United States: Arbitration: It’s Here To Stay

The cost of access to the courts has long been an issue for the practicing bar, as well as advocates for the poor. A variety of programs have been instituted to address this issue. Efforts to provide lawyers to the poor at taxpayers’ expense in criminal trials were successful by way of judicial decree. Efforts to provide lawyers to the poor at taxpayers’ expense in civil trials focused on a legislative solution resulting in the formation and funding of the Legal Services Corporation. The practicing bar has encouraged pro-bono activities and the federal courts have mandated it for civil trials.

Corporate America has been concerned with the cost of litigation as well. This concern has only heightened as legislatures have passed new laws, many of which grant a prevailing plaintiff his attorneys fees. Lacking the political clout to balance the scales, corporate America has turned to mandatory arbitration as a means to quick and inexpensive resolution of disputes. In Illinois, their efforts got a big boost from the Court of Appeals for the First District in Hutcherson v. Sears Roebuck & Co., 793 N.E. 2d 886, 2003 Ill. App. Lexis 826 (Ill. App. 1st, June 30, 2003).

In Hutcherson, the Plaintiff Betty Hutcherson applied for a credit card from Sears. Although, Hutcherson did not apply for credit insurance (which was offered as an option on the credit card application) Sears billed her for credit insurance. Hutcherson brought a class action against Sears alleging common law theories as well as a count under the Illinois Consumer Fraud and Deceptive Business Practices Act.

Between the time Hutcherson applied for and was granted a credit card and the filing of her lawsuit, Sears sent her a revised credit card agreement. The revised agreement contained a mandatory arbitration provision. The revised agreement by its terms became effective thirty (30) days after receipt. The arbitration provision expressly prohibited class action proceedings.

Sears filed a motion to compel arbitration citing the revised credit card agreement. The trial court denied Sears’ motion and Sears filed an appeal.

The Court of Appeals began its decision with a clear and succinct summary of the legal status of arbitration. Id. at 890. It noted that arbitration was a creature of contract and, thus, state law principles of contract formation and revocation governed. Turning to the issue of which state’s laws applied -- the revised agreement provided it was Arizona law -- the Court gave effect to the terms of the revised credit card agreement and applied Arizona state law.

The Court then addressed Hutcherson’s arguments that the arbitration provision was void because it was either procedurally or substantively unconscionable. Id. at 891. Finding no case from an Arizona court addressing procedural unconscionability in the context of adding an amendment to an agreement which compelled arbitration, the Court looked to decisions from other jurisdictions. The Court cited a case decided by the United States Court of Appeals for the Fifth Circuit and a number of cases decided by lower courts within that judicial circuit involving claims under Texas, Mississippi and Alabama state as well as an Ohio Appellate Court decision. In each case the Court had allowed an amendment to an Agreement which compelled all disputes arising under the agreement be arbitrated.

Based on these decisions the Court rejected Hutcherson’s procedural unconscionability argument. It noted the original credit card agreement allowed for amendments and that notices of the amendments would be in writing. The cover letter sending the Amendment, directed them the recipients to "read the attached Agreement" and to "retain" it for their records. The attachment was in small print with the exception of the paragraph compelling arbitration -- that entire paragraph was in capital letters.

The Court summarily rejected Hutcherson’s argument that the amendment was oppressive. It did so because Hutcherson had thirty (30) days to reject it. It also rejected Hutcherson’s argument that the amendment was a contract of adhesion. The Court determined that under Arizona law the question of whether a contract was one of adhesion was separate and distinct from the issue of its unenforceability.

Turning next to Hutcherson’s claim of substantive unconscionability the Court determined that under Arizona law the applicable test was the relative fairness of the obligations assumed. Id. at 894. Applying a multifactored analysis the Court rejected this claim.

Hutcherson’s first argument was that the waiver of class action claims was impermissible. Finding no Arizona decisions addressing the issue the Court looked to other jurisdictions for guidance. Despite the fact several cases had voided arbitration agreements prohibiting class actions, the Court rejected this Argument. It did so because Sears agreed to advance the fees of the arbitrator and to pay them even if Hutcherson lost, unless the arbitrator expressly found her claim was frivolous. Furthermore, the Court concluded that a prohibition on class-actions in arbitration was not in and of itself unconscionable. Id. at 894-95.

The Court also rejected Hutcherson’s claim that the amended agreement contained a so-termed "escape hatch." (A escape hatch allows one party to reject an adverse award.) Id. at 896. The Court also rejected Hutcherson’s argument that any award had to be kept confidential. The Court reviewed the applicable rules and determined the rules did not require any award be kept confidential. Similarly the Court rejected Hutcherson’s claim that the applicable rules contained a "loser pays all" provision. Rather the Court ruled Hutcherson was required to pay only if her claim was decreed frivolous -- a permissible requirement under Arizona law. Id. at 898. Finally, the Court rejected Hutcherson’s claim that Sears had an advantage as a "repeat player."

The Court also addressed Hutcherson’s claim the amendment was void for lack of consideration in that Sears was not compelled to arbitrate if the card holder was in default on her payments. The Court rejected this argument finding instead that Sears could not escape arbitration once it was selected. Id. at 899.

As to Hutcherson’s final two arguments that Section 2-207 of the Uniform Commercial Code and the requirement of good faith and fair dealing precluded the amendment, the Court rejected both arguments. Section 2-207 applied only to the sale of goods, which a credit card was not. The original agreement allowed amendments which the Court interpreted to allow additions to its terms.

The lesson for Illinois’ citizens was succinctly summarized by the Court: "people should read their mail." 793 N.E.2d at 887. The second lesson is, do not move to Arizona. The final chapter on many of these issues may yet be written, as the Illinois Supreme Court has not ruled on many of them. If and when that occurs, the result could be different for contracts enforced under Illinois law.

Douglas A. Darch, Partner at Seyfarth Shaw
Member of the ISBA Individual Rights and Responsibility Section Counsel