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No. 15-0128 -- Nationstar Mortgage, LLC v. Adam West and Bethany W est Workman, Justice, dissenting

In reversing the well-reasoned decision of the circ uit court, the majority destroys consumer rights through its overly harsh a nalysis of the Wests’ unconscionability contract defense. The real questi on in this case is whether the Wests met their burden under Green Tree Financial Corp.-Alabama v. Randolph , 531 U.S. 79 (2000), to demonstrate that they face such “high co sts” if compelled to arbitrate their claims against Nationstar that they are effectively precluded from vindicating their rights in the arbitral forum. Id . at 90. The record is clear that the Wests have me t their burden of showing the likelihood of incurring such costs, and I would invalidate the arbitration agreement as “prohibitively expensive.” Id. at 92. I therefore respectfully dissent.

This case presents just another example of the trou bling issues surrounding arbitration clauses inserted into form contracts in consumer transactions by powerful outof-state corporations. 1 As Justice Ginsburg recently commented, the preced ent of the

1 See Melissa T. Lonegrass, Finding Room for Fairness in Formalism-the Sliding Scale Approach to Unconscionability , 44 Loy. U. Chi. L.J. 1, 3 (2012) (“Standard forms are ubiquitous, but hardly innocuous. In fact, form contracts are rife with the potential for abuse. Their nature and universality permit drafter s to impose any number of onerous terms on unwary consumers, including arbitration ag reements, class action waivers, liquidated damages provisions, warranty disclaimers , exculpatory clauses, and choice-oflaw provisions. Form contracts even empower drafter s to shift risks at will, often without warning, through unilateral change-of-terms clauses --an increasingly common favorite of credit card issuers, banks, utility companies, and a host of other merchants and service (continued . . .) 

### FILED April 7, 2016 released at 3:00 p.m. RORY L. PERRY II, CLERK SUPREME COURT OF APPEALS OF WEST VIRGINIA2

United States Supreme Court has “predictably result ed in the deprivation of consumers’ rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer-protection laws.” DIRECTV, Inc. v. Imburgia , 136 S. Ct. 463, 477 (2015) (Ginsburg, J., dissent ing); see e.g. , Judith Resnick, Diffusing Disputes: The Public in the Private of Ar bitration, the Private in Courts, and the Erasure of Rights , 124 Yale L.J. 2804, 2804 (2015) (“Although hundre ds of millions of consumers and employees are obliged to use arbitration as their remedy, almost none do so -- rendering arbitration not a vi ndication but an unconstitutional evisceration of statutory and common law rights.”). Because “consumers lack bargaining power to change the terms of consumer adhesion cont racts ex ante , ‘[t]he providers [have] won the power to impose a mandatory, no-opt- out system in their own private “courts” designed to preclude aggregate litigation. ’” DIRECTV, 136 S.Ct. at 477 (Ginsburg, J., dissenting) (quoting Resnik, Fairness in Numbers: A Comment on AT&T v. Concepcion, Wal-Mart v. Dukes, and Turner v. Rogers , 125 Harv. L. Rev. 78, 133 (2011)).

Although the Supreme Court has stressed that federa l policy under the Federal Arbitration Act, 9 United States Code § 2 ( West 2016), favors the enforcement of

providers. Although essential to the American econo my, form contracts expose consumers to a parade of one-sided, risk- and right s-shifting provisions.”) (footnotes omitted).3

valid arbitration agreements, 2 the Supreme Court has been equally clear that a pa rty can be forced into arbitration only if he or she has in fact entered into a valid, enforceable contract waiving his or her right to a judicial for um. AT&T Tech., Inc. v. Commc’n Workers of Am., 475 U.S. 643, 648 (1986). Whether the parties actu ally agreed to arbitrate is determined under ordinary state-law co ntract principles. Penn v. Ryan’s Family Steak Houses, Inc., 269 F.3d 753, 758-59 (7th Cir. 2001). An arbitrati on clause may be declared unenforceable upon the same grounds at law or equity for the revocation of any contract. AT&T Mobility LLC v. Concepcion , 563 U.S. 333, 339 (2011). Therefore, a traditional unconscionability contract defense still exists because the FAA’s saving clause permits it. Id

.

