Class Action Waiver in Payday Loan Agreement Containing Mandatory Arbitration Clause was Unconscionable and Trial Court did not Err in Severing Class Action Waiver, Compelling Arbitration, and Allowing Arbitrator to Determine Whether Matter should Proceed as Class Action Missouri State Appellate Court Holds
Plaintiff filed a class action against QC Financial, a payday lender, from whom plaintiff had borrowed money several times; the class action complaint alleged that defendant violated various Missouri state laws governing payday lenders. Woods v. QC Financial Services, Inc. d/b/a Quik Cash., ___ S.W.2d ___ (Mo.App. December 23, 2008) [Slip Opn., at 1]. Defense attorneys moved to dismiss the class action and to compel plaintiff to arbitrate the dispute individually; the motion was premised on an arbitration clause with a class action waiver that was contained in the payday loan documents. Id., at 1-2. Each loan agreement contained a mandatory arbitration clause that provided in pertinent part that the borrower is (1) waiving their right to a jury trial, (2) waiving their right to any court proceeding (other than small claims), and (3) waving the right to “SERVE AS A REPRESENTATIVE, AS A PRIVATE ATTORNEY GENERAL, OR IN ANY OTHER REPRESENTATIVE CAPACITY, AND/OR TO PARTICIPATE AS A MEMBER OF A CLASS OF CLAIMANTS, IN ANY LAWSUIT FILED AGAINST US AND/OR RELATED THIRD PARTIES.” Id., at 2. The arbitration clause further provided that “all disputes including any Representative Claims against us…shall be resolved by binding arbitration only on an individual basis with you” and precluded the arbitrator from allowing any dispute to proceed as a class action, id. Plaintiff moved for declaratory judgment, seeking to hold the class action waiver unconscionable; the trial court granted plaintiff’s motion and severed the provisions of the arbitration clause prohibiting class actions. Id. At the same time, the trial court denied the defense motion to compel plaintiff “to participate in individual arbitration,” but granted the defense motion to dismiss in part, in that the matter was ordered to arbitration for the arbitrator to decide whether the litigation could proceed as a class action. Id. Defendant appealed, and the Missouri Court of Appeal affirmed.
Defense attorneys raised several issues on appeal: (1) that plaintiff failed to prove procedural unconscionability; (2) that the arbitration clause was not procedurally unconscionable “because the font size used complies with statute and [plaintiff] signed the contract without any misrepresentations, hurry, or duress from [defendant]”; (3) that the arbitration clause was not substantively unconscionable, in part because the Federal Arbitration Act (FAA) “preempts the trial court’s holding as Missouri law does not bar class action waivers in all consumer contracts”; (4) that the class action waiver was an “essential “ part of the loan agreement, which does not contain a severance clause, so the trial court erred in severing the class action waiver from the arbitration clause; and (5) that the trial court erred in granting plaintiff’s request for declaratory judgment because it was not properly presented. Woods, at 3-4. The appellate court began by addressing the fifth point, quickly rejecting the defense characterization of the trial court’s action as one of “granting summary judgment,” and holding that the court granted declaratory judgment only to the extent that the mandatory arbitration clause precluded class action relief and only after hearing argument and testimony. Id., at 4-5. The Court of Appeal concluded that there was nothing improper in this aspect of the court’s ruling, id., at 5.
Turning to the defense arguments concerning procedural unconscionability, the appellate court began noting that the “level” of procedural unconscionability required to invalidate a contract turns in part on the substantive unconscionability of the contract, describing a “sliding scale” or “balancing” between substantive and procedural unconscionability. Woods, at 5-6. The defense argued that the trial court relieved plaintiff of her obligation to prove procedural unconscionability, but the appellate court rejected this reading of the court’s order and analysis because the trial court discussed procedural unconscionability at length. Id., at 6. The defense also challenged the trial court’s finding of procedural unconscionability, arguing that the font size used complied with Missouri law and that plaintiff did not execute the loan agreement under duress, id. The appellate court explained that the defense argument was too narrow because those factors were not the only ones that could support a finding of procedural unconscionability; rather, the courts must examine “‘the totality of the circumstances surrounding the transaction.’” Id., at 7 (citations omitted). Here, defendant was “in a much superior bargaining position,” presented the loan contracts on a “take it or leave it basis,” and had “never negotiated the terms of the contract with any of the 400,000 customers with whom it has entered into the contract approximately 2.8 million times over the five years prior to the trial court proceeding.” Id. These, and other factors, persuaded the Court of Appeal that the trial court did not err in finding the class action waiver procedurally unconscionable. Id., at 7-8.
The bulk of the Court of Appeal’s opinion was devoted to the defense challenge to the trial court’s finding of substantive unconscionability. See Woods, at 8-14. The sole issue was whether the class action waiver was substantively unconscionable, id., at 8. The arbitration clause in defendant’s loan agreement was a contract of adhesion, id., at 9, and defendant’s borrowers had “no realistic choice as to the terms of the arbitration provision,” id., at 10. And while the agreement did not limit plaintiff’s individual remedies, if she were precluded from pursuing a class action then it would “reduce the possibility of attracting competent counsel to advance the cause of action, and thus can functionally exculpate wrongful conduct.” Id. In the appellate court’s view, “The terms of the arbitration provision in [defendant’s] loan contract leave consumers like [plaintiff] with no meaningful avenue of redress through the courts.” Id., at 11. Further, the requirement for arbitration “insulates” defendant from any adverse ruling having precedential effect, id., at 12. And the Court of Appeal rejected defendant’s argument that the FAA preempted the trial court order invalidating the class action wavier, id., at 12-13. The appellate court therefore affirmed the trial court’s finding of substantive unconscionability. Id., at 13-14.
Finally, the Court of Appeal held that the trial court did not err in severing the class action waiver from the loan contract. In particular, defendant argued that it had “promise[d] to pay all arbitration fees” based on the assurance that the arbitration would be a straight-forward matter, but that “class arbitration is more expensive and unwieldy than even class litigation” thereby defeating the purpose of promise and fundamentally and prejudicially altering the terms of the bargain. Woods, at 14-15. The appellate court noted, however, that it was defendant who had argued so vigorously in the trial court that the arbitration clause was enforceable, and that defendant did not argue that the arbitration clause must stand or fall as a whole. Id. Accordingly, it was not error for the trial court to sever the class action waiver from the arbitration clause, id., at 15. The Court of Appeal therefore affirmed the trial court’s orders in their entirety. Id.