Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-4_06-cv-00010/USCOURTS-azd-4_06-cv-00010-0/pdf.json

Nature of Suit Code: 150
Nature of Suit: Overpayments &amp; Enforcement of Judgments
Cause of Action: 

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Emily Cooper, individually and as

representative of all others similarly

situated,

Plaintiff, 

vs.

QC Financial Services, Inc., 

Defendant. 

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No. CV 06-10-TUC-FRZ (HCE)

REPORT & RECOMMENDATION

Pending before the Court is Defendant's Motion to Dismiss or in the Alternative to

Compel Arbitration and Stay Proceedings. On September 14, 2006, the Magistrate Judge

heard oral argument on Defendant's Motion. For the following reasons, the Magistrate Judge

recommends that the District Court deny in part and grant in part Defendant's Motion.

I. FACTUAL & PROCEDURAL BACKGROUND

This lawsuit was originally filed in Arizona state court on September 15, 2005 by

Plaintiff Ms. Emily Cooper "by and through her counsel... individually and as representative

of a class of all others similarly situated." (Complaint, p.1) Plaintiff named as the sole

Defendant QC Financial Services, Inc., a company which is in the business of providing

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1

"In general, payday loans are small-dollar, short-term loans with high interest rates.

In such transactions, a borrower receives a modest cash advance that becomes due for

repayment within a short period of time, usually about 14 days. As security for the loan, the

borrower gives a check to the payday lender in the amount of the cash advance, plus the

interest” and/or fee charged by the lender. Jenkins v. First American Cash Advance of

Georgia, 400 F.3d 868, 871(11th Cir. 2005). Plaintiff herein alleges that Defendant charged

her a fee that exceeded 15% of the amount borrowed. (Plaintiff's Opposition, p.3) Plaintiff

alleges that "[t]he annual percentage rate charged for sums advanced frequently exceeds four

hundred (400%)." (Complaint, p.3) "When the loan is due, the borrower may redeem the

check for cash, allow the check to be cleared through the bank, or pay another fee to extend

the loan until the next payday." (Id., at p.2) 

2

In her Complaint, Plaintiff alleges that she obtained the loans in or about 2003.

(Complaint, p.2) In an affidavit attached to her Opposition, Plaintiff states that in March 2004

she obtained a payday loan in the amount of $200 from Defendant. (Plaintiff's Affidavit,

attached to Plaintiff's Opposition) Defendant submits a Customer Application and Deferred

Presentment Agreement both signed by Plaintiff on March 12, 2004. (Defendant's

Memorandum, Ex. A, B) According to Defendant, "Plaintiff subsequently entered into

various loan agreements and Deferred Presentment Agreements between March 12, 2004 and

May 25, 2005." (Defendant's Memorandum, p.2)

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"payday loans"1

 to the public. (Id.; Defendant's Memorandum of Points and Authorities in

Support of Its Motion to Dismiss or in the Alternative to Compel Arbitration and Stay

Proceedings (hereinafter "Defendant's Memorandum") p.2)

 On January 11, 2006, Defendant QC Financial Services, Inc., filed a notice of

removal indicating that this Court had original and diversity jurisdiction.

Plaintiff's Complaint sets out the following eight counts: (1) Violation of Deferred

Presentment Companies Statutes, A.R.S. § 6-1251, et seq.; (2) Breach of Contract; (3)

Fraudulent Misrepresentation; (4) Negligent Misrepresentation; (5) Negligence Per Se; (6)

Racketeering: Pattern of Unlawful Activity pursuant to A.R.S. § 13-2301, et seq.; (7) Unjust

Enrichment; and (8) Declaratory Judgment. Plaintiff's claims arise from one or more loans,

altogether totaling a principal amount of $500, that she obtained from Defendant in 2003.2

(Complaint, p.2) "Each two weeks after Ms. Cooper obtained her initial loan, she returned

to the Q.C. Financial office and made a payment to 'roll-over' the loan. When her loan was

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increased to $500.00 the fee she paid every two weeks was approximately $88.00....Ms.

Cooper made $88.00 payments every two weeks, and her loan was 'rolled-over' every two

weeks, for approximately six to nine months. By that time, Ms. Cooper had paid fees

totaling between $1,000.00 and $1,500.00 for her $500.00 payday loan." (Id. at p.3) 

According to Plaintiff, during the time she continued to roll her loan over, Defendant charged

her fees that exceeded the 15% permitted by Arizona statute. (Id. at p. 4; Plaintiff's

Opposition, p.3 (citing A.R.S. § 6-1260)) "Altogether, Ms. Cooper was charged fees totaling

$1,395.44 for her payday loans." (Plaintiff's Opposition, p.3) Plaintiff does not seek "any of

the principal amount of the loan to be repaid." (TR. p.63) The figure "alleged in the

Complaint represents the amount that Ms. Cooper alleges that she paid in fees." (Id.) 

Defendant moves to dismiss the instant action, or in the alternative, to compel

arbitration and stay proceedings. At issue herein is whether Plaintiff's claims are subject to

arbitration in light of a Customer Application (hereinafter "Application") and Deferred

Presentment Agreement (hereinafter "Agreement") that she completed in order to obtain the

loans. The Application, which Plaintiff signed on March 12, 2004, indicates that Plaintiff

was 21 on that date; was employed as an optician earning $420; sometimes received

additional income from her mother; and was referred to Defendant by a customer named

Angela Randolph. (Defendant's Memorandum, Ex. A) The Application contained the

following provision regarding arbitration:

ARBITRATION AND WAIVER OF JURY TRIAL: Arbitration is a means

for legal matters between parties to be resolved by a neutral arbitrator rather

than a Court. We have a policy of arbitrating all claims, demands, and

disputes which cannot be resolved in a small claims tribunal, including the

scope and validity of this arbitration provision and any right you may have to

participate in an alleged class action (hereinafter "dispute(s)"). All customer

agreements contain another arbitration provision that supercedes this

arbitration provision and governs the resolution of disputes. However, if you

do not enter into a customer agreement with us, then this arbitration provision

governs the resolution of disputes [sic] You agree that YOU ARE WAIVING

YOUR RIGHT TO HAVE A TRIAL BY JURY to resolve disputes against

us, our agents and/or owners. The Federal Arbitration Act governs this

arbitration provision. If either party has a dispute, they must notify the other

in writing of the dispute. You have the right to select any of the following

arbitration organizations, which will govern the arbitration under its consumer

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That amount consisted of $200 that was paid directly to Plaintiff and a $35.29 finance

charge, thus resulting in the "[t]otal amount financed with us: $235.29." (Defendant's

Memorandum, Ex. B)

4

It appears that a percent sign is missing and the figure should read: 459.90%. (See

Defendant's Memorandum, Ex. B)

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rules: American Arbitration Association.., J.A.M.S./Endispute..., or National

Arbitration Forum..., and we will advance all of the expenses associated with

the arbitration, including the filing, administrative, hearing and arbitrator's

fees. You will be responsible for your attorney's fees, if any. Any appeal of a

judgment from a small claims tribunal shall be resolved by binding

arbitration. The arbitrator shall not conduct class arbitration. The

arbitration hearing will be conducted in the county in which this Customer

Application was signed.

You acknowledge that the information provided on this Application is

accurate to the best of your knowledge and information...You agree to the

terms of the "Arbitration and Waiver of Jury Trial" provision.

(Defendant's Memorandum, Ex. A (emphasis by bold, underlined, and capital lettering in

original; emphasis by italics added))

On March 12, 2004, Plaintiff also signed an Agreement promising to pay the principal

amount of $235.29 borrowed at that time3

 "plus service fee at the rate of 459.90[4] per year

according to the Payment Schedule as disclosed" elsewhere in the document. (Defendant's

Memorandum, Ex. B) The Agreement contained the following concerning arbitration:

ADDITIONAL TERMS AND CONDITIONS OF THE DEFERRED

PRESENTMENT AGREEMENT

Arbitration is a process in which persons with a dispute: (a) waive their rights

to file a lawsuit and proceed in court and to have a jury trial to resolve their

disputes; and (b) agree, instead, to submit their disputes to a neutral third

person (an larbitrator)) [sic] for a decision. Each party to the dispute has an

opportunity to present some evidence to the arbitrator. Pre-arbitration

discovery may be limited. Arbitration proceedings are private and less formal

than court trials. The arbitrator will issue a final and binding decision

resolving the dispute, which may be enforced as a court judgment. A court

rarely overturns an arbitrator's decision THEREFORE, YOU

ACKNOWLEDGE AND AGREE AS FOLLOWS:

1. For purposes of this Waiver of Jury Trial and Arbitration Provision

(hereinafter the "Arbitration Provision"), the words "we", "us" and "our" mean

QC Financial Services, Inc [sic] d/b/a/ Quick Cash. The words "you" and

"your" mean the customer who has signed below [sic] Furthermore, the words

"dispute" and "disputes" are given the broadest possible meaning and include,

without limitation (a) all claims, disputes, or controversies arising from or

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relating directly or indirectly to the signing of this Arbitration Provision, the

validity and scope of this Arbitration Provision and any claim or attempt to set

aside this Arbitration Provision; (b) all federal or state law claims, disputes or

controversies, arising from or relating directly or indirectly to this Deferred

Presentment Agreement (including the Arbitration Provision)...; (c) all

counterclaims, cross-claims, and third-party claims; (d) all common law

claims, based upon contract, tort, fraud, or other intentional torts; (e) all claims

based upon a violation of any state or federal constitution, statute or

regulation; (f) all claims asserted by us against you, including claims for

money damages to collect any sum we claim you owe us; (g) all claims

asserted by you individually against us and/or any of our employees, agents,

directors, officers, shareholders, governors, managers, members, parent

company or affiliated entities (hereinafter collectively referred to as "related

third parties"), including claims for money damages and/or equitable or

injunctive relief; (h) all claims asserted on your behalf by another person; (i)

all claims asserted by you as a private attorney general, as a representative

and member of a class of persons, or in any other representative capacity,

against us and/or related third parties (hereinafter referred to as

"Representative Claims").... 2. You acknowledge and agree that by entering into this Arbitration

Provision:

(a) YOU ARE WAIVING YOUR RIGHT TO HAVE A TRIAL BY

JURY TO RESOLVE ANY DISPUTE ALLEGED AGAINST US

OR RELATED THIRD PARTIES;

(b) YOU ARE WAIVING YOUR RIGHT TO HAVE A COURT,

OTHER THAN A SMALL CLAIMS TRIBUNAL, RESOLVE

ANY DISPUTE ALLEGED AGAINST US OR RELATED THIRD

PARTIES; and

(c) YOU ARE WAIVING YOUR RIGHT TO SERVE AS A

REPRESENTATIVE, AS A PRIVATE ATTORNEY GENERAL,

OR IN ANY OTHER REPRESENTATIVE CAPACITY, AND/OR

TO PARTICIPATE AS A MEMBER OF A CLASS OF

CLAIMANTS, IN ANY LAWSUIT FILED AGAINST US

AND/OR RELATED THIRD PARTIES. 

