Scratch unconscionability off the list of likely arguments to make to avoid arbitration. In a pair of opinions issued this week, the North Carolina Court of Appeals made it much more difficult going forward for a plaintiff to escape the consequences of an agreement to arbitrate, even when included in a contract of adhesion and even when it includes a class action waiver. In doing so, the Court of Appeals gingerly sidestepped a Supreme Court of North Carolina case from 2008, finding it had been effectively overruled by the United States Supreme Court’s more recent holdings in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) and American Express Co. v. Italian Colors Rest., 133 S.Ct. 2304 (2013).
The twin Court of Appeals decisions, in Torrence v. Nationwide Budget Finance and Knox v. First Southern Cash Advance, arise from purported class action lawsuits filed by consumers against several companies offering “short-term consumer loans,” or payday loans. The companies moved to compel arbitration. The trial court denied the motions, finding the agreements procedurally and substantively unconscionable under Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93 (2008).
In Tillman, a plurality of the Supreme Court of North Carolina analyzed the specific facts and circumstances presented, finding that several provisions of the parties’ agreement were unconscionable because they would deprive the consumers of certain rights or benefits available in litigation but not in arbitration.
The Court of Appeals held that the U.S. Supreme Court has since rejected that type of “arbitration-specific” reasoning:
Unconscionability attacks that are directed at the arbitration process itself will no longer be tolerated.
In other words, an arbitration agreement can be attacked as unconscionable in the same way as any other contract can be so attacked, but not with reference to the differences between litigation and arbitration. The underpinnings of Tillman, the Court of Appeals held, have therefore been overruled. Indeed, as the Concepcion Court noted: “[T]he times in which consumer contracts were anything other than adhesive are long past,” and a class action waiver does not render an arbitration agreement unconscionable.
The Court of Appeals also rejected the Plaintiffs’ contention that the arbitration agreement had become impossible to perform, as the identified arbitral forum—the “National Arbitration Forum”—is no longer performing arbitrations. The Court of Appeals relied on the “savings clause” of the Federal Arbitration Act, which allows a court to appoint an arbitrator when “there shall be a lapse in the naming of an arbitrator” for any reason. 9 U.S.C. § 5.
These cases, involving a potent mix of excellent lawyers, detailed analysis by the Court of Appeals, and a conflict between the precedents of the federal and state Supreme Courts, may very well end up being decided by the Supreme Court of North Carolina by way of discretionary review. We’ll keep you posted.