Opinion ID: 2645917
Heading Depth: 3
Heading Rank: 2

Heading: Unconscionability of the Arbitration Clause

Text: Under Washington law, a contractual provision is unenforceable if it is procedurally unconscionable. Nelson v. McGoldrick, 896 P.2d 1258, 1264 (Wash. 1995) (en banc). SMITH V. JEM GROUP, INC. 9 Procedural unconscionability is determined in light of the totality of the circumstances, including (1) the manner in which the parties entered into the contract, (2) whether the parties had a reasonable opportunity to understand the terms, and (3) whether the terms were hidden in a maze of fine print. Torgerson v. One Lincoln Tower, LLC, 210 P.3d 318, 322 (Wash. 2009) (en banc) (internal quotation marks omitted). The district court concluded that all three of the listed circumstances were present in Smith’s agreement to the arbitration clause in the ARA. The court therefore held the clause procedurally unconscionable. JEM does not argue on appeal that if Washington law applies to this case, the district court applied it incorrectly. However, it argues that Washington law does not apply because it is preempted by the Federal Arbitration Act (“FAA”), as interpreted by the Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). We disagree. Under Washington law, an attorney fee agreement, or a provision thereof, is unenforceable if the attorney has not complied with the Washington Rules of Professional Conduct. Valley/50th Ave., L.L.C. v. Stewart, 153 P.3d 186, 189 (Wash. 2007) (en banc). An attorney must provide a “reasonable and fair disclosure of material elements of the fee agreement” to the client. Wash. Rules of Prof’l Conduct R. 1.5(a)(9). Advisory opinions interpreting the professional rules are persuasive but not binding authority under Washington law. In re Disciplinary Proceeding Against DeRuiz, 99 P.3d 881, 888 (Wash. 2004) (en banc). In 10 SMITH V. JEM GROUP, INC. Opinion 1670, the Washington State Bar Association (“WSBA”) specified that an arbitration provision may be included in an attorney fee agreement only if the attorney provides full disclosure of the provision to the client. The Opinion states that there is no per se prohibition in the Rules of Professional Conduct against including an arbitration provision in a fee agreement with a client, but that it (1) must be consistent with a lawyer’s fiduciary obligations and statutory law such as RCW Ch. 4.24; and (2) it properly must be done only with full disclosure to the client. An ABA Formal Opinion similarly concludes that arbitration agreements are permissible in ARAs only if the client has been given “sufficient information to permit her to make an informed decision about whether to agree to the inclusion of the arbitration provision in the retainer agreement.” ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 02-425 (2002). The district court relied on Professional Conduct Rule 1.5, as well as the WSBA and ABA opinions, to conclude that an arbitration clause is a material element of an ARA, and that such a clause is unenforceable under Washington law unless the attorney has fully disclosed the arbitration clause to his or her client. For several reasons, Concepcion does not support a conclusion that Washington procedural unconscionability law is preempted. First, Washington law does not unduly burden arbitration. Concepcion held that a California law forbidding a class-action waiver provision in arbitration agreements was preempted by the FAA. 131 S. Ct. at 1750–51. The Court SMITH V. JEM GROUP, INC. 11 provided additional examples of arbitration-specific rules that would be preempted by the FAA, such as state rules declaring unconscionable any arbitration clause that does not provide for judicially monitored discovery, requiring arbitration to proceed in accordance with the Federal Rules of Evidence, or requiring final disposition by a jury. Id. at 1747. Such rules, the Court explained, would “stand as . . . obstacle[s] to the accomplishment of the FAA’s objective[],” which is to ensure the enforcement of private arbitration agreements. Id. at 1748. In contrast to those rules, the Washington procedural unconscionability rule applied in this case does not burden arbitration. Washington law provides only that an arbitration clause in an ARA is material, and that an arbitration clause is unenforceable if the attorney fails to disclose it fully. This law does not “make[] the process slower, more costly, [or] more likely to generate [a] procedural morass.” Concepcion, 131 S. Ct. at 1751. Second, Washington procedural unconscionability law is concerned only with the process that results in the formation of the agreement. The state rule at issue in Concepcion, as well as the rules provided by the Court as examples, were preempted because they specified the manner in which the arbitration could or should be conducted. Unlike those rules, the Washington law at issue says nothing about the manner in which an arbitration is to be conducted. As the Eleventh Circuit has observed, “[t]he Supreme Court has consistently recognized” that “unconscionability doctrine[s] concerned with defects in the process of contract formation” are “valid under 9 U.S.C. § 2, and has repeatedly identified unconscionability as one of the general principles of contract law that, if applied impartially, may be applied to arbitration agreements under § 2.” In re Checking Account Overdraft Litig. MDL No. 2036, 685 F.3d 1269, 1278 (11th Cir. 2012). 12 SMITH V. JEM GROUP, INC. Third, Washington procedural unconscionability law applicable to ARAs is not specifically aimed at arbitration clauses. Washington law, including Opinion 1670, does not single out or place any additional burden on arbitration provisions. Rather, Opinion 1670 merely clarifies that an arbitration clause is among the material provisions in an ARA that an attorney, acting as a fiduciary, must disclose to his or her client. An attorney must disclose the arbitration agreement only to the same degree that he or she must disclose all material terms in an ARA.