Consistent with these principles, this Court still has the authority to find an arbitration clause invalid due to unconscionability . “[W]e analyze unconscionability in terms of two component parts: procedural unconscion ability and substantive unconscionability.” Brown v. Genesis Healthcare Corp ., 228 W.Va. 646, 681, 724 S.E.2d 250, 285 (2011) (“Brown I”) . Substantive unconscionability goes to the specifi c terms of the contract and procedural unconscionability conce rns the formation of the agreement. While the presence of both procedural and substanti ve problems is necessary for an ultimate finding of unconscionability, such a findi ng may be appropriate when a contract

2 “[D]ue regard must be given to the federal policy f avoring arbitration, and ambiguities as to the scope of the arbitration clau se itself resolved in favor of arbitration.” Volt Inf. Sciences, Inc. v. Bd. of Tr. of Leland St anford Jr. Univ. , 489 U.S. 468, 475-76 (1989).4

presents pronounced substantive unfairness and a mi nimal degree of procedural unfairness, or vice versa. To be unenforceable, a c ontract term must -- “at least in some small measure” -- be both procedurally and substant ively unconscionable. Id . at Syl. Pt. 20; Dan Ryan Builders, Inc. v. Nelson , 230 W. Va. 281, 289, 737 S.E.2d 550, 558 (2012).

The United States Court of Appeals for the Fourth C ircuit explained the particular characteristics of both procedural and s ubstantive unconscionability in Carlson v. General Motors Corp., 883 F.2d 287 (4th Cir. 1989):

Substantive unconscionability involves those one-si ded terms of a contract from which a party seeks relief (for instance, “I have the right to cut off one of your child’s finge rs for each day you are in default”), while procedural unconsci onability deals with the process of making a contract -- “bar gaining naughtiness” (for instance, “Just sign here; the sm all print on the back is only our standard form”). Each of these branches of unconscionability has common-law cousins; proced ural unconscionability looks much like fraud or duress i n contract formation, and substantive unconscionability remind s us of contracts or clauses contrary to public policy or i llegal. Id. at 296 n.12 (quoting James J. White & Robert S. Su mmers, Uniform Commercial Code § 4-3, at 186 (3d ed. 1988)).

Our substantive/procedural analysis is more of a sliding scale than a true dichotomy. The more substantively oppressive the co ntract term, the less evidence of procedural unconscionability is required to establi sh unconscionability. Syl. Pt. 9, Brown v. Genesis Healthcare Corp. , 229 W. Va. 382, 729 S.E.2d 217 (2012) ( Brown II ). See Lonegrass, Finding Room for Fairness in Formalism-the Sliding Scale Approach to5

Unconscionability , 44 Loy. U. Chi. L.J. 1, 12 (“[T]he sliding scale approach does not require that procedural and substantive unconsciona bility each be present in any particular degree; rather, a relatively large quant um of one type of unconscionability can offset a relatively small quantum of the other. Thu s, under the sliding scale approach, the two prongs are viewed in tandem, permitting the cou rt to make a finding of unconscionability if the overall weight of the fact s and circumstances favors intervention.”) (footnotes omitted); Cordova v. World Fin. Corp. of N.M. , 208 P.3d 901, 908 (N.M. 2009) (“The more substantively oppressive a contract term, the less procedural unconscionability may be required for a court to co nclude the offending term is unenforceable.”).

As discussed below, taken together, the oppressiv e and one-sided substantive provisions of the arbitration clause at issue in the instant case and the inequality of bargaining power between the parties render the arbitration clause in the Wests’ loan agreement unconscionable. Therefore, th e circuit court appropriately applied traditional tools of our State contract law when it held the arbitration clause was unenforceable.

A. The Arbitration Clause is Procedurally Unconscio nable There can be no reasonable disagreement that the co ntract between the Wests and Nationstar was a contract of adhesion at the time of formation, but the majority is correct in determining that our analysi s does not end here. “[T]he times in6

which consumer contracts were anything other than a dhesive are long past.” 3 Concepcion , 563 U.S. at 346-47. While adhesion can be a facto r when arguing unconscionability, the mere lack of a meaningful ch oice and negotiation between the parties will not, standing alone, establish unconsc ionability. 4

The majority goes on to address the elements of pro cedural unconscionability pursuant to Brown I

. 5 While I agree that the omission of an “opt out”

3 “Experts have long acknowledged that consumers do not read form contracts before signing them, and have recently come to bett er understand the more fundamental, and sobering, truths about standard contracts: cons umers who actually read consumer contracts do not understand them, either because th ey lack the requisite legal training, or worse, basic literacy skills.” Lonegrass, supra at 3-4 (footnotes omitted).

