Opinion ID: 1359971
Heading Depth: 2
Heading Rank: 2

Heading: Unconscionability and Public Policy

Text: CCP argues that it adequately pled the arbitration provision was unconscionable and in violation of public policy. We disagree. Unconscionability has been recognized as the absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them. Fanning v. Fritz's Pontiac-Cadillac-Buick, Inc., 322 S.C. 399, 403, 472 S.E.2d 242, 245 (1996). The trial court ruled that CCP's allegations of unconscionability and violation of public policy as to the arbitration clause were based on the same claims the trial court rejected; that had CCP known of the alleged misconduct by United and Martin, it would have still entered into the 1996 Services Agreement but would not have agreed to the arbitration clause. Therefore, the trial court dismissed both causes of action for failure to state a claim pursuant to Rule 12(b)(6). CCP argues it sufficiently pled the arbitration clause was unconscionable because Martin, in his capacity as CEO, breached his fiduciary duties by acting in the best interests of United. Again, CCP argues that Martin should have informed CCP about the arbitration clause and the rights being forsaken by CCP. CCP further contends the arbitration clause was one-sided in favor of United because it prevents discovery [7] and prohibits an award of punitive damages. We hold that CCP has failed to allege any facts that would show the clause was unconscionable. Both parties were sophisticated entities and, as United points out in its brief, CCP was apparently represented by independent counsel. While CCP alleged it lacked a meaningful choice as to the entire contract, CCP has simply failed to allege that it lacked a meaningful choice as to the arbitration clause specifically. Therefore, we agree with the trial court's ruling that any misconduct by Martin affected whether the entire agreement was unconscionable, not simply the arbitration clause. As to the substantive claim involving the public policy issue, CCP alleged that because the clause sought to limit CCP's rights and remedies, the clause was unenforceable as a matter of law. In its complaint, CCP also alleged that its rights and remedies under the SCUTPA were limited by the clause. This Court has not addressed whether it violates South Carolina public policy for parties to voluntarily forgo punitive damages in an arbitration agreement. The general rule is that courts will not enforce a contract which is violative of public policy, statutory law, or provisions of the Constitution. Beach Co. v. Twillman, Ltd., 351 S.C. 56, 64, 566 S.E.2d 863, 866-67 (Ct.App.2002). As noted in 83 A.L.R.3d 1037, 1039 (1978): courts in some cases have held that an arbitrator has the power, at least in certain circumstances, to award punitive damages. Thus, the court in one case has held that arbitrators possess the power, apparently without limitation in a labor law context, to award punitive damages. In other cases, however, the courts have taken the position that arbitrators have the power to award punitive damages only when they are given such power by express language in the contract authorizing arbitration or in the submission papers. A number of courts in other jurisdictions have held that an arbitration agreement limiting or excluding punitive damages is enforceable. Martin v. SCI Mgt. L.P., 296 F.Supp.2d 462 (S.D.N.Y.2003) (parties to an arbitration agreement may expressly preclude an arbitrator from awarding punitive damages); Investment Partners, L.P. v. Glamour Shots Licensing, Inc., 298 F.3d 314 (C.A.5 2002) (holding provisions in arbitration agreements that prohibit punitive damages are generally enforceable); 7-Eleven, Inc. v. Dar, 325 Ill.App.3d 399, 258 Ill.Dec. 826, 757 N.E.2d 515 (2001) (holding arbitrators may award punitive damages only where the parties have expressly agreed to the arbitrator's authority to award punitive damages). Other courts have held that an arbitration agreement excluding punitive damages violates public policy. Ex parte Thicklin, 824 So.2d 723 (Ala.2002) (holding that it violates Alabama public policy for a party to contract away its liability for punitive damages, regardless of whether the provision was intended to operate in an arbitral or a judicial forum); State ex rel. Dunlap v. Berger, 211 W.Va. 549, 567 S.E.2d 265 (2002) (holding prohibitions on punitive damages and class action relief that would be the result of the application of a purchase and finance agreement are clearly unconscionable). CCP cites In re Managed Care Litig., 132 F.Supp.2d 989 (S.D.Fla.2000), in support of its public policy argument. In that case, the U.S. District Court for the Southern District of Florida ruled that a similar clause [8] excluding punitive or exemplary damages was unenforceable as a matter of public policy as it related to the plaintiff's RICO [9] claims. However, the United States Supreme Court overturned that decision in PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401, 123 S.Ct. 1531, 155 L.Ed.2d 578 (2003). The Supreme Court held that the issue of whether statutory treble damages under the RICO statute were barred was not yet ripe because there was some question as to whether treble damages were punitive or compensatory, and it was unclear how an arbitrator would rule on the issue. PacifiCare, 538 U.S. at 406-07, 123 S.Ct. at 1535-36. Based on PacifiCare, it is clear an arbitrator may or may not choose to award treble damages in accordance with the SCUTPA, depending upon whether an arbitrator finds the SCUTPA was violated and whether the arbitrator finds that statutory treble damages are punitive or compensatory damages. Accordingly, we hold that the question of whether the clause preventing punitive damages violates public policy as to the SCUTPA is not yet ripe because an arbitrator has not ruled on the issue. However, CCP is also seeking punitive damages in several common law causes of action. We hold that this issue is also not ripe for two reasons. First, it is unclear whether CCP will prevail on the merits in arbitration. Second, it is unclear whether an arbitrator would find that punitive damages are warranted. Accordingly, we hold that any challenge that the clause violates public policy is premature. See Hawkins v. Aid Assn. for Lutherans, 338 F.3d 801 (7th Cir.2003) (holding that complaints about the unavailability of punitive damages must first be presented to the arbitrator). Additionally, we note that our holding in no way limits CCP's ability to pursue its claims of fraud in the inducement of the arbitration clause, unconscionability, and public policy violations in arbitration. See Larry's United Super, Inc. v. Werries, 253 F.3d 1083, 1086-87 (8th Cir.2001) (holding that whether federal public policy prohibits an individual from waiving certain statutory remedies is an issue that may be raised when challenging an arbitrator's award).