3. Except as provided in Paragraph 6 below, all disputes including any

Representative Claims against us and/or related third parties shall be

resolved by binding arbitration only on an individual basis with you.

THEREFORE, THE ARBITRATOR SHALL NOT CONDUCT

CLASS ARBITRATION; THAT IS, THE ARBITRATOR SHALL

NOT ALLOW YOU TO SERVE AS A REPRESENTATIVE, AS A

PRIVATE ATTORNEY GENERAL, OR IN ANY OTHER

REPRESENTATIVE CAPACITY FOR OTHERS IN THE

ARBITRATION.

4. ...Regardless of who demands arbitration, you shall have the right to

select any of the following arbitration organizations to administer the

arbitration: the American Arbitration Association...,

J.A.M.S./Endispute...,or National Arbitration Forum....However, the

parties may agree to select a local arbitrator who is an attorney, retired

judge, or arbitrator registered and in good standing with an arbitration

association and arbitrate pursuant to such arbitrator's rules....The parties

to such dispute will be governed by the rules and procedures of such

arbitration organization applicable to consumer disputes, to the extent

those rules and procedures do not contradict the express terms of this

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5

The meaning of "FAA" is never explained to the signatory.

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Deferred Presentment Agreement or the Arbitration Provision,

including the limitations on the arbitrator below....

5. If you demand arbitration, then at your request we will advance your

portion of the expenses associated with the arbitration, including the

filing, administrative, hearing and arbitrator's fees ("Arbitration

Fees"). If related third parties or we demand arbitration, then at your

written request we will advance your portion of the Arbitration Fees.

Throughout the arbitration, each party shall bear his or her own

attorneys' [sic] fees and expenses, such as witness and expert witness

fees. The arbitrator shall apply applicable substantive law consistent

with the FAA,[5] applicable statutes of limitation, and shall honor claims

of privilege recognized at law. The arbitration hearing will be

conducted in the county of your residence, or within 30 miles from such

county, or in the county in which the transaction under this Deferred

Presentment Agreement occurred, or in such other place as shall be

ordered by the arbitrator....If allowed by statute or applicable law, the

arbitrator may award you expert witness fees, statutory damages

and/or your reasonable attorneys' [sic] fees and expenses....The

arbitrator's award may be filed with any court having jurisdiction.

Regardless of whether the arbitrator renders a decision or an award in

your favor resolving the dispute, you will not be responsible for

reimbursing us for your portion of the Arbitration Fees.

6. All parties, including related third parties, shall retain the right to seek

adjudication in a small claims tribunal for disputes within the scope of

such tribunal's jurisdiction. Any dispute, which cannot be adjudicated

within the jurisdiction of a small claims tribunal, shall be resolved by

binding arbitration. Any appeal of a judgment from a small claims

tribunal shall be resolved by binding arbitration. 7. This Arbitration Provision is made pursuant to a transaction involving

interstate commerce and shall be governed by the FAA. If a final nonappealable judgment of a court having jurisdiction over this transaction

finds, for any reason, that the FAA does not apply to this transaction,

then our agreement to arbitrate shall be governed by the arbitration law

of the State of Arizona.

8. This Arbitration Provision is binding upon and benefits you, your

respective heirs, successors and assigns. The Arbitration Provision is

binding upon and benefits us....The Arbitration Provision survives any

termination, amendment, expiration or performance of any transaction

between you and us and continues in full force and effect unless you

and we otherwise agree in writing [sic]

You acknowledge that you have read, understand, and agree to the terms

of the Deferred Presentment Agreement, including the Additional Terms

and Conditions set forth above, and that you have received a complete

copy of such [sic]

(Defendant's Memorandum, Ex. B (emphasis by bold and capital lettering in original;

emphasis by italics added))

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Plaintiff, through affidavit, states she was told that she was required to sign "the

agreement"; the agreement forms were not explained to her; and she did not read all of their

terms. (Plaintiff's Affidavit attached to Plaintiff's Opposition)

Defendant argues that Plaintiff is bound to arbitrate pursuant to the Agreement.

(Defendant’s Memorandum, p.6) Plaintiff contends that Defendant waived arbitration and,

alternatively, the arbitration provision is unenforceable because it is unconscionable and in

violation of public policy.

II. DISCUSSION

A. Waiver

Plaintiff argues that Defendant waived arbitration when it removed this action. "It is

well-established...that a party to a contract may waive its right to enforce an arbitration

agreement by its conduct.....Unless the repudiation is clear, however, the court should not

infer it." Meineke v. Twin City Fire Insur. Co., 892 P.2d 1365, 1370 (Ariz. App. 1994)

(citations omitted). "[P]roof of waiver requires showing conduct inconsistent with the

arbitration remedy....Inconsistency usually is found when one party engages in conduct

preventing arbitration, proceeds at all times in disregard of arbitration, expressly agrees to

waive arbitration, or unreasonably delays requesting arbitration." City of Cottonwood v.

James L. Fann Contracting, Inc., 877 P.2d 284, 289-290 (Ariz. App. 1994) (footnote

omitted) (citing EFC Develop. Corp. v. F.F. Baugh Plumbing & Heating, Inc., 540 P.2d 185

(1975)). See also Bolo Corp. v. Homes & Son Constr. Co., 464 P.2d 788, 793 (Ariz. 1970)

("when...plaintiff sought redress through the courts, in lieu of the arbitration tribunal, and

asked the court for exactly the same type of relief (i.e. damages), which an arbitrator is

empowered to grant, it waived the right to thereafter arbitrate the controversy over the protest

of the defendant.") Thus, "a party's filing of a lawsuit without invoking arbitration...would

nearly always indicate a clear repudiation of the right to arbitrate..., and the filing of an

answer normally has the same effect." Meineke, 892 P.2d at 1371. (even though the

defendant's answer reserved the right to demand arbitration or appraisal, the fact that the

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Cases cited by both parties to support their arguments regarding whether arbitration

should be compelled were decided in federal court upon consideration of defendants'

motions to compel arbitration filed subsequent to removal. Jenkins, 400 F.3d at 870 ("After

removing the case to federal court, Defendants moved to stay the court proceedings and

compel arbitration."); Ticknor v. Choice Hotels Int'l. Inc., 265 F.3d 931 (9th Cir. 2001)

(defendant removed action to federal court and filed a motion to dismiss or, alternatively, to

compel arbitration). See also Bosinger v. Phillips Plastics Corp., 57 F.Supp.2d 986 (S.D.

Cal. 1999) (removed by the defendant who filed motion to dismiss or stay pending

arbitration) (not cited by the parties). None of these cases discussed the issue of waiver. 

7

Curiously, in her Opposition captioned as "Emily A. Cooper...Plaintiff, vs. Q.C.

Financial Services, Inc., Defendant," Plaintiff refers to herself as the

"Defendant/Counterclaimant Emily Cooper." (Opposition, p.1) The record does not reflect

that a counterclaim was filed.

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defendant did not request same "simultaneously with filing its answer...indicated a

repudiation"). 

The record in the instant action reflects that on December 23, 2005 Defendant was

served with the Complaint. (Defendant’s Notice of Removal, p.2) On January 11, 2006

Defendant filed its notice of removal and "[n]o proceedings ha[d] occurred in the state court

in relation to this lawsuit as of the date of...removal"6

 (Id.), on January 19, 2006 the parties

filed a Stipulation for Extension of Time to Answer or Otherwise Plead which the Court

granted the following day, and on February 1, 2006, Defendant filed the instant Motion to

Dismiss or in the Alternative to Compel Arbitration and Stay Proceedings. 

Plaintiff initiated her suit. Defendant merely selected the forum in which it would file

its Motion to Dismiss or in the Alternative to Compel Arbitration. Defendant did not file an

Answer or a counterclaim7

 prior to filing its motion to enforce the arbitration provision. Nor

did Defendant delay an unreasonable amount of time to seek arbitration. To the contrary,

Defendant's prompt "attempt to compel arbitration...shows that it had not voluntarily

relinquished its right to arbitrate." City of Cottonwood, 877 P.2d at 290. Defendant did not

waive its right to seek arbitration herein because nothing in Defendant's conduct was

"inconsistent with the use of the arbitration remedy" or showed "an intent not to arbitrate."

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Meineke, 892 P.2d at 1370.

B. Plaintiff's Challenges to the Arbitration Provision

1. Standard

Congress enacted the Federal Arbitration Act, (hereinafter "FAA"), 9 U.S.C. §§ 1-16,

to overcome judicial resistance to arbitration. Buckeye Check Cashing, Inc. v. Cardegna, __

U.S. __ , 126 S.Ct. 1204, 1207 (2006). Section 2 of the FAA "embodies the national policy

favoring arbitration and places arbitration agreements on equal footing with all other

contracts" by providing that written agreements to arbitrate disputes "'shall be valid,

irrevocable, and enforceable save upon such grounds as exist at law or in equity for the

revocation of any contract.'" Id. at 1207-1208 (quoting 9 U.S.C. § 2). See also Ticknor, 265

F.3d at 936. "'Thus, generally applicable contract defenses such as fraud, duress, or

unconscionability, may be applied to invalidate arbitration agreements without contravening

section 2.'" Ticknor, 265 F.3d at 937 (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S.