4 Admittedly, the United States Supreme Court in Concepcion “did not automatically entitle defendants to arbitration, bu t it did make it easier for defendants to enforce their contract provisions.” Megan Barnett, There Is Still Hope for the Little Guy: Unconscionability Is Still A Defense Against Arbitr ation Clauses Despite AT&T Mobility v. Concepcion , 33 Whittier L. Rev. 651, 664 (2012).

5 In syllabus point seventeen of Brown I , we held:

Procedural unconscionability is concerned with inequities, improprieties, or unfairness in the bar gaining process and formation of the contract. Procedural unconscionability involves a variety of inadequacie s that results in the lack of a real and voluntary meeting of the minds of the parties, considering all the circumsta nces surrounding the transaction. These inadequacies inc lude, but are not limited to, the age, literacy, or lack of s ophistication of a party; hidden or unduly complex contract terms ; the adhesive nature of the contract; and the manner and setting in which the contract was formed, including whether ea ch party had a reasonable opportunity to understand the term s of the contract. (continued . . .)7

provision is not in itself sufficient to establish procedural unconscionability, the Brown I factors, taken as a whole, weigh in favor of proced ural unconscionability in this case.

It is clear that the Wests had no reasonable opport unity to understand the terms of the contract they were signing. They had n o opportunity to review the arbitration rider prior to the closing; the arbitration rider w as contained in a stack of papers prepared by and provided by Nationstar; and the Wests were u naware they signed an arbitration agreement. Furthermore, the documents Nationstar pr ovided to the Wests did not contain information about the American Arbitration Associat ion (AAA) rules and protocols that governed commercial arbitration or the costs associ ated with filing a claim. 6

Finally, the bargaining power between Nationstar an d the Wests was unquestionably unequal in that the Wests are relati vely unsophisticated consumers contracting with corporate defendants who drafted t he arbitration clause and included it as boilerplate language in the loan agreement. Simp ly put, there was no “‘real and

228 W.Va. 646, 724 S.E.2d 250.

6 I recognize that “even the most diligent consumer w ho on his or her own initiative obtains the rules from the AAA and reads them would have a most difficult time accurately assessing his or her exposure.” DeVito v. Autos Direct Online, Inc. , 37 N.E.3d 194, 202-03 (Ohio 2015). A review of the 201 3 amendments to the AAA’s rules reflects a set of elaborate rules and procedures fo r commercial arbitration (the “Commercial Arbitration Rules and Mediation Procedu res”), and a separate set of more streamline rules and procedures for consumer disput es (the “Consumer Arbitration Rules”).8

voluntary meeting of the minds’ of the parties at t he time that the contract was executed.”
Brown I , 228 W.Va. at 681, 724 S.E.2d at 285.

Further, the arbitration provision is substantively unconscionable because of the prohibitive costs the Wests would incur in f iling an action for commercial arbitration. When these costs are coupled with the total lack of mutuality, the sliding scale is tipped heavily in favor of complete uncons cionability. See 1 E. Allan Farnsworth, Farnsworth on Contracts § 4.28, at 585 (3d ed. 2004) (“A court will weigh all elements of both substantive and procedural unconscionabilit y and may conclude that the contract is unconscionable because of the overall imbalance. ”).

B. The Arbitration Clause is Substantively Unconsci onable The Wests contend they are facing paying more than $5,750 (and possibly well over $14,700) to arbitrate their claims agains t Nationstar under the AAA Commercial Rules and Mediation Procedures. It is di fficult to ascertain the precise costs of the proceedings because one or three arbitrators may be appointed to hear the matter. 7 In addition, the AAA may require the parties to dep osit in advance of the hearing such sums as it deems necessary to cover the expense of the arbitration. AAA Comm. R. 56(a).

7 See AAA Comm. R. 16(a) (“If the arbitration agreement does not specify the number of arbitrators, the dispute shall be heard a nd determined by one arbitrator, unless the AAA, in its discretion, directs that three arbi trators be appointed. A party may request three arbitrators in the Demand or Answer, which re quest the AAA will consider in exercising its discretion regarding the number of a rbitrators appointed to the dispute.”).9

Following the hearing, the Wests could incur thousa nds more in shared expenses for the arbitrator and other costs. 8 The prospect of incurring these onerous costs and fees effectively precludes the Wests’ opportunity to vin dicate their consumer rights.

