Commercial Law (Mgmt 348)

1. Commercial Law(Mgmt 348) Unconscionable Contracts Professor Charles H. Smith Spring 2011

2. Introduction to Unconscionable Contracts • An “unconscionable” contract is a contract that will be invalidated and therefore not enforced by the court. • This issue is often raised in an attempt to invalidate an arbitration agreement so we will discuss these four cases involving arbitration agreements • Thibodeau v. Comcast Corp. (pages 277-79) – cable TV, Pennsylvania law. • Simpson v. MSA of Myrtle Beach, Inc. (pages 297-98) – car purchase, South Carolina law. • Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002) – employment setting, California law. • Llotka v. Geographic Expeditions, Inc., 181 Cal.App.4th 816 (2010) – mountain-climbing trip, California law.

3. Introduction cont. • An unconscionability challenge has two aspects – procedural and substantive. • Both aspects must be shown for the contract to be invalidated on unconscionability grounds though it is not required that both need to be present to the same extent. • In other words, the courts apply a “sliding scale” so that, for instance, only a small amount of procedural unconscionability needs to be shown if there is a lot of substantive unconscionability.

4. Procedural Unconscionability • Procedural unconscionability shown by “oppression” or “surprise” • “Oppression occurs where a contract involves lack of negotiation and meaningful choice” (Llotka, 181 Cal.App.4th at 821); “a contract of adhesion: a standard-form contract, drafted by the party with superior bargaining power, which relegates to the other party the option of either adhering to its terms without modification or rejecting the contract entirely” (Circuit City, 279 F.3d at 893); “[a]bsence of a meaningful choice on the part of one party generally speaks to the fundamental fairness of the bargaining process” (Simpson, page 297); “standardized form contracts presented to consumers without negotiation or any option for modification” (Thibodeau, page 278). • There is “surprise where the allegedly unconscionable provision is hidden within a prolix [wordy, tedious] printed form” (Llotka, 181 Cal.App.4th at 821).

5. Procedural Unconscionability cont. • Quote from Thibodeau showing procedural unconscionability as to the arbitration agreement • “The Comcast customer agreement received by the plaintiff and all other class members are clearly contracts of adhesion [another name for procedural unconscionability]. They were sent without any opportunity for customers to negotiate and even without any requirement of assent [since new customer agreement requiring arbitration of disputes and barring class actions simply mailed to customers]” (page 278).

6. Procedural Unconscionability cont. • Quote from Simpson showing procedural unconscionability as to the arbitration agreement • “In determining whether a contract was tainted by an absence of meaningful choice, courts should take into account the nature of the injuries suffered by the plaintiff; whether the plaintiff is a substantial business concern; the relative disparity in the parties' bargaining power; the parties' relative sophistication; whether there is an element of surprise in the inclusion of the challenged clause; and the conspicuousness of the clause” (page 297).

7. Procedural Unconscionability cont. • Quote from Circuit City showing procedural unconscionability as to the arbitration agreement • “Circuit City, which possesses considerably more bargaining power than nearly all of its employees or applicants, drafted the contract and uses it as its standard arbitration agreement for all of its new employees. The agreement is a prerequisite to employment, and job applicants are not permitted to modify the agreement’s terms – they must take the contract or leave it” (279 F.3d at 893, italics supplied).

8. Procedural Unconscionability cont. • Quotes from Llotka showing procedural unconscionability as to the arbitration agreement • GeoEx “advis[ed] participants that they must sign an unmodified release form to participate in the expedition; that GeoEx's ‘lawyers, insurance carriers and medical consultants give [it] no discretion’ on that point; and that other travel companies were no different…GeoEx led plaintiffs to understand not only that its terms and conditions were nonnegotiable, but that plaintiffs would encounter the same requirements with any other travel company. This is a sufficient basis for us to conclude plaintiffs lacked bargaining power” (181 Cal.App.4th at 821-22). • “While the nonessential nature of recreational activities is a factor to be taken into account in assessing whether a contract is oppressive, it is not necessarily the dispositive factor” (181 Cal.App.4th at 822).