681, 686 (1996)). See also Buckeye Check Cashing, Inc., __ U.S. __, 126 S.Ct. at 1209 (with

respect to such challenges to arbitration agreements, “an arbitration provision is severable

from the remainder of the contract.”) However, courts may not invalidate arbitration

agreements under state laws applicable only to arbitration provisions. Ticknor, 265 F.3d at

937. Moreover, "unless the challenge is to the arbitration clause itself, the issue of the

contract's validity is considered by the arbitrator in the first instance." Buckeye Check

Cashing, Inc., __ U.S. __, 126 S.Ct. at 1209-1210. Therefore, a challenge to the validity of

the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator

instead of the court. Id. See also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395, 403-404 (1967) ("if the claim is fraud in the inducement of the arbitration clause

itself–an issue which goes to the making of the agreement to arbitrate–the federal court may

proceed to adjudicate it...the statutory language does not permit the federal court to consider

claims of fraud in the inducement of the contract generally." (footnote omitted)); Ticknor,

265 F.3d at 937 ("the role of the federal courts in these circumstances is limited: the sole

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question is whether the arbitration clause at issue is valid and enforceable under section 2 of

the Federal Arbitration Act.") "[A]ny doubts concerning the scope of arbitrable issues should

be resolved in favor of arbitration" and the district court must order arbitration if it is satisfied

that the making of the agreement for arbitration is not in issue. Simula Inc. v. Autoliv, Inc.,

175 F.3d 716, 719 (9th Cir. 1999) (citation omitted).

Defendant argues that Plaintiff's allegations in her Complaint do "not challenge the

arbitration provision in the agreements but rather attacks the agreements themselves" as a

whole. (Defendant's Reply, p.2) Defendant points out that "[a]ll but one of [Ms.]Cooper's

eight count Complaint take issue with the total amount of fees charged and the number of

rollovers allowed by the agreements, challenging the entire agreement, not just the arbitration

provision." (Id. at pp. 2-3) Defendant also cites paragraph eight of Plaintiff's prayer for relief

requesting "'an order declaring deferred presentments made by QC Financial to Emily

Cooper and members of the class to be void ab initio pursuant to A.R.S. § 6-1262(D); and

directing the repayment of all fees charged by QC Financial.'" (Id. at p. 3 (quoting

Complaint, p. 11, ¶8) According to Defendant, such allegations and prayer for relief seeking

to invalidate the agreement as a whole are matters under Buckeye and Prima Paint to be

considered by the arbitrator in the first instance.

Plaintiff alleges in Count Eight of her Complaint that the provisions requiring

arbitration and prohibiting class action claims "are unenforceable as adhesive contract

provisions that are outside the reasonable expectations of Ms. Cooper and members of the

Class, are unconscionable, and are void as against public policy." (Complaint, p. 10, ¶66);

(see also Id., p.11, ¶67 ("Ms. Cooper and other Class members are entitled to a judicial

declaration that arbitration provisions in the agreements that prohibit class claims and class

relief are unenforceable.")) Plaintiff's prayer for relief also specifically seeks declaratory

judgment that the “arbitration provisions within Q.C. Financial's contracts, which prohibit

class claims, are unenforceable." (Complaint, p.11, ¶2) 

Plaintiff argues that the arbitration provision, and not the agreement as a whole, are

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unenforceable as unconscionable and against public policy. "Because unconscionability is

a generally applicable contract defense, it may be applied to invalidate an arbitration

agreement without contravening section 2 of the FAA." Ting v. AT&T, 319 F.3d 1126, 1150

n.15 (9th Cir. 2003) (citing Doctor’s Assocs., 517 U.S. at 687). See also Ticknor, 265 F.3d at

937 (finding arbitration agreement unconscionable under Montana law); Muhammad v.

County Bank of Rehoboth Beach, Delaware, __ A.2d __, 2006 WL 2273448 (N.J. Supreme

Court August 9, 2006) (because the "distinct class-arbitration waivers" are within the

arbitration clauses, they are "part of the arbitration agreements, and not part of the contracts

as a whole...we are empowered to address" issue of unconscionability directed at such

waivers). A plain reading of Plaintiff's Complaint reveal that she has raised "grounds...'at

law or in equity'" specific to the arbitration provision and that is the portion of Plaintiff's

Complaint which is at issue in the present Motion. 9 U.S.C. § 2. Therefore, the Court has

jurisdiction to address Plaintiff's claims directed solely to the arbitration provision. see

Buckeye Check Cashing, Inc., __ U.S. __, 126 S.Ct. at 1209-1210.

 2. Assessment of the Arbitration Provision

"To evaluate the validity of an arbitration agreement, federal courts 'should apply

ordinary state-law principles that govern the formation of contracts.'" Ingle v. Circuit City

Stores, Inc., 328 F.3d 1165, 1170 (9th Cir. 2003) (citation omitted). 

Defendant concedes that the contract, which encompasses the arbitration provision

herein, is adhesive. (TR. p. 8) “An adhesion contract is typically a standardized contract

form ‘offered to consumers of goods and services on essentially a ‘take it or leave it’ basis

without affording the consumer a realistic opportunity to bargain and under such conditions

that the consumer cannot obtain the desired product or services except by acquiescing in the

form of contract...`[t]he distinctive feature of a contract of adhesion is that the weaker party

has no realistic choice as to its terms.’” Broemmer v. Otto, 840 P.2d 1013, 1015-1016 (Ariz.

1992) (quoting Wheeler v. St. Joseph Hosp., 133 Cal. Rptr. 775, 783 (App. 1976)). The

arbitration provision herein is part of a standardized form contract. The arbitration terms

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8

Consistent with Buckeye, this Court’s analysis is focused on the arbitration provision

in the contract and not on the contract in its entirety.

9

At least one court has recognized that the American Arbitration Association

Consumer Due Process Protocols state that consumer arbitration agreements should offer all

parties the option of seeking adjudication in a small claims tribunal. Jenkins, 400 F.3d at 879

(enforcing arbitration agreement that permitted small-claims actions and any appeal

therefrom would be resolved by arbitration). Any support such a provision may provide to

Defendant is severely undercut by the contractual requirement herein that any appeal of a

judgment from small claims court “shall be resolved by binding arbitration." (Defendant's

Memorandum, Ex. B)

10The American Arbitration Association and J.A.M.S./Endispute have promulgated

procedures for class actions within arbitration proceedings. Harrington v. Pulte Home,

Corp., 119 P.3d 1044, 1055 (Ariz. App. 2005) (American Arbitration Association);

http://www.adr.org; http://www.jamsadr.com. 

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were offered on a take it or leave it basis.8

 By essentially removing from courts any potential

“claims, disputes, or controversies” (Defendant's Memorandum, Ex. B) the arbitration

provision leaves Plaintiff with no meaningful avenue of redress through the courts,9

 while

at the same time “the drafter inserted additional terms potentially advantageous to itself,”

Broemmer, 840 P.2d at 1016, by prohibiting Plaintiff from initiating or participating in a

class action against Defendant.”10 QC Financial staff did not explain the arbitration

provision to Plaintiff. Staff represented to Plaintiff that she was required to sign the

agreements containing the arbitration provision in order to accomplish the loan transaction.

Plaintiff had no realistic choice as to the terms of the arbitration provision. Under Arizona

“general contract law" the provision at issue constitutes an agreement of adhesion. See

Broemmer, 840 P.2d at 1016.

The conclusion that the arbitration provision is adhesive does not necessarily portend

resolution in Plaintiff’s favor. “[A] contract of adhesion is fully enforceable according to its

terms...unless certain other factors are present which, under established legal rules–legislative

or judicial–operate to render it otherwise.” Id. (citing Graham v. Scissor-Tail, Inc., 623 P.2d

165, 172 (Cal. 1981)) Applying such judicial limitations, courts will not enforce a contract

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 12 of 36
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of adhesion that is unduly oppressive or unconscionable. Id. (citing Graham at 623 P.2d at

172-173); Huff v. Bekins Moving & Storage Co., 702 P.2d 1341, 1343 (Ariz. App. 1985).

See also Maxwell v. Fidelity Financial Services, Inc., 907 P.2d 51, 57 (Ariz. 1995) (en banc)

(unconscionability is a distinct ground for invalidating or limiting the enforcement of a

contract); Szetela v. Discover Bank, 118 Cal.Rptr.2d 862, 868 (App. 2002) (“While adhesive

arbitration provisions are not per se unconscionable, there may be arbitration provisions

which do give an advantage to one party...[i]n those cases...it is not the requirement of

arbitration alone which makes the provision unfair but rather...the manner in which the

arbitration is to occur” that would support a finding of unconscionability.)

Arizona courts have recognized that "'[a] bargain is 'unconscionable' if it is 'such as

no man in his senses and not under delusion would make on the one hand, and as no honest

and fair man would accept on the other.'" Phoenix Baptist Hosp. & Med. Ctr., Inc., v. Aiken,

877 P.2d 1345, 1349 (Ariz.App. 1994) (quoting Broemmer v. Otto, 821 P.2d 204, 208 (Ariz.

App. 1991), rev'd in part on other grounds, 840 P.2d 1013, 1018). A contract may be

procedurally unconscionable and/or substantively unconscionable. Maxwell, 907 P.2d at 58-

59; (see also Defendant's Memorandum, p. 9; Plaintiff's Opposition, p. 8). The Arizona

Supreme Court has held that "a claim of unconscionability can be established with a showing

of substantive unconscionability alone, especially in cases involving...limitation of

remedies." Maxwell, 907 P.2d at 59. The Arizona court left "for another day the questions

involving the remedy for procedural unconscionability alone." Id. The determination of

unconscionability is to be made by the court as a matter of law. Harrington, 119 P.3d at

1055 (citing Maxwell, 907 P.2d at 56). 

