts to an unconscionable limitation of liability. In Art’s Flower Shop v. Chesapeake & Potomac Tel. Co., 186 W. Va. 613, 618-19 (1991), this Court, based on the imbalance in bargaining strengths between the disputants, held a limitation of liability clause drafted by the stronger party void for unconscionability. Commenting about the stronger party which had sought to shield itself behind the limitation of liability clause, this Court added that: “Like other businesses, C & P must be liable for the foreseeable results of its acts or omissions.” Id. at 619. The generally applicable principle set forth in Art’s Flower Shop clearly applies to the arbitration clause in this case.
D. Friedman’s Attempt to Curtail Available Consumer Remedies Renders the Contract’s Arbitration Clause an Unenforceable Exculpatory Clause
In holding an exculpatory clause unenforceable, this Court in Murphy v. North Am. River Runners, 186 W. Va. 310 (W. Va. 1991), stated that: “when a statute imposes a standard of conduct, a clause in an agreement purporting to exempt a party from tort liability to a member of the protected class for the failure to conform to that statutory standard is unenforceable. Restatement (Second) of Contracts § 195 comment a, at 66 (1979). See also Restatement (Second) of Contracts § 179(a) (1979) (a public policy against enforcement of promises or other terms may be derived by the court from legislation relevant to such a policy).” 186 W. Va. at 315-316 . While Murphy was a tort case, the principle enunciated there ought apply in this case to Mr. Dunlap and similarly situated consumers: that it is against public policy in West Virginia to shield from liability, via an exculpatory contract, wrongdoers who harm members of a class that the legislature sought to protect.
Here, Friedman’s, by drafting a contract which expressly sought to limit the remedies otherwise available to West Virginia consumers, in effect drafted an exculpatory clause to erase the protections available to a class the West Virginia legislature sought to protect via, e.g.; the West Virginia Credit Protection Act, W. Va. Code § 46A-6-104, and to hold itself free of the consequences stemming from violation of legal dictates such as the Uniform Commercial Code’s good faith obligation, W. Va. Code § 46-1-203. No business ought be able to legislate for itself through a take-it-or-leave-it contract an exemption from what the legislature and courts of this state decree to be the rights and protections available to the citizenry.
E. It Is For This Court To Decide Which West Virginia Statutory Rights May Not Be Waived in A Contract.
Faced with an attempt to curtail, via contract, the statutory and common law remedies available in its state, the California Supreme Court declared that “Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by private agreement.” Armendariz v. Foundation Health, 24 Cal.4th at 100. This Court ought apply that rule of Armendariz, and hold that the rights and remedies of West Virginia’s consumer protection laws, having been established for public reasons, cannot be contravened by private agreement.
Nothing in the FAA would conflict with such a rule, as it provides that courts may refuse to enforce unconscionable arbitration clauses, as established in Part I above.
state legislation specifically aimed at arbitration agreements is preempted by the Federal Arbitration Act. In all situations where arbitration provisions are "placed upon the same footing as other contracts," state law applies.
Ticknor v. Choice Hotels Int’l, Inc., 265 F.3d 931, 941 (9th Cir. 2001) (citations omitted). The rule of Armendariz, holding some rights established for public purpose non-waivable by private agreement, is not “specifically aimed at arbitration agreements,” and simply places arbitration provisions on the same footing as other contracts. It would not be preempted by the FAA.
Of course, it is beyond dispute that state courts are the final arbiters of the substantive laws within their respective state borders. “[W]hether the law of the State shall be declared by its Legislature in a statute or by its highest court in a decision is not a matter of federal concern.” Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78 (1938). “[T]he highest court of the state is the final arbiter of what is state law.” West v. AT&T, 311 U.S. 223, 236 (1940). “The final arbiter of state law is the state supreme court, which is another way of saying that Alabama law is what the Alabama Supreme Court says it is.” Spain v. Brown & Williamson Tobacco Corp., 230 F.3d 1300, 1307 (11th Cir. 2000).