9. Substantive Unconscionability • Substantive unconscionability is determined by “whether the terms of the contract are unduly harsh or oppressive” (Circuit City, 279 F.3d at 893); “one-sided” (Llotka, 181 Cal.App.4th at 825); “violative of public policy, statutory law, or provisions of the Constitution” (Simpson, page 298); or “whether, in light of the general commercial background and the commercial needs of a particular trade, the clause is so one-sided that it is unconscionable under the circumstances” (page 278).

10. Substantive Unconscionability cont. • Quote from Thibodeau showing substantive unconscionability as to the arbitration agreement • “It is only the class action vehicle which makes small consumer litigation possible…[the] class members are claiming minimal damages…No individual will expend the time, fees, costs and/or other expenses necessary for individual litigation or individual arbitration for this small potential recovery…It is clearly contrary to public policy to immunize large corporations from liability by allowing them to preclude all class action”(page 278).

11. Substantive Unconscionability cont. • Quote from Simpson showing substantive unconscionability as to the arbitration agreement • “First, this arbitration clause violates statutory law because it prevents Simpson from receiving the mandatory statutory remedies to which she may be entitled [under the two state statutes which supported plaintiff’s case]…Second, unconditionally permitting the weaker party to waive these statutory remedies pursuant to an adhesion contract runs contrary to the underlying statutes' very purposes of punishing acts that adversely affect the public interest…we find the provision prohibiting double and treble damages to be oppressive, one-sided, and not geared toward achieving an unbiased decision by a neutral decision-maker” (page 298).

12. Substantive Unconscionability cont. • Quotes from Circuit City, 279 F.2d at 894, showing substantive unconscionability as to the arbitration agreement • “…unilaterally forces employees to arbitrate claims against the employer…The provision does not require Circuit City to arbitrate its claims against employees…This unjustified one-sidedness deprives the DRA of the ‘modicum of bilaterality’ that the California Supreme Court requires...” • “…limits the relief available to employees…the remedies are limited to injunctive relief, up to one year of back pay and up to two years of front pay, compensatory damages, and punitive damages in an amount up to the greater of the amount of back pay and front pay awarded or $ 5,000. By contrast, a plaintiff in a civil suit for sexual harassment under the FEHA is eligible for all forms of relief…including appropriate punitive damages and damages for emotional distress.” • “…requires the employee to split the arbitrator's fees with Circuit City. This fee allocation scheme alone would render an arbitration agreement unenforceable” (italics supplied). • “…imposes a strict one year statute of limitations on arbitrating claims that would deprive Adams of the benefit of the continuing violation doctrine available in FEHA suits.”

13. Substantive Unconscionability cont. • Quote from Llotka showing substantive unconscionability as to the arbitration agreement • “The arbitration provision in GeoEx's release is similarly one-sided [since i]t guaranteed that plaintiffs could not possibly obtain anything approaching full recompense for their harm by limiting any recovery they could obtain to the amount they paid GeoEx for their trip. In addition to a limit on their recovery, plaintiffs, residents of Colorado, were required to mediate and arbitrate in San Francisco—all but guaranteeing both that GeoEx would never be out more than the amount plaintiffs had paid for their trip, and that any recovery plaintiffs might obtain would be devoured by the expense they incur in pursing their remedy. The release also required plaintiffs to indemnify GeoEx for its costs and attorney fees for defending any claims covered by the release of liability form. Notably, there is no reciprocal limitation on damages or indemnification obligations imposed on GeoEx” (181 Cal.App.4th at 825).

14. Conclusion re Unconscionable Contracts • As a practical matter, many contracts – especially consumer contracts – have some measure of unconscionability. • After all, how much bargaining occurs in the ordinary consumer transaction? • Also, the price or other conditions may be unfair, though this can often be justified by supply and demand in the market. • Many large companies will require arbitration of disputes but, in order to maintain the enforceability of their arbitration agreements, will make the process fairly similar to civil litigation so no substantive unconscionability can be found.