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 13 of 36
11That Plaintiff did not read all of the terms has little bearing. See Darner Motor

Sales, Inc. v. Universal Underwriters Insur. Co., 682 P.2d 388, 399 (Ariz. 1984)(footnote

omitted) (indicating reluctance to enforce critical terms of “contracts (or parts of contracts)

made up of standardized forms which, because of the nature of the enterprise, customers will

not be expected to read and over which they have no real power of negotiation.”)

- 14 -

a. Procedural Unconscionability

Procedural unconscionability "is concerned with 'unfair surprise,' fine print clauses,

mistakes or ignorance of important facts or other things that mean bargaining did not proceed

as it should." Maxwell, 907 P.2d at 57-58. Thus, "[u]nder the procedural rubric, courts

examine factors influencing the bargaining process: 'the real and voluntary meeting of the

minds of the contracting party: age, education, intelligence, business acumen and experience,

relative bargaining power...[and] whether there were alternative sources of supply of the

goods in question.'" Southwest Pet Products, Inc. v. Koch Indus. 107 F.Supp.2d 1108, 1113

(D.Ariz. 2000) (quoting Maxwell, 907 P.2d at 58). 

The procedural unconscionability analysis herein focuses on the manner in which the

arbitration provision was presented to the party with the weaker bargaining power, i.e. Ms.

Cooper. The arbitration provisions at issue herein were unilaterally drafted by Defendant and

presented to the then 21-year-old Plaintiff on a take-it-or-leave-it basis. No explanation of

the arbitration provision was provided to Plaintiff. Plaintiff has a high school education in

addition to “some college credits” from a local community college. (Plaintiff’s Affidavit

attached to Plaintiff’s Opposition) Plaintiff “was told that [she] was required to sign the

agreements” that contained the arbitration provisions. (Id.) When she could not afford to pay

off her loan, Plaintiff believed that her “only option was to extend the loan....I believed that

if I wanted to extend the loan, I had to sign the agreement that was put before me.” (Id.)

When Plaintiff signed the agreements, she had not read all of the terms and she did not know

what arbitration was.11 (Id.) 

Defendant argues that the provision is not procedurally unconscionable because there

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 14 of 36
- 15 -

is no evidence that when Plaintiff entered into the agreement, she was rushed, under a great

deal of emotional stress, or the atmosphere was in any other way “tension laden.”

(Defendant’s Reply, p.5 (citing Broemmer, 840 P.2d 1013; Phoenix Baptist Hosp., 877 P.2d

1345)). Broemmer, is distinguishable. In Broemmer, the court declined to address the issue

of unconscionability and instead held that the contract of adhesion at issue, which required

arbitration, was unenforceable because it was outside the plaintiff’s reasonable expectations,

especially given the unique circumstances of that case including that the plaintiff was under

a great deal of stress at the time. Broemmer, 840 P.2d 1013 (involving agreement to arbitrate

disputes arising out of the defendant's performance of abortion for the plaintiff-patient). 

While the atmosphere surrounding the signing of the contract may certainly be considered

when resolving the issue of procedural unconscionability, see Phoenix Baptist Hosp., 877

P.2d at 293-294 (fact that the plaintiff “hurriedly signed the preprinted agreement in order

to obtain emergency medical care for” his wife factored into procedural unconscionability

finding), the weaker party’s age, education, intelligence, business acumen and experience,

and relative bargaining power are also relevant. See Maxwell, 907 P.2d at 57-58; Southwest

Pet Products, 107 F.Supp.2d at 1113. See also Ingle, 328 F.3d at 1171 (finding procedural

unconscionability “because of the stark inequality of bargaining power between” the plaintiff

and defendant).

The circumstances in the present case surrounding the unilateral drafting and the

manner of presentation of the agreement to someone of Plaintiff’s age and educational

background on a take-it-or-leave it basis, in light of Plaintiff’s total lack of bargaining power,

supports the conclusion that the arbitration provision is procedurally unconscionable. The

Arizona Supreme Court has declined to identify when a showing of procedural

unconscionability alone will support denial of enforcement of contract terms. Plaintiff herein

does not suggest that her claim can rest on grounds of procedural unconscionability alone.

Instead, the primary emphasis of her argument addresses substantive unconscionability of

the arbitration provisions. Given the lack of Arizona law on the issue of when procedural

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 15 of 36
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unconscionability alone will justify refusal to enforce contractual terms, and given the

conclusion discussed infra that the provision is also substantively unconscionable, the Court

need not address whether Plaintiff’s showing of procedural unconscionability is sufficient

without more to invalidate the arbitration provisions at issue.

b. Substantive Unconscionability

Substantive unconscionability concerns the actual terms of the contract and examines

the relative fairness of the obligations assumed at the time the contract was made. Southwest

Pet Products, 107 F.Supp.2d. at 1113. "Indicative of substantive unconscionability are

contract terms so one-sided as to oppress or unfairly surprise an innocent party, an overall

imbalance in the obligations and rights imposed by the bargain, and significant cost-price

disparity." Maxwell, 907 P.2d at 58 (citation omitted). 

(1) Argument

Plaintiff argues that the class-action prohibition set out in the arbitration provision is

substantively unconscionable for the following reasons: (1) a class action is the only

meaningful mechanism for addressing Plaintiff’s consumer claims presented herein; (2) the

prohibition is one-sided as only Plaintiff and not Defendant is prohibited from bringing such

actions; (3) even if the arbitration clause prevented Defendant from filing a class action, “the

practical effect of the waiver would still” favor Defendant given that “it is impossible to

imagine a context in which Q.C. Financial would sue its customers in a class-action lawsuit”;

(4) Defendant is “fully aware that few customers will go to the time and trouble of suing in

small claims court and, therefore, has created for itself virtual immunity from class or

representative actions despite their potential merit while suffering no detriment to its own

rights.” (Plaintiff’s Opposition, pp.8-9 (citing Szetela, 118 Cal.Rptr. 2d at 867-868)) 

Defendant argues that Plaintiff relies on “cases in which courts have adhered to an

unquestionably minority view that finds that a no-class-action provision in an arbitration

agreement can make the agreement unconscionable and unenforceable.” (Defendant’s Reply,

p.5 citing Walther v. Sovereign Bank, 872 A.2d 735, 750, 751 (Md. App. 2005) (emphasis

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 16 of 36
12Plaintiff's application indicates that Ms. Angela Randolph referred her to Defendant's

business. (Defendant’s Memorandum, Ex. A) Ms. Randolph was represented in the state

actions by the same attorney who represents Plaintiff herein. (Defendant’s Memorandum,

Ex. E).

13The precise claims raised in Ms. Randolph's counterclaim are not contained in the

record. The decision from small claims court dismissing her counterclaim focuses on the

arbitration clause. On appeal, the Arizona Superior Court stated "[i]t is not the arbitration

provision itself which is claimed to violate Randolph's reasonable expectations but the waiver

of the right to participate in a class action." (Defendant's Memorandum, Ex. E, p.2)

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added by Defendant)) Defendant urges the court to adopt the reasoning of jurisdictions that

“have upheld the validity of arbitration agreements containing no-class-action provisions.”

(Defendant’s Reply, p.8) (citations omitted)

Defendant stresses that the terms of the arbitration provision herein can be

distinguished from the provisions at issue in the cases cited by Plaintiff. Unlike the

provisions in the cases cited by Plaintiff, Defendant (1) “undertakes the burden of all

arbitration fees at Cooper’s request and would be responsible for the arbitration fees

regardless of the outcome of the arbitration”; (2) no matter the outcome of the arbitration

proceeding, Defendant will not require Plaintiff to reimburse it for her share of the arbitration

fees; (3) the arbitrator’s decision would be final and binding on Defendant. (Id. at p.7)

Therefore, according to Defendant, plaintiff “cannot argue that the arbitration provision is

not bilateral because she has no disadvantage and bears no cost.” (Id.)

Defendant also submits a decision from the Arizona small claims court in Q.C.

Financial Services, Inc., v. Angela Randolph12 and the subsequent decision on appeal in that

case. It appears that QC Financial initiated an action against Ms. Randolph in small claims

court and that Ms. Randolph filed a counter claim. The small claims court dismissed Ms.

Randolph's counter claim holding that Ms. Randolph was bound by her agreement to waive

her rights: to a jury trial; to a forum other than small claims court; and to serve as a

representative or to participate as a member in a class action.13 Ms. Randolph appealed that

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 17 of 36
14Plaintiff in her Opposition does not invoke the reasonable expectation doctrine. 

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decision to the Arizona Superior Court which affirmed. Even though the Superior Court

found the contract was one of adhesion, the court nonetheless rejected Ms. Randolph's

challenge to the prohibition of class actions because Ms. "Randolph probably did not have

any expectation of being able to pursue a class action, but she would have reasonably

expected to arbitrate the dispute under the FAA or proceed in small claims court. The

agreement did not violate her reasonable expectations."14 (Defendant's Memorandum, Ex. E,

p.2) The court stated that "the precise language contained in the arbitration provision in this

case has been found to not be unconscionable." (Id. (citing Jenkins, 400 F.3d at 879)) The

court also noted that Arizona public policy favors arbitration. (Id.)

In another Arizona action against Ms. Randolph, this time filed by Speedy Cash, Inc.,

Ms. Randolph again filed a counter claim. (Defendant's Notice of Related Decision) She

alleged, inter alia, that the arbitration provision regarding a payday loan transaction was

adhesive; that the arbitration provision was unconscionable; and that the class-action waiver

was unlawful. On appeal of the dismissal of such counter claim, the Arizona Superior Court

upheld the arbitration provision, including the class-action waiver, because the provisions

were conspicuous, repetitive, and explicit; and because the Jenkins court found "the precise

arbitration language used in Plaintiff's contract" was not unconscionable under Georgia law.

(Id.) The Superior Court also noted that Arizona public policy favors arbitration. 

