Arbitration Agreement Found Unconscionable
Just when you start to lose faith in the judiciary, a coupleof cases come along that suggest that some judges are willing to exercisecommon sense. I blogged about JudgeKoh’s opinion regarding consent in a case involving Google and email scanning ina previous post. Today, I want to talkabout a case that was even more delightful because it bucked the wave ofarbitration clause cases ruling against consumers. In Clark v. Renaissance West, LLC, theSuperior Court of Maricopa County found an arbitration clause substantivelyunconscionable and therefore unenforceable — and the Court of Appealsaffirmed!
The plaintiff was John H. Clark, an eighty-eight year oldman who was admitted into a nursing facility owned by Renaissance West. After checking in, he signed an arbitrationagreement which required him to arbitrate all disputes with Renaissance West. After he was discharged, he filed acomplained alleging that while he was at the nursing facility, he had beenneglected and consequently, suffered a severe pressure ulcer that requiredmedical treatment and long term case. Renaissance West moved to dismiss and compel arbitration. The trial court held an evidentiary hearingat which Clark’s expert witness testified that it would cost Clarkapproximately $22,800 in arbitrator’s fees to arbitrate the case. The trial court ruled that based upon Clark’slimited income (he was retired and living on a fixed income), the arbitrationagreement was substantively unconscionable. The Court of Appeals agreed.
There were several noteworthy aspects to this case. First, the trial court found that thearbitration agreement was notprocedurally unconscionable. TheAgreement was a separate document from other paperwork signed at the time ofadmission, 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 beenrescinded within thirty days of signature. But, as Maxwell v. Fidelity held, you don’t need both procedural andsubstantive 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 soexcessive as to ‘deny a potential litigant the opportunity to vindicate his orher rights.’” The question of whetherarbitration is prohibitively expensive depends “on the unique circumstances ofeach case” and courts consider the following factors.
The first is “the party seeking to invalidate thearbitration agreement must present evidence concerning the cost toarbitrate.” This evidence “cannot bespeculative,” and must be based upon “specific facts showing with reasonablecertainty the likely costs of arbitration.” The court found that the expert testimony was adequate to establish theestimate cost of $22,800 in arbitrators’ fees alone.
The second factor is that a party must make a “specific individualized showing as to whyhe or she would be financially unable to bear the costs of arbitration” basedupon his or her specific income/assets. Here, the plaintiff testified that he was retired, living on a fixedincome, and did not have any financial resources such as savings orstocks. His total monthly income of$4,630, consisted of social security benefits, a pension and veteran’sassistance payments. The court deferredto the trial court’s finding that in light of these facts, arbitration would becost-prohibitive.
The third factor is “whether the arbitration agreement orthe applicable arbitration rules references in the arbitration agreement permita party to waive or reduce the costs of arbitration based on financialhardship.” In this case, the arbitrationagreement did not provide for a reduction or waiver of fees based uponfinancial hardship. Strike three.
Based upon an analysis of the three above factors, the courtconcluded that there was reasonable evidence to support the trial court’sfinding that plaintiff would be unable to afford to arbitrate his claims.Consequently, the arbitration agreement “effectively precludes Plaintiff fromobtaining redress for any of his claims, and is therefore substantivelyunconscionable and unenforceable.”
[Nancy Kim]