The Supreme Court of Washington issued a recent opinion reminding us that, even after Conception, arbitration clauses must be fair in order to be enforceable. While not in the franchise context, the court’s decision in Gandee v. LDL Freedom Enterprises offers guidance for those who wish to draft enforceable arbitration clauses.
Gandee and LDL entered into a debt adjustment contract in the state of Washington, where Gandee lived. LDL was not registered to do business in Washington. Three years later, Gandee filed a class action lawsuit against LDL, alleging that it charged excessive fees under Washington law and violations of the Washington Consumer Protection Act (CPA). A few months later, LDL moved to compel arbitration pursuant to the parties’ contract.
The arbitration provision read in its entirety:
Arbitration. All disputes or claims between the parties related to this Agreement shall be submitted to binding arbitration in accordance with the rules of [the] American Arbitration Association within 30 days from the dispute date or claim. Any arbitration proceedings brought by Client shall take place in Orange County, California. Judgment upon the decision of the arbitrator may be entered into any court having jurisdiction thereof. The prevailing party in any action or proceeding related to this Agreement shall be entitled to recover reasonable legal fees and costs, including attorney’s fees which may be incurred.
The contact also included a severability clause, requiring the enforcement of any provisions of the contract not held to be invalid or unenforceable.
While it started out by recognizing the strong preference for enforcement of arbitration clauses under both federal and state law, the court found that the entire arbitration clause was unenforceable because unconscionable terms pervaded the arbitration agreement. Specifically, the court found:
- The requirement that the arbitration occur in California would cause Gandee prohibitive financial hardship, as the cost of arbitration for Grandee, an unemployed individual, would be significantly higher than any potential recovery.
- Because the CPA already provided Gandee with her costs and fees if she prevailed, the "loser pays" clause in the contract benefited only LDL and, as such, was contrary to the intent of Washington’s legislature when it enacted the CPA.
- The shortening of the statute of limitations from four years to 30 days was unreasonable.
Given that 3 out of the 4 short clauses of the arbitration clause were found invalid by the court, only a general "agreement to arbitrate" existed after the court’s review. Consequently, the court concluded it could not reasonably sever the unconscionable clauses. Thus, it invalidated the entire arbitration clause.
The court further rejected LDL’s offer to "waive" the unconscionable clauses, stating that such offers would permit parties to load their arbitration clauses with unconscionable clauses that would likely be dropped only after challenge in court. Such a process would encourage one-sided agreements and be inconsistent with the principle–especially adhesion contacts–should be conscionable and fairly drafted.
Finally, the court rejected LDL’s argument that the entire matter was preempted by Concepcion. Significantly, the court found that the arbitration clause in Concepcion contained several provisions favorable to the consumer, as opposed to its conclusion that the LDL arbitration clause contained many unconscionable provisions. In sum, the Washington Supreme Court concluded the Concepcion Court overturned a overbroad rule that invalidated an otherwise valid arbitration clause. Because the LDL clause contained many unenforceable provisions, Concepcion neither preempted analysis of the arbitration clause by Washington courts nor required enforcement of the arbitration clause.
What the Gandee case boils down to, then, is fundamental fairness. Even after Concepcion, it appears that courts will continue to examine arbitration clauses in the first instance to ensure, as the Washington Supreme Court explained it, they are not "one-sided" or "harsh". While the meaning of such phrases is obviously a judgment call, Grandee offers guidance from at least one state’s highest court regarding where the line will be drawn.