(2) Analysis

(a) Review of cited authority

Both parties cite cases from various state and federal jurisdictions that they contend

support their respective positions. See also William M. Howard, Annotation, Validity of

Arbitration Clause Precluding Class Actions, 13 A.L.R. 6th 145 (2006); Alan S. Kaplinsky,

A Scorecard on Where Federal and State Appellate Courts and Statutes Stand on Enforcing

Class-Action Waivers in Pre-Dispute Consumer Arbitration Agreements, (PLI Litig. &

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 18 of 36
15At oral argument, Defendant submitted the Kaplinsky article.

- 19 -

Admin. Practice Course, Handbook Series, No. 8588, 2006).15 The parties also distinguish

each other’s cited authority which is a fairly easy task given that each case turns not only on

nuances of contract law from jurisdictions other than Arizona, but also on the intricacies of

the language used in the specific arbitration clauses and the different causes of action raised

by each particular plaintiff. Nonetheless, the cases advance rationale that can be used to

enforce or reject the arbitration provision at issue herein depending upon the context of the

instant Plaintiff’s case and the application of Arizona law. A brief discussion of the rationale

supporting each party’s argument follows.

The line of cases Plaintiff primarily relies upon essentially adopt the reasoning of a

California appellate court decision refusing to enforce the arbitration clause in a credit card

agreement that prohibited class actions. Szetela, 118 Cal. Rptr. 2d 862. The relevant contract

language in that case provided that neither the consumer nor the corporation could "JOIN OR

CONSOLIDATE CLAIMS IN ARBITRATION BY OR AGAINST OTHER

CARDMEMBERS WITH RESPECT TO OTHER ACCOUNT, OR ARBITRATE ANY

CLAIMS AS A REPRESENTATIVE OR MEMBER OF A CLASS OR IN A PRIVATE

ATTORNEY GENERAL CAPACITY." Id. at 864 (emphasis in original). The Szetela court

held that the provision was "not only substantively unconscionable, it violates public policy

by granting...[the defendant] a 'get out of jail free' card while compromising important

consumer rights." Id. at 868. In reaching this conclusion, the court reasoned that:

fully aware that few customers will go to the time and trouble of suing in small

claims court, Discover has instead sought to create for itself virtual immunity

from class or representative actions despite their potential merit, while

suffering no similar detriment to its own rights...It is the manner of arbitration,

specifically, prohibiting class or representative actions, we take exception to

here. The clause is not only harsh and unfair to Discover customers who might

be owed a relatively small sum of money, but it also serves as a disincentive

for Discover to avoid the type of conduct that might lead to class action

litigation in the first place. By imposing this clause on its customers, Discover

has essentially granted itself a license to push the boundaries of good business

practices to their furthest limits, fully aware that relatively few, if any,

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 19 of 36
16Plaintiff cites the following cases holding that arbitration provisions in consumer

contracts that include a class-action waiver were substantively unconscionable: Laster v. TMobile USA, Inc., 407 F.Supp.2d 1181, 1191-1192 (S.D. Cal. 2005) (because contracts at

issue were "non-negotiable form contracts, involving an alleged scheme to cheat large

numbers of consumers out of small sums of money, the arbitration clauses" prohibiting class

actions were substantively unconscionable and noting that there is no indication attorney's

fees are an adequate substitute for the class action); Acorn v. Household Intern, Inc., 211

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customers will seek legal remedies, and that any remedies obtained will only

pertain to that single customer without collateral estoppel effect. The potential

for millions of customers to be overcharged small amounts without an

effective method of redress cannot be ignored. Therefore, the provision

violates fundamental notions of fairness.

While the advantages to Discover are obvious, such a practice

contradicts the California Legislature's stated policy of discouraging unfair and

unlawful business practices, and of creating a mechanism for a representative

to seek relief on behalf of the general public as a private attorney general. (See,

e.g., Bus. & Prof. Code, § 17200 et. seq.) It provides the customer with no

benefit whatsoever; to the contrary, it seriously jeopardizes customers'

consumer rights by prohibiting any effective means of litigating Discover's

business practices. This is not only substantively unconscionable, it violates

public policy....

Id. at 867-868. See also Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005)

(California Supreme Court applying Szetela rationale to invalidate class-action waiver in

arbitration provision). 

The Ninth Circuit, applying California law, has endorsed the Szetela court’s reasoning

to hold that arbitration provisions prohibiting class actions, inter alia, are substantively

unconscionable. See Ting, 319 F.3d at 1150 (“it is not only difficult to imagine AT&T

bringing a class action against its own customers, but AT&T fails to allege that it has ever

or would ever do so.”); Ingle, 328 F.3d at 1176 (through such provision, the defendant “seeks

to insulate itself from class proceedings while conferring no corresponding benefit

to...[plaintiff] in return...because [defendant’s] prohibition of class action proceedings in its

arbitral forum is manifestly and shockingly one-sided, it is substantively unconscionable.”)

Plaintiff cites cases from district courts within the Ninth Circuit and from other state

and federal jurisdictions wherein the courts have found class-action waivers in arbitration

contracts to be unconscionable.16 (Plaintiff’s Opposition, pp. 10-13); (TR. p.35)

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 20 of 36
F.Supp.2d 1160, 1174 (N.D.Cal. 2002) (arbitration agreement that "contains numerous onesided provisions including the prohibition on class actions, the availability of judicial

remedies with respect to foreclosure," confidentiality provisions, and provision dividing the

majority of costs between plaintiff and defendant was substantively

unconscionable);Wisconsin Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155 (Wis. 2006)

(where arbitration provision was silent as to class actions and parties assumed claims must

be pursued individually, court found arbitration provision was unconscionable because it

limited the relief available to a putative class given that injunctive relief was not available

in the arbitral forum but was available through courts, because defendant was not limited to

arbitration, and arbitration fee was assessed without regard for plaintiff's indigence.); Luna

v. Household Finance Corp., III., 236 F.Supp.2d 1166, 1178-1183 (W.D. Wash. 2002)

(recognizing that class-action prohibition in an arbitration clause "is likely to bar actions

involving practices applicable to all potential class members, but for which an individual

consumer has so little at stake that she is unlikely to pursue her claim" and finding

prohibition on class action was "used as a sword to strike down access to justice instead of

a shield against prohibitive costs" weighed heavily in favor of substantive unconscionability

and arbitration provision was in fact substantively unconscionable given class-action waiver,

confidentiality provision, one-sided access to court for defendant, and prohibitive arbitration

costs to plaintiff); Lozada v. Dale Baker Oldsmobile, Inc., 91 F.Supp.2d 1087 (W.D. Mich.

2000) (arbitration provision was substantively unconscionable because it imposed substantial

arbitration costs, failed to provide for declaratory and injunctive relief, and class-action

prohibition waived state statutory remedy where state consumer protection law expressly

permitted class actions); Muhammad, A.2d. , 2006 WL 2273448 (N.J. 2006) (classaction waiver in payday loan agreement was substantively unconscionable because such

waivers "can functionally exculpate wrongful conduct by reducing the possibility of

attracting competent counsel to advance the cause of action" and can "prevent an aggregate

recovery that can serve as a source of contingency fees for potential attorneys" given that in

light of the small dollar amount at issue, "[t]he availability of attorney's fees is illusory...");

Leonard v. Terminix International Co., 854 So.2d 529, 539 (Ala. 2002) (finding arbitration

agreement substantively "unconscionable because it is a contract of adhesion that restricts

the [plaintiffs] to a forum wherein the expense of pursuing their claim far exceeds the amount

in controversy...by foreclosing the [plaintiffs] from an attempt to seek practical redress

through a class action and restricting them to a disproportionately expensive individual

arbitration"); Whitney v. Alltel Communications, Inc., 173 S.W.3d 300 (Mo. App. 2005)

(where disputed .88 cent per-month overcharge was applied to all customers' bills, arbitration

clause was substantively unconscionable because the class-action prohibition required

customers to bear arbitration costs and because clause prohibited award of incidental,

consequential, or exemplary damages that would otherwise be available under state law);

Kinkel v. Cingular Wireless, LLC, 828 N.E.2d 812 (Ill. App.) review granted, 839 N.E.2d

1025 (Ill. 2005) (arbitration agreement was substantially unconscionable where the cost of

- 21 -

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 21 of 36
filing individual claims would offset a significant portion of any potential recovery which

would further be offset by any costs incurred in presenting the claim and any lost wages for

taking time from work to do so and, thus, consumers in the plaintiff's position were left

without the effective remedy of class arbitration); Eagle v. Fred Martin Motor Co., 809

N.E.2d 1161 (Ohio App. 2004) (finding substantively unconscionable and against public

policy an arbitration clause that contained class-action waiver, waiver of right to proceed as

a private attorney general, and confidentiality provision); Dunlap v. Berger, 567 S.E.2d 265

(W.Va. 2002) (arbitration provision was substantively unconscionable due to prohibition on

availability of punitive damages and class action because such prohibitions bar plaintiff from

utilizing two remedies that are essential to enforcing and vindicating rights and protections

afforded under state consumer protection statute and state common law); Powertel, Inc., v.

Bexley, 743 So.2d 570, 575-576 (Fla. App. 1999) (finding arbitration clause substantively

unconscionable because of defective notice of terms and because customers were required

to waive statutory remedies such as injunctive relief which "effectively removes [defendant's]

exposure to any remedy that could be pursued on behalf of a class of consumers...[t]he

prospect of class litigation ordinarily has some deterrent effect on a...service provider, but

that is absent here" in light of class action prohibition). Omitted from this discussion are

Plaintiff's citations to Sutton's Steel & Supply, Inc. v. Bellsouth Mobility, Inc., 776 So.2d 589

(La.App. 2001) which was abrogated by Aguillard v. Auction Management Corp., 908 So.2d

1 (La. 2005) (holding that presumption of arbitrability exists with regard to enforcement of

arbitration agreements under a contract of adhesion analysis) and Mandel v. Household Bank

(Nevada), N.A., 129 Cal. Rptr.2d 380 (App. 2003) wherein a petition for review was

subsequently granted but the case was ultimately dismissed in light of settlement before the

California Supreme Court issued its decision. Mandel v. Household Bank, 29 Cal.Rptr.3d 1

(2005). Additionally, Lozada cited supra may no longer be reliable to the extent that the

court relied on a decision that was ultimately reversed by the Third Circuit. Further, the

District Court for the Northern District of West Virginia noted in dicta that Dunlap, cited

supra, is preempted by the FAA. Schultz v. AT&T Wireless Servs., Inc., 376 F.Supp.2d 685,

692 (N.D.W.Va. 2005).