In the landmark case of Green Tree , the United States Supreme Court directly addressed the question of whether arbitrat ion fees potentially incurred by consumers could invalidate an arbitration clause. I n Green Tree , a mobile home buyer brought a class-action suit against the lender for alleged Truth in Lending Act (“TILA”) and Equal Credit Opportunity Act (“ECOA”) violation s in the loan agreement, which required that all disputes arising from or related to the contract were to be resolved by binding arbitration. 531 U.S. at 83. The Supreme Co urt reversed the Eleventh Circuit’s holding that the arbitration agreement’s silence as to the filing fees, arbitrators’ costs, and other arbitration expenses had rendered the arbitra tion provision unenforceable because it exposed the buyer to potentially steep arbitration costs. Id. at 84. Acknowledging that the
Green Tree parties had provided no detail of the expected arb itration fees and costs, the Supreme Court observed that while “the existence of large arbitration costs could preclude a litigant” of limited resources from effe ctively pursuing his or her claims in an arbitral forum, “[t]he ‘risk’ that [the buyer] will be saddled with prohibitive costs is too

8 See AAA Comm. R. 54 (“The expenses of witnesses for ei ther side shall be paid by the party producing such witnesses. All other ex penses of the arbitration, including required travel and other expenses of the arbitrato r, AAA representatives, and any witness and the cost of any proof produced at the d irect request of the arbitrator, shall be borne equally by the parties, unless they agree oth erwise or unless the arbitrator in the award assesses such expenses or any part thereof ag ainst any specified party or parties.”).10

speculative to justify the invalidation of an arbit ration agreement.” Id. at 92. Essentially,
Green Tree placed upon the party asserting the prohibitive ex pense the burden of showing the likelihood of incurring such costs. See Bradford v. Rockwell Semiconductor Sys., Inc., 238 F.3d 549, 556 (4th Cir. 2001) (“[A]ppropriate inquiry is one that evaluates whether the arbitral forum in a particular case is an adequate and accessible substitute to litigation, i.e., a case-by-case analysis that focuses, among other things, upon the claimant’s ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation in court, and wh ether that cost differential is so substantial as to deter the bringing of claims”); Burden v. Check into Cash, LLC, 267 F.3d 483, 492 (6th Cir. 2001) (finding Green Tree requires party resisting arbitration to show likelihood of prohibitive expenses).

Consistent with Green Tree , the court in Tillman v. Commercial Credit Loans, Inc. , 655 S.E.2d 362 (N.C. 2008), found an arbitration clause substantively unconscionable because the collective effect of its provisions would have precluded the plaintiffs from “‘vindicating [their] . . . rights in the arbitral forum.’” Id . at 371 (quoting Green Tree, 531 U.S. at 90). In Tillman , the court was persuaded by the prohibitively high costs the borrowers would face to bring their claims in the commercial arbitration setting. In terms of ability to pay, the evidence of plainti ffs’ limited

financial means is uncontested. Plaintiffs live pay check to paycheck and usually have very little money left in their bank accounts after paying their monthly bills. The arbi tration clause specifies that AAA will administer any arbit ration11 between the parties to the loan agreement, and evid ence in the record indicates that the average daily rate of AAA arbitrator compensation in North Carolina is $1,225.00. Accord ing to the arbitration clause, when an arbitration lasts m ore than eight hours, the loser will be charged with costs. Moreover, the clause provides for a de novo appeal before a panel of three arbitrators, and again, the loser pays the co sts. For example, at the average rate, a two-day appeal woul d cost the losing party $7,350.00 in arbitrator fees. Plaintif fs simply do not have the resources to risk facing these kinds o f fees. Id. at 371; but see Torrence v. Nationwide Budget Fin. , 753 S.E.2d 802, 812 (N.C. App. 2014) (recognizing Tillman’s substantive unconscionability analysis is undermin ed by “[b]oth Concepcion and Italian Colors 9 [which] hold that a class action waiver does not render an arbitration agreement unconscionable.”).

In the instant case, the Wests do not have the fina ncial resources to risk losing sky-high commercial arbitration fees in thei r fight to save their home. The majority belittles the Wests’ legitimate concerns as “wholly speculative.” However, it would be more judicious for this Court to reject Nationstar’ s argument—that simply because the arbitrator might

order it to pay the costs of arbitration, the clau se can be rescued—as wholly speculative.

The circuit court correctly determined that the thr eat of oppressive costs rendered the arbitration clause unconscionable and, therefore, unenforceable. Consequently, I would affirm the circuit court’s ru ling.

9 American Express Co. v. Italian Colors Rest. , 133 S.Ct. 2304 (2013).