F. Punitive Damages, in Particular, Ought not be Waivable
Monetary damages have traditionally been awarded for one or more of the following reasons: restitution, restoring a damaged party to where it had been, disgorgement, prevention of unjust enrichment, and, if the wrongdoer’s act or omission were odious enough, punishment. Punitive damages are a tool for deterring egregious conduct. See, e.g.; Burgess v. Porterfield, 196 W. Va.178 (1996) (“The award of punitive damages is unconcerned with compensation; it is intended to punish the wrongdoer and to deter the commission of similar offenses in the future. To further the objectives of punishment and deterrence, it is more important that a defendant pay for his wrongdoing than that the plaintiff receive the payment”); Travis v. Alcon Lab, Inc., 202 W. Va.. 369, 379 (1998); Bartles v. Hinkle, 196 W. Va. 381, 388 (1996). The Friedman’s arbitration clause, however, expressly seeks to shield the company from this deterrent.
Perhaps the Alabama Supreme Court put it best when recently faced with an arbitration clause that prohibited punitive damages. The court struck down the clause and explained:
We hold that a predispute arbitration clause that forbids an arbitrator from awarding punitive damages is void as contrary to the public policy of this State -- to protect its citizens in certain legislatively prescribed actions from wrongful behavior and to punish the wrongdoer. If parties to an arbitration agreement waive an arbitrator's ability to award punitive damages, the door will open wide to rampant fraudulent conduct with few, if any, legal repercussions.”
Cavalier Manufacturing, Inc. v. Jackson, 2001 Ala. LEXIS 373, 11-12 (Ala. Oct 5, 2001).
CONCLUSION
Under the Friedman’s arbitration clause, West Virginia consumers are faced with a Catch-22. They must expend prohibitively high costs in order to bring a complaint before a private arbitrator. Under the arbitration clause’s limitation of remedies, however, no arbitrator could ever grant an award that would justify expenditure of these high costs. This Court ought break that circle, and hold the Friedman’s arbitration clause unenforceable on the generally applicable grounds of unconscionability.
Respectfully Submitted,
___________________________
Michael J. Quirk, Esq. (pro hac vicae motion pending) Harry Deitzler, Esq. (WVSB No. 981)
Khalid Elhassan, Esq. (pro hac vicae motion pending) Hill, Peterson, Carper, Bee & Deitzler
Trial Lawyers for Public Justice, P.C. 500 Tracy Way
1717 Massachusetts Avenue, NW Charleston, WV 25311-1555
Suite 800 Telephone/(304) 345-5667
Washington, D.C. 20036
Telephone/(202) 797-8600
CERTIFICATE OF SERVICE
I hereby certify that on this 28th day of December, 2001, one copy of the foregoing brief of amicus curiae was served by first class mail, postage prepaid, on counsel for all parties as follows:
P. Michael Pleska, Esq.
Fazal A. Share, Esq.
Ronda L. Harvey, Esq.
Bowles, Rice, McDavid, Graff & Love
600 Quarrier Street
Charleston, WV 25325-1386
Charles L. Woody, Esq.
Spilman, Thomas & Battle, PLLC
Spilman Center
300 Kenawha Boulevard East
P.O. Box 273
Charleston, WV 25321-0273
Gregory R. Hanthorn, Esq.
Jones, Day, Reavis & Pogue
3500 Suntrust Plaza
303 Peachtree Street, NE
Atlanta, GA 30308-3242
Farrokh Jhabvala, Esq. John Barrett, Esq. Brian Glasser, Esq.
Jorden, Burt, Boros, Cicchetti David Grubb, Esq. Bailey & Glasser, LLP
Berensen & Johnson, LLP The Grubb Law Group Suite 202, Laidley Tower
777 Brickell Avenue, Suite 500 1324 Virginia Street, East 500 Lee Street
Miami, FL 33131-2803 Charleston, WV 25301 Charleston, WV 25301
Hon. Irene C. Berger
State of West Virginia
Thirteenth Judicial Circuit
Kanawha County Judicial Building
Charleston, WV 25301
Attorneys for Parties in Interest
All parties required to be served have been served.
______________________________
Harry Deitzler, Esq. (WVSB No. 981)
Counsel for Amicus Curiae Trial Lawyers for Public Justice