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Defendant relies on decisions that have enforced class-action prohibitions in the face

of challenges based upon various grounds including unconscionability grounds and statutory

grounds. These courts have rejected challenges based on unconscionability primarily because

they found that “precluding class action relief will not have the practical effect of

immunizing” the defendant given that the agreements permit the plaintiff “and other

consumers to vindicate all of their substantive rights in arbitration,” Jenkins, 400 F.3d at

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 22 of 36
17See also Snowden v. Checkpoint Check Cashing, 290 F.3d 631 (4th Cir. 2002)

(because statute at issue permitted recovery of attorney’s fees, the court rejected argument

that class-action prohibition in arbitration agreement was unconscionable where the plaintiff

argued she would be unable to maintain legal representation given small amount of

damages); Autonation USA Corp. v. Leroy, 105 S.W.3d 190, 200 (Tex. App. 2003) (rejecting

Plaintiff's "generalizations" that "without the class-action device consumers will be

disinclined to pursue individual remedies for small damages" given that Plaintiff did not

argue that "arbitration will deprive her of any substantive rights or statutory remedies" under

state law that she would otherwise have as a member of a class).

18Plaintiff attempts to distinguish Vigil because the arbitration clause therein did not

prohibit class claims. (Plaintiff’s Opposition, p. 14) A reading of Vigil is to the contrary.

The court therein specifically stated that the plaintiff challenged the arbitration provisions

waiving the right to a jury trial or a proceeding as a class action. Vigil, 205 F.Supp.2d at 570,

573. Although Arizona law was applied in Vigil, that court looked to other jurisdictions

given that Arizona had not yet addressed the issue whether such class-action waivers are

unconscionable.

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87817; the arbitrator’s decision will be final and binding on the defendant, Hutcherson v.

Sears Roebuck & Co., 793 N.E.2d 886 (Ill. App. 2003); and the strong policy expressed in

both federal and state law favors the enforcement of arbitration provisions. Walther, 872

A.2d 735; Vigil v. Sears National Bank, 205 F.Supp 2d 566 (E.D. La. 2002).18

Courts have also rejected arguments that class-action prohibitions in arbitration

agreements are inconsistent with various federal statutes such as the Truth in Lending Act

(hereinafter “TILA”) and the Age Discrimination in Employment Act (hereinafter "ADEA").

The rationale supporting those decisions focused on the text of the statute at issue to

determine whether Congress intended to create a non-waivable right to bring a class action.

See Randolph v. Green Tree Financial Corp.-Alabama, 244 F.3d 814, 818 (11th Cir. 2001)

(even though TILA specifically contemplates class actions, Congress did not intend to

preclude parties from entering contracts waiving their ability to seek class-action relief);

Johnson v. West Suburban Bank, 225 F.3d 366 (3rd Cir. 2000) (same regarding TILA and

Electronic Fund Transfer Act): Livingston v. Associates Finance, Inc., 339 F.3d 553 (7th Cir.

2003) (same holding under TILA); Marsh v. First USA Bank NA., 103 F.Supp.2d 909

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 23 of 36
19Although Marsh found generally that the contract was not unconscionable, the

court's specific discussion of the class-action prohibition addressed the argument that such

prohibition foreclosed substantive statutory rights under the TILA.

20The Illinois Supreme Court has issued an opinion on review of Kinkel which has not

been released for publication in the permanent law reports and until it is released the decision

is subject to revision or withdrawal. Kinkel v. Cingular Wireless, __ A.2d __, 2006 WL

2828664 (Ill. October 5, 2006). This Report and Recommendation does not rely upon the

- 24 -

(N.D.Tex. 2000) (same under TILA).19 The United States Supreme Court, in a decision

holding that mandatory arbitration was not inconsistent with the ADEA noted that the

applicable arbitration rules provide for class proceedings. Gilmer v. Interstate/Johnson Lane

Corp., 500 U.S. 20, 33 (1991). 

The courts in this line of cases also noted that the state's public policy goals could be

vindicated through arbitration and that the federal statutes at issue also provided for

enforcement by administrative agencies. See e.g., Gilmer, 500 U.S. at 32-33; Randolph, 244

F.2d at 818; Johnson, 225 F.3d at 373-374. Plaintiff persuasively points out that these cases

did not address whether the class-action prohibition was unconscionable. (Plaintiff’s

Opposition, p.14) However, several courts have overlooked this distinction and have cited

many of these cases as authority to reject challenges based on state-law unconscionability

grounds to class-action prohibitions. See Jenkins, 400 F.3d 868; Vigil, 205 F.Supp.2d 566;

Lomax v. Woodmen of the World Life Insur. Soc’y., 228 F.Supp.2d 1360 (N.D. Ga. 2002);

Hutcherson, 793 N.E.2d 886. Decisions determining whether a federal statute impliedly

limits arbitration, while instructive, are not binding on the issue of "whether class arbitration

waivers are unconscionable under state law principles." Discover Bank, 113 P.3d at 1114

n.6 (emphasis added). See also Muhammad, __ A.2d. __, 2006 WL 2273448 (the reconciling

of various remedial federal statutes, such as the TILA and ADEA, with the FAA requires

consideration of whether "Congress has evinced an intention to preclude a waiver of judicial

remedies for the statutory rights at issue...[t]hat is a uniquely federal question, distinct from

an analysis of state contract law...") (emphasis in original); Kinkel, 828 N.E. 2d 812, 82120

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 24 of 36
Illinois Supreme Court's opinion.

- 25 -

(“It is one thing to say that a particular arbitration clause or portion thereof is

unconscionable; it is another thing to say that arbitration is inconsistent with the purposes of

an entire statutory scheme.”)

(b) The class-action prohibition herein is substantively

unconscionable

The Ninth Circuit has stated that 

[t]he task of a federal court in a diversity action is to approximate state law as

closely as possible in order to make sure that the vindication of the state right

is without discrimination because of the federal forum...In doing so, federal

courts are bound by the pronouncements of the state's highest court on

applicable state law...Where the state's highest court has not decided an issue,

the task of the federal courts is to predict how the state high court would

resolve it...In assessing how a state's highest court would resolve a state law

question-absent controlling state authority-federal courts look to existing state

law without predicting potential changes in that law.

Ticknor, 265 F.3d at 939 (citations and quotation marks omitted). It is well-established

among the Arizona courts that "if Arizona law has not addressed an issue, we ‘look

approvingly to the laws of California,' especially when interpreting a similar or identical

statute. The caveat to that principle, however, is that we ‘follow the California cases in so

far as their reasoning is sound.'" Moore v. Browning, 50 P.3d 852, 860 (Ariz. App. 2002)

(quoting State v. Vallejos, 358 P.2d 178, 182 (1960)) (declining to follow California law in

that case because such reasoning was unsound). Defendant points out that the California

courts' reasoning rejecting class-action prohibitions in arbitration agreements, as applied by

the Ninth Circuit and adopted by other jurisdictions, has been referred to by some as the

"minority" view. (See Defendant's Reply, p.5 (citing Walther, 872 A.2d at 750-751)).

However the holding of Szetela and its progeny has also been described as "the better

reasoned view." Walther, 872 A.2d at 759 n.2 (CJ Bell dissenting). Under the instant

circumstances the reasoning of the California court is sound and the better reasoned view.

Arizona recognizes that consumer protection statutes are necessary "to counteract the

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disproportionate bargaining power which is typically present in consumer transactions."

Dunlap v. Jimmy GMC of Tucson, Inc., 666 P.2d 83, 89 (Ariz.App. 1983) (discussing

Consumer Fraud Act). Similarly, regulation of the small-loan/deferred presentment industry

serves dual purposes: "first–to protect consumers from abuses and predatory practices and

second, to allow authorized lenders to lawfully charge higher interest rates on small loans

than would be allowed under the general usury statute." Aros v. Beneficial Arizona, Inc., 977

P.2d 784, 788 (Ariz. 1999) (en banc) (discussing Consumer Loan Act). See also Minutes of

Committee on Financial Institutions and Retirement, 44th Leg., 2d Regular Sess. (Ariz.

January 26, 2000) (regarding S.B. 1266 providing for licensure and regulation of deferred

presentment companies).

The United States Supreme Court has recognized the importance of class actions

generally and specifically in the context of consumer protection as follows:

The aggregation of individual claims in the context of a classwide suit is an

evolutionary response to the existence of injuries unremedied by the regulatory

action of government. Where it is not economically feasible to obtain relief

within the traditional framework of a multiplicity of small individual suits for

damages, aggrieved persons may be without any effective redress unless they

may employ the class-action device.

Deposit Guaranty National Bank v. Roper, 445 U.S. 326, 339 (1980); and 

The policy at the very core of the class action mechanism is to overcome the

problem that small recoveries do not provide the incentive for any individual

to bring a solo action prosecuting his or her rights. A class action solves this

problem by aggregating the relatively paltry potential recoveries into

something worth someone's (usually an attorney's) labor.

Amchem Products, Inc. v. Windsor, 521 U.S. 591, 617 (1997) (citation omitted). The Arizona

court, likewise, has recognized that when individual recoveries are relatively small, a class

action is the only possible device which would afford relief to numerous plaintiffs with such

claims. See Godbey v. Roosevelt School Dist. No. 66 of Maricopa County, 638 P.2d 235,

240 (Ariz. App. 1981).

