West Virginia's Highest Court Holds That Arbitration Clauses Cannot Be Used to Eliminate Consumers' Rights

Court Strikes Down Arbitration Clause That Banned Punitive Damages Awards and Consumer Class Actions

In a major consumer rights victory, the West Virginia Supreme Court of Appeals held on June 14, 2002, that a retailer’s mandatory arbitration clause was illegal and unenforceable because it would bar customers from participating in class actions or recovering punitive damages. The Court’s unanimous 42-page decision held that Friedman’s Jewelers, a national jewelry retailer, was violating the law by inserting a mandatory arbitration clause into its form contract with customers as a "scheme or mechanism to shield itself from legal accountability for misconduct." Trial Lawyers for Public Justice (TLPJ) filed an amicus brief urging the Court to rule as it did.

"This decision should send a powerful message to businesses that are using mandatory arbitration systems to try to avoid liability for their wrongdoing," said TLPJ attorney Michael J. Quirk, co-counsel on TLPJ’s amicus brief. "Mandatory arbitration provisions will not be enforced if they prevent consumers from effectively vindicating all of their rights and claims."

The case, State of West Virginia ex rel. Dunlap v. Honorable Irene C. Berger, Judge of the Circuit Court of Kanawha County, and Friedman’s, Inc., was filed as a consumer class action challenging an alleged "loan packing" scheme in which Friedman’s was adding unnecessary and undisclosed insurance charges to the price of jewelry bought on installment by low income customers. In response to the customers’ class action complaint, Friedman’s moved to have the case ordered into private arbitration based on a provision in its installment sales contract. The arbitration clause contained a one-sided provision that would have forced customers to arbitrate any of their claims, but would have permitted the company to sue customers for its own claims.

"Friedman’s stacked the deck against its customers by designing an arbitration system that drastically limited the relief available to customers, and then exempting its own claims from this unfair system," said John W. Barrett of the Barrett Law Firm in Charleston, West Virginia, co-counsel for the successful plaintiffs. "The Supreme Court of Appeals was absolutely right to rule that this arbitration requirement was unconscionable. Friedman’s was wrong to use an arbitration clause to shield itself from legal accountability."

The Court’s opinion focused on the fact that Friedman’s arbitration provision was part of a contract of adhesion – a grossly imbalanced contract tilted in favor of the company – presented to customers on a non-negotiable basis. Under West Virginia’s Consumer Credit and Protection Act and controlling precedent, the court held that exculpatory provisions in contracts of adhesion are generally unconscionable and may be enforced only in rare circumstances. In examining the terms of the arbitration clause, the Court held that its prohibitions on punitive damages and class action relief were exculpatory in nature and therefore were "clearly unconscionable." The Court further found that the exemption of Friedman’s own claims from arbitration would have been sufficient grounds for finding the arbitration clause unconscionable. Finally, the Court noted that an adhesive contract requiring consumers to arbitrate cannot impose unreasonably burdensome costs that would deter consumers from enforcing their rights to statutory or common-law relief, and that an arbitration system would be presumably unfair if only one party controlled the designation of the private decision-maker.

"James Dunlap and thousands of other customers just like him had no idea whatsoever that they were giving up important legal rights when they bought pieces of jewelry from Friedman’s," said TLPJ attorney Khalid Elhassan, co-counsel on TLPJ’s amicus brief. "This decision lays down baseline requirements to ensure that consumers faced with mandatory arbitration contracts will continue to be able to hold corporations accountable for their misconduct."

Along with Quirk and Elhassan, TLPJ’s legal team on the amicus brief included TLPJ Staff Attorney F. Paul Bland, Jr., and Harry G. Deitzler of Hill, Peterson, Carper, Bee & Deitzler, P.L.L.C., in Charleston, West Virginia. Along with Barrett, the plaintiff’s legal team included David L. Grubb of the Grubb Law Group and Brian A. Glasser of Bailey & Glasser, both of Charleston, West Virginia. The decision and a link to TLPJ’s amicus brief are posted on the Briefs and Legal Documents page of TLPJ’s web site, www.tlpj.org.

Trial Lawyers for Public Justice is the only national public interest law firm dedicated to using trial lawyers’ skills and resources to advance the public good. Founded in 1982, TLPJ utilizes a nationwide network of more than 2,700 trial lawyers to pursue precedent-setting and socially significant litigation. It has a wide-ranging litigation docket in the areas of civil rights and liberties, consumer rights, worker safety, toxic torts, environmental protection, and access to the courts. TLPJ is the principal project of The TLPJ Foundation, a not-for-profit membership organization. It has offices in Washington, DC, and Oakland, CA. The TLPJ web site address is www.tlpj.org. TLPJ’s West Coast Office can be contacted at (510) 622-8150. TLPJ’s West Virginia State Coordinator is Harry G. Deitzler in Charleston, (304) 345-5667.