NC SCT Declares Arbitration Agreement Unconscionable In Landmark Case

On Friday, a fractured NC SCT held in Tillman v. Commercial Credit Loans, Inc. that an arbitration agreement attendant to a consumer loan was unconscionable -- a first in NC appellate law. In the wake of that opinion, businesses will have to grapple with how to secure arbitration agreements with consumers while ensuring that they expose themselves to neither "bargaining naughtiness" nor substantive unconscionability claims.

In Tillman, the plaintiffs brought a purported class action against subprime lenders. The lenders sought to compel arbitration. The trial court refused to compel, determining that the arbitration agreements were unconscionable. The lenders appealed, won at the NC COA, and plaintiffs appealed to the SCT.

The plurality opinion, referred to in Tillman as a majority, was authored by Justice Timmons-Goodson and joined by Justices Hudson and Brady. The plurality adopted a framework that to successfully assert unconscionability, a party must prove procedural and substantive unconscionability.

The plurality held that procedural unconscionability is "bargaining naughtiness," set out as "unfair surprise, lack of meaningful choice, and an inequality of bargaining power." Here, the plurality held procedural unconscionability was established by the trial court's determinations that 1) plaintiffs were "rushed" through the loan closing process, 2) the loan closing officer(s) did not specifically mention the arbitration provision (though it was set off in a box, bolded, capitalized, and underlined and required separate signature, which plaintiffs provided), 3) defendants admitted they would have refused to negotiate the terms of the arbitration provision, and 4) the status of the consumers versus the corporate defendants.

What the SCT did not do is provide any sense of what "rushed" means, not to mention how lenders or other businesses might avoid committing that particular "bargaining naughtiness." The SCT also didn't really square a "mention" of the arbitration provision with the provision's prominent appearance on the documents, or the plaintiffs' signing of that specific provision, or indicate what kind of "mention" clears the "naughtiness" hurdle. As to bargaining power, any consumer beyond the Warren Buffetts of the world will have vastly unequal bargaining power to the likes of CitiGroup, a defendant in the case. Inescapable "bargaining naughtiness"? And as for the lack of choice because defendants wouldn't negotiate the arbitration provision, the plurality doesn't address whether the plaintiffs could simply have gone to another lender with another agreement and gotten choice that way.

The plurality held that substantive unconscionability "refers to harsh, one-sided, oppressive contract terms." The plurality held substantive unconscionability was established by the trial court's determinations that 1) the arbitration costs borrowers may face were prohibitively high, 2) the provision is one-sided and lacks mutuality, and 3) the provision prohibits class actions.

In deciding that the costs were prohibitive, the plurality focused, inter alia, on the purportedly low likelihood that plaintiffs' attorneys will take relatively low-damages cases such as these individual arbitrations -- despite the fact that the plaintiffs' claims are Chapter 75 claims, which provide for attorneys' fees and costs above and beyond damages precisely to enable consumers to bring small-damages cases against businesses. As to one-sidedness, the plurality focused on the fact that foreclosures and claims under $15 K were exempt from mandatory arbitration and prohibition of class claims. The plurality focused on these provisions' benefiting only defendants in practice -- though they apply in theory equally to plaintiffs, and small claims exemptions from arbitration are, as Justice Newby noted in his dissent, intended to benefit plaintiffs and leave open for them the small claims arena. As for the class prohibition, the plurality doesn't really square declaring a bar of a class action, which is a discretionary and procedural device, with the "substantive" in substantive unconscionability.

Justice Edmunds concurred in result only, being joined by Justice Martin. It appears as if the concurring justices' main concern with the plurality opinion was that it looked to federal law rather than just NC law and then established the procedural and substantive framework that allows itself to be projected onto NC precedent but wasn't explicit in that precedent. However, as for substance, the concurrence looks to the same determinations as the plurality and gives the plaintiffs the green light.

(Interestingly, the concurrence posits that the "lopsided effect of the arbitration clause is best demonstrated by the fact" that defendants had given 68 K loans with the arbitration agreement, had had no arbitrations brought against them, but had themselves instituted over 3 K lawsuits against borrowers. The causation issue is, however, unaddressed. Maybe CitiGroup has an excellent customer service department that nips potential consumer complaints in the bud, for example.)

Justice Newby, joined by Chief Justice Parker, dissented. Justice Newby noted that this is the very first case in which an NC appellate court has found a contract to be unconscionable. Justice Newby believed that grounds on which the plurality invalidated the arbitration agreement are unique to and common among arbitration agreements -- which is verboten under federal law. Justice Newby also noted that a number of grounds for unconscionability are not specific to the arbitration provision but rather go to the entire contract (e.g., plaintiffs were "rushed" through the loan closings, not the arbitration provision specifically), and that the US SCT ruled 40 years ago in Prima Paint that challenges to the contract as a whole were for the arbitrator, not the court, to decide. Justice Newby would hold that there was no procedural unconscionability -- he noted that "the majority's analysis criticizes aspects common to all consumer transactions..." He also would find no substantive unconscionability on numerous grounds. Justice Newby stated that "[a]t its core, this case is about plaintiffs' challenge to an arbitration agreement that substitutes individual arbitration for class action litigation" and he "did not believe this case presents the landmark occasion for invalidating a bargain due to unconscionability."