Defendant asserts that because "the arbitration provision has the same binding effect

on QC Financial and QC Financial bears the financial burden of arbitration," the arbitration

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 26 of 36
21In Hutcherson the Illinois appellate court stated that, inter alia, a class-action

prohibition was not unconscionable given that the "arbitrator's decision is final and binding

on [the defendant]....Moreover, [the defendant] undertakes the burden of all arbitration fees

at the customer's request. [The defendant]...would remain responsible for the fees even if the

customer loses but the arbitrator finds the claims were not frivolous." Hutcherson, 739

N.E.2d at 895. Although the Hutcherson court "applied" Arizona law pursuant to the choiceof-law provision of the contract at issue, the court recognized that the "Arizona courts have

not addressed this issue so we look to other jurisdictions for guidance." Id. at 894.

Defendant agrees that Hutcherson is not a statement of Arizona law. (TR. pp.9-10) 

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provision "therefore does not 'protect' QC Financial." (Defendant's Reply, p.7 (citing

Hutcherson, 793 N.E.2d at 895)).21 Although the arbitration provision is binding upon

Defendant, the provision does not expressly provide that the class-action prohibition applies

to Defendant. (See Defendant's Memorandum, Ex. B, ¶8; Defendant's Reply, p.7 ("the

arbitration provision has the same binding effect on QC Financial..."); TR. pp. 28, 40)

Defendant concedes that it "may not be likely to file a class action against customers."

(Defendant's Reply, p.7) Upon the Court's inquiry at oral argument whether there is a

circumstance where Defendant would ever file a class action against its customers,

Defendant's counsel responded:

I can't answer that question, Your Honor...I guess, yes...I could see that... I'm

personally familiar with situations in which entities...having been involved in

a lot of standardized contracts will file a class action seeking to resolve an

issue on the class basis so that they have the benefit of collateral estoppel or

res judicata on that issue, but it's highly unusual. 

(TR. pp. 14-15) Defendant thus implicitly recognizes the importance of class actions

obtaining collateral estoppel effect and avoiding the filing of individual suits against each

customer.

That the arbitrator's decision is final and binding on Defendant does not support

Defendant's assertion that the class-action waiver herein does not "protect" Defendant. The

fact that resolution by arbitration of one consumer's claim against Defendant would be

binding overlooks the impact the class-action prohibition has on actual and potential claims

against Defendant. To appreciate the full impact of the class-action waiver, its purpose must

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be examined. The "birth" of the class-action waiver has been described by one commentator

as follows:

In the late 1990s, trade-journal articles first appeared encouraging corporate

counsel to consider redrafting contracts to include provisions requiring

consumers and others to waive the right to participate in class actions or even

group arbitrations. A 1997 "Practice Tips" column in the Franchise Law

Journal suggested that, in the wake of a nine-figure class action jury verdict in

favor of Meineke Discount Muffler franchisees against the home office,

franchisors should seriously consider requiring:

each franchisee in the potential class to pursue individual claims

in a separate arbitration. Since many (and perhaps most) of the

putative class members may never do that, and because

arbitrators do not issue runaway awards, strict enforcement of an

arbitration clause should enable the franchisor to dramatically

reduce its aggregate exposure.

Another corporate attorney writing in a business journal recommended that

commercial clients take full advantage of the favorable Supreme Court

arbitration jurisprudence by incorporating class action waivers into arbitration

clauses whenever practical. 

Myriam Gilles, Opting Out of Liability: The Forthcoming, Near-Total Demise of the Modern

Class Action, 104 Mich. L. Rev. 373, 396-397 (2005) (citing Broussard v. Meineke Disc.

Muffler Shops,, 958 F.Supp. 1087 (W.D.N.C. 1997) rev'd on other grounds, 155 F.3d 331

(4th Cir. 1998); Edward Wood Dunham, The Arbitration Clause as Class Action Shield, 16

Franchise L.J. 141 (1997); Kay O. Wilburn, A Clause You Don't Want to Overlook, Bus. L.

Today, Nov./Dec. 1996 at 55, 57-58)). One of the proponents of class-action waivers, cited

by Gilles, also "warned that '[i]n this day and age ... most class action suits against

established franchisors will involve impressively large aggregate damage claims.... [And

while] [a]n arbitration clause may not be an invincible shield against class action litigation,

it is surely one of the strongest pieces of armor available to the franchisor.'" Id. n.121

(quoting Dunham, 16 Franchise L.J. at 141). Thus it is well-known that such clauses are

inserted into arbitration agreements to protect the drafter of the agreement, such as

Defendant, from large aggregate damage awards. Id.

That the arbitration result is binding on Defendant means "that any remedies obtained

will only pertain to that single customer without collateral estoppel effect." Szetela, 118

Cal.Rptr. 2d at 868. "[B]ecause...damages in consumer cases are often small and because

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 28 of 36
22Otherwise, Defendant's source of disincentive is internal business altruism,

speculatively regardful governmental action, or some ephemeral external influence of the

marketplace. (See TR. p. 16 ("As a practical matter, if an arbitrator finds that...the company

is engaged in a...criticizable practice, as a practical matter, my [defense counsel's] experience

has been that the company has changed that practice because they don't want to go through

it again."); TR. p. 21 ("if a company hypothetically were systematically engaged in unfair

business practices, two things will happen. One, the authorities, the attorney general, the

county attorney will...do something about it. And two, the marketplace is going to shun

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'[a] company which wrongfully exacts a dollar from each of millions of customers will reap

a handsome profit...the class action is often the only effective way to halt and redress such

exploitation.'" Discover Bank, 113 P.3d at 1108-1109 (quoting Linder v. Thrifty Oil Co., 2

P.3d 27, 39 (Cal. 2000)). By denying class arbitration, Defendant "has precluded the

possibility that a group of its customers might join together to seek relief that would be

impractical for any of them to obtain alone...this is an advantage that inures only to"

Defendant. Powertel, 743 So.2d at 576. Hence, the class-action waiver is not

inconsequential as Defendant contends. That provision insulates Defendant from the spectre

of a ruling which would have precedential effect and value, such as application of collateral

estoppel, on Defendant's business practice as a whole. 

Although the parties may elect to bring a claim in small claims court, any appeal

therefrom must be to an arbitrator, not the Arizona courts. Such a provision works together

with the class-action prohibition to insulate Defendant from aggregate awards that otherwise

could be imposed and from collateral estoppel effect. Individualizing each claim absolutely

and completely insulates and immunizes Defendant from scrutiny and accountability for its

business practices and "'also serves as a disincentive for [Defendant]...to avoid the type of

conduct that might lead to class action litigation in the first place.'" Discover Bank, 113 P.3d

at 1108 (quoting Szetela, 118 Cal.Rptr 2d at 868). Thus, any deterrent effect Plaintiff's action

would have upon Defendant's business practices, in light of Arizona's public policy evinced

in its consumer protection laws, small-loan/deferred presentment industry regulation, and

recognition of the importance of class actions, is absent.22 See Powertel, 743 So. 2d at 576

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 29 of 36
them."))

23Plaintiff "has a lawyer because she's" the roommate of the daughter of Plaintiff's

counsel's legal assistant. (TR. p. 45)

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("The prospect of class litigation ordinarily has some deterrent effect on a manufacturer or

service provider, but that is absent here" due to class-action waiver in arbitration clause)

Courts that have disagreed with this reasoning failed to acknowledge the complete impact

of such a waiver and/or relied on cases that did not consider an unconscionability argument.

The Arizona Attorney General may have the ability to bring an enforcement action

against Defendant but that does not, in and of itself, support a finding that the class-action

waiver herein is enforceable. Class actions are "an evolutionary response to the existence

of injuries unremedied by the regulatory action of government." Deposit Guaranty National

Bank, 445 U.S. at 339. Defendant acknowledges that Plaintiff would not directly "benefit

from" a state governmental enforcement action because any award would not compensate

Plaintiff but would go to the state. (TR. pp. 18-19) The mere possibility that a state agency

may at some time file an enforcement action should not preclude Plaintiff and other similarly

situated consumers from seeking a legal remedy, including money damages, for Defendant's

alleged widespread conduct. See Discover Bank, 113 P.3d at 1110 ("small claims litigation,

government prosecutions, or informal resolution" are not adequate substitutes for class

actions).

Plaintiff's concedes that if she proves to an arbitrator that she was overcharged, "then

she can an obtain an arbitration award and" attorney's fees. (TR. p.42) However, Plaintiff

also points out: "[i]f it weren't for the mechanism of a class action claim," she "probably"

would not have been able to file and prove her claim "from the start..."because Ms. Cooper

probably wouldn't have been able to hire a lawyer...she's not going to find a lawyer who's

going to represent her for a $100 claim...it's just not cost effective do that." (TR. pp. 42-43;

see also TR. pp. 44-45)23 Plaintiff's point is well-taken in light of the fact that "[t]he

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availability of attorney's fees is illusory if it is unlikely that counsel would be willing to

undertake the representation." Muhammad, __ A.2d __, 2006 WL 2273448 (N.J. 2006). 

There is no indication that "attorney fees are an adequate substitute for the class action"

mechanism or that they ameliorate the problems posed by such class-action waivers.

Discover Bank, 113 P.3d at 1110. See also Laster, 407 F.Supp.2d at 1191 (same). 

Arizona has acknowledged "a strong public policy, both federal and state, favoring

arbitration." Harrington, 119 P.3d at 1051 (citations omitted). See also City of Cottonwood,

877 P.2d at 288 (Because Arizona public policy favors "arbitration, arbitration clauses are

construed liberally and any doubts about whether a matter is subject to arbitration are

resolved in favor of arbitration.") Yet, the Arizona court has not hesitated to set aside

arbitration provisions that were oppressive, "grossly inequitable," or beyond the reasonable

expectation of the parties. Harrington, 119 P.3d at 1051 (citing Stevens/Leinweber/Sullens,

Inc. v. Holm Dev. and Mgmt., Inc., 795 P.2d 1308, 1313 (App. 1990)); see also Broemmer,

840 P.2d 1013. Where, as here, the class-action prohibition “is found in a consumer contract

of adhesion in a setting in which disputes between the contracting parties predictably involve

small amounts of damages, and when it is alleged that the party with the superior bargaining

power has carried out a scheme to deliberately cheat large numbers of consumers out of

individually small sums of money," Discover Bank, 113 P.3d at 1110 , "[t]his court cannot

close its eyes to the reality" of the impact of the class-action waiver. 

Stevens/Leinweber/Sullens, Inc. 795 P.2d at 1313 (invalidating one-sided arbitration

agreement). For the foregoing reasons, the class-action waiver herein, is substantively

unconscionable and against public policy. 

Such conclusion does not:

indicate[] any hostility...directed at arbitration, but at the manner in which it

was forced upon the consumers,...The decision is hostile to the adhesive and

oppressive nature of the [agreement], not to the particular forum... More

importantly, the Supreme Court's generalized statements on arbitration do not

override the FAA's particular rule, which obtains here and which is wellsettled: '[G]enerally applicable contract defenses, such as fraud, duress or

unconscionability, may be applied to invalidate arbitration agreements without

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contravening section 2.' See Doctor's Assocs., 571 U.S. at 687.

Ting, 319 F.3d. at 1152. See also Buckeye Check Cashing, Inc., __ U.S. __, 126 S.Ct. 1204

(recognizing that the FAA permits "[c]hallenges to the validity of arbitration agreements

'upon such grounds as exist at law or in equity for the revocation of any contract...'") (quoting

9 U.S.C. § 2). Neither this opinion nor Arizona contract law on unconscionability singles

out arbitration provisions. The unconscionability of class-action waivers in arbitration

provisions must be determined on a case-by-case basis as was done in the instant case.

(3) Remedy

Under the circumstances of this case, the arbitration provision is unconscionable and

against public policy because of the prohibition on class-actions. The next question is

whether the entire arbitration provision should be set aside as unenforceable. Courts have

set aside entire arbitration agreements upon a finding that the class-action prohibition

together with other additional unconscionable terms permeated the arbitration provision in

such a way as to invalidate the entire arbitration agreement. See e.g. Ingle, 328 F.3d at 1180

("because an 'insidious pattern' exists in [defendant's] arbitration agreement...we conclude

the agreement is wholly unenforceable") (footnotes omitted); Luna, 236 F.Supp.2d at 1183

(severing entire arbitration provision because "the unconscionable provisions are interrelated

and each serves to magnify the one-sidedness of the others. As such the Arbitration Rider

is tainted with illegality."); Eagle, 809 N.E.2d at 1185 ("in light of the various deficiencies

found within the clause, this court finds that this arbitration clause is substantively and

procedurally unconscionable, and therefore unenforceable in its entirety.") 

In contrast, where only the class-action waiver is the unconscionable aspect of the

arbitration provision, the court has severed that specific waiver and directed that the action

proceed to class arbitration. See e.g. Szetela, 118 Cal.Rptr.2d 862 (court severed the classwaiver provision from the arbitration clause and left the plaintiffs to pursue classwide

arbitration); Gilles, 104 Mich. L. Rev. at 409 & n.185 ("Other courts faced with arbitration

agreements that were silent as to classwide arbitration have similarly ordered class claims to

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proceed in the arbitral forum.") However, a plurality of the United States Supreme Court has

since held that federal and state courts may not order that the matter proceed as a class

arbitration, but the court may order that the arbitrator determine whether class arbitration is

appropriate. Gilles, 104 Mich. L. Rev. at 409 (citing Green Tree Financial Corp. v. Bazzle,

539 U.S. 444 (2003)). See also Kinkel, 828 N.E.2d at 823 (severed only the unconscionable

class-action waiver and determined the "claim can still be arbitrated if the arbitrator is free

to determine that class arbitration is appropriate.") The American Arbitration Association

and J.A.M.S./Endispute, both of which Plaintiff herein may select to administer the

arbitration, have promulgated procedures to govern cases where, inter alia, "a court has

ordered that an arbitrator determine whether a class arbitration may be maintained."

Supplementary Rules for Class Arbitrations, American Arbitration Association website,

www.adr.org.. See also www.Jamsadr.com. 

Generally, the Arizona "courts do not rewrite contracts for parties...If it is clear from

its terms that a contract was intended to be severable, the court can enforce the lawful part

and ignore the unlawful part...Where the severability of the agreement is not evident from

the contract itself, the court cannot create a new agreement for the parties to uphold the

contract." Olliver/Pilcher Insur. Inc. v. Daniels, 715 P.2d 1218, 1221 (Ariz. 1986) (citations

omitted). See also Himes v. Safeway Insur. Co., 66 P.3d 74, 87 (Ariz. App. 2003)

(recognizing that "[a] lawful promise made for a lawful consideration is not invalid merely

because an unlawful promise was made at the same time for the same consideration.")

(citation omitted). The Arizona Supreme Court has recognized that in the context of

contracts containing restrictive covenants but not containing a severability clause, Arizona

courts will eliminate "grammatically severable, unreasonable provisions." Fearnow v.

Ridenour Swenson, Cleere & Evans, P.C., 138 P.3d 723, 731 (Ariz. 2006). 

The arbitration provision in the Application herein, is superseded by the arbitration

provision in the Agreement. (Defendant's Memorandum, p.2 (The Agreement "super[c]eded

the Customer Application..."); Defendant's Memorandum, Ex. A ("All customer agreements

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 33 of 36
24The issue for the arbitrator does not concern whether the class-action prohibition is

unconscionable. Pursuant to section 2 of the FAA, this Court has made the determination

that the prohibition is unconscionable. Rather, the issue for the arbitrator is whether the

matter is suitable for class arbitration under the applicable criteria. 

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contain another arbitration provision that supercedes this arbitration provision and governs

the resolution of disputes.")) Paragraph 1 of the Agreement requires Plaintiff to agree to

arbitrate, inter alia, all claims asserted by her as a private attorney general, as a

representative and member of a class of persons, or in any other representative capacity,

against Defendant or related third parties–however, paragraphs 2(c) and 3 of that same

Agreement prohibit such class actions. (Defendant's Memorandum, Ex. B) Paragraphs 2(c)

and 3 are grammatically severable from the Agreement. Once these unconscionable

paragraphs are severed, the case can proceed to arbitration and this Court can direct the

arbitrator to determine whether Plaintiff satisfies the requisite criteria for this matter to

proceed as a class arbitration.24 Preserving the arbitration provision sans unconscionable

paragraphs 2(c) and 3 is also consistent with the Federal Arbitration Act and Arizona public

policy favoring both arbitration and class actions.

(d) Dismissal

Defendant has moved for dismissal, or in the alternative, for an order compelling

arbitration and staying proceedings. At oral argument, Defendant indicated that "[i]t really

doesn't matter" whether the action is stayed or dismissed. (TR. p. 30) Although Plaintiff

agrees that there is not "any real difference between" a stay or dismissal, Plaintiff requests

dismissal if the Court is inclined to order arbitration so that the order will be immediately

appealable. (TR. 53) 

Section 3 of the FAA specifically provides for a stay:

If any suit or proceeding be brought in any of the courts of the United States

upon any issue referable to arbitration under an agreement in writing for such

arbitration, the court in which such suit is pending, upon being satisfied that

the issue involved in such suit or proceeding is referable to arbitration under

such an agreement, shall on application of one of the parties stay the trial of

the action until such arbitration has been had in accordance with the terms of

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the agreement, providing the applicant for the stay is not in default in

proceeding with such arbitration. 

9 U.S.C. §3. The Ninth Circuit has held that section 3 of the FAA does "not limit the court's

authority to grant a dismissal" where the arbitration clause in that case required the plaintiff

to submit all claims to arbitration. Sparling v. Hoffman Constr. Co., Inc., 864 F.2d 635, 638

(9th Cir. 1988). See also Simula Inc., 175 F.3d 716 (Ninth Circuit affirming district court's

order granting motion to compel arbitration and motion to dismiss); Alford v. Dean Witter

Reynolds, Inc., 975 F.2d 1161, 1164 (5th Cir. 1992) ("The weight of authority clearly supports

dismissal of the case when all of the issues raised in the district court must be submitted to

arbitration.") (emphasis in original).

Once the class-action prohibition herein is severed, the unconscionable provision is

thus removed and all of Plaintiff's claims must be submitted to arbitration. Consequently,

Plaintiff cannot state a claim for relief in this forum. Dismissal is appropriate. See Sparling,

864 F.2d 635; Simula Inc.,175 F.3d 716.

III. RECOMMENDATION

For the foregoing reasons, Plaintiff is correct that the class-action prohibition herein

is procedurally and substantively unconscionable and against public policy. Therefore, the

Magistrate Judge recommends that the District Court: (1) sever the class-action prohibition;

(2) grant Defendant's Motion to Compel Arbitration; (3) direct the parties to submit to the

arbitrator the question whether Plaintiff satisfies the requisite criteria necessary for class

arbitration; (4) grant Defendant's Motion to Dismiss (Doc. No. 10); and (5) deny as moot

Defendant's alternative request for a stay.

Pursuant to 28 U.S.C. §636(B), any party may serve and file written objections within

ten days after being served with a copy of this Report and Recommendation. A party may

respond to another party's objections within ten days after being served with a copy thereof.

Fed.R.Civ.P. 72(b). If objections are filed, the parties should use the following case number:

CV 06-10-TUC-FRZ.

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If objections are not timely filed, then the parties' right to de novo review by the

District Court may be deemed waived. See United States v. Reyna-Tapia, 328 F.3d 1114,

1121 (9th Cir.) (en banc), cert. denied, 540 U.S. 900 (2003).

The Clerk of Court is directed to send a copy of this Report and Recommendation to

the parties and/or their counsel.

DATED this 22nd day of November, 2006.

Case 4:06-cv-00010-FRZ-HCE Document 33 Filed 11/22/06 Page 36 of 36