Tuesday, August 31, 2010

Ruhl v. Lee’s Summit Honda[1]

Opinion issued August 31, 2010
Link to Mo. Sup. Ct. Opinion

The Supreme Court of Missouri held (1) an agreement to arbitrate disputes regarding the purchase of a vehicle requires arbitration of a claim that a dealer unlawfully charged a fee to prepare legal documents to finance vehicles; and (2) the trial court did not err in declaring a class arbitration waiver unconscionable when a single plaintiff’s recovery would total approximately $800. In sum, the court determined that the claim was within the scope of the arbitration agreement; however, the agreement’s class action waiver was unconscionable and could not be severed from the arbitration agreement.

I. Facts and Holding

Lee’s Summit Honda (“Honda”) sold and financed the purchase of a new car for plaintiff Ashley Ruhl (“Ruhl”).[2] The retail purchase agreement listed a total purchase price including a “Cash Price of Vehicle,” “Other Goods/Services,” and a “Dealership Administrative Fee.”[3] Honda required customers, including Ruhl, to sign an arbitration agreement waiving the opportunity to participate in a class action.[4]

Ruhl brought suit against Honda for damages on two counts seeking class action certification for herself and “others who paid the fee as part of the purchase price.”[5] Ruhl first claimed that the dealership “engaged in the unauthorized practice of law or conducted legal business violating section 484.020 because it charged a fee separate from other sale costs for preparing legal instruments to finance the transactions.”[6] Second, Ruhl claimed that the dealership “engaged in unfair and deceptive practices connected with the sale of merchandise under section 407.010” stemming from the same alleged acts.[7]

Honda sought to compel arbitration pursuant to the parties’ agreement, but the trial court denied Honda’s motion, “finding that the claim of unauthorized practice of law is not subject to arbitration because the courts exclusively decide what constitutes the unauthorized practice of law.”[8] Further, the court “found the arbitration agreement to be procedurally and substantively unconscionable.”[9]

On appeal to the Supreme Court of Missouri, Honda argued three points. First, that Ruhl’s claims were within the scope of the arbitration agreement.[10] Second, that the “unauthorized practice of law claim” should be subject to arbitration.[11] Finally, that the “class arbitration waiver was not unconscionable.”[12]

II. Legal Background

A. Scope of Arbitration Contracts

According to the U.S. Supreme Court, if a party has not agreed to arbitrate a matter, it cannot be compelled to arbitrate the matter.[13] In Missouri, “[t]here is a strong presumption in favor of arbitrability,”[14] and any “dispute that ‘touches matters covered by the parties’ contract’” is subject to arbitration.[15]

The court cited the pertinent section of the arbitration agreement:
[The Parties agree] to settle by binding arbitration any dispute between them regarding: (1) the purchase/lease by Customer(s) of the above-referenced Vehicle; . . . (4) any dispute with respect to the existence, scope or validity of this Agreement. Matters that the Parties agree to arbitrate include any alleged unfair, deceptive, or unconscionable acts or practices.[16]

The court found that the plaintiff’s claims were based on an allegation that the dealership unlawfully billed customers to draft the “legal documents to finance vehicles.”[17] Thus, all damages would have been predicated on a refund of the “Dealership Administrative Fee,” which was expressly listed as part of the “total purchase price” in the contract.[18] The claims challenging the fee were within the scope of the arbitration agreement because they “constitute[d] a dispute regarding the purchase” of Ruhl’s automobile.[19]

B. Unconscionability

Although the court found that Ruhl’s claim fell “within the scope of the arbitration contract,” the dispositive issue in the case was the unconscionability of the class arbitration waiver.[20] The U.S. Supreme Court has recognized that an arbitration contract must positively indicate consent to class arbitration if a party is to be compelled to arbitrate on a class-wide basis.[21]

If the class arbitration waiver is unconscionable, one possible remedy is to sever it from the agreement.[22] However, if, after severing an unconscionable class waiver, a party is still pursuing the claim under unconscionable circumstances, courts may deem the entire arbitration agreement unconscionable. [23]

Here, severing the class waiver would require Ruhl to pursue a claim worth a maximum of approximately $800 in actual damages plus, potentially, attorney’s fees and punitive damages.[24] Because an attorney would be unlikely to take a consumer case where the potential recovery is so low and because the Missouri Merchandising Practices Act provides a right to bring a class action after meeting certain requirements, the court concluded that the trial court did not err in deeming the arbitration clause unconscionable.[25]

Since the class arbitration waiver was regarded as unconscionable, the court concluded that the appropriate remedy would be to invalidate the entire arbitration agreement as unconscionable.[26] This was appropriate because simply severing the class waiver would have required Ruhl “to pursue her claim under the very circumstances held to be unconscionable under Missouri law.”[27]

III. Comment

The decision in
Ruhl comes at a time when the subject of arbitration has been in the spotlight. This case was largely decided in light of the recent Supreme Court case Stolt-Nielsen S.A. v. AnimalFeeds International Corp., where the Court clarified that, under federal law, the existence of an arbitration agreement does not provide grounds for an inference that a party implicitly authorized class action arbitration.[28]

Stolt-Nielsen construed federal law, the Supreme Court of Missouri did not need to follow that decision’s rationale. However, the Supreme Court of Missouri did ultimately take that route in Brewer v. Missouri Title Loans, Inc.[29] An interesting twist here is that Brewer was decided August 31, 2010, the same day as Ruhl.[30] While both parties in Ruhl likely had reason to believe that Missouri would follow the rationale of Stolt-Nielsen, it was not certain that the new default rule would be applied.

Ultimately, the basic rule that “arbitration ‘is a matter of consent, not coercion’” prevailed.[31] Missouri adopted the holding from
Stolt-Nielsen that a party cannot be compelled to arbitrate on a class-wide basis when the agreement is silent with respect to class arbitration.[32] The Supreme Court of Missouri also determined that the appropriate remedy for a complainant suffering from an unconscionable class action arbitration waiver is to invalidate the entire arbitration agreement as unconscionable.[33]

-Chris Dandurand

[1] No. SC90601, 2010 Mo. LEXIS 200 (Mo. 2010) (en banc).
[2] Id. at *1.
[3] Id. at *1-2. The Dealership Administrative Fee totaled $199.95. Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id. at *2-3.
[9] Id. at *3.
[10] Id.
[11] Id.
[12] Id.
[13] Stolt-Nielsen v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758, 1775 (2010).
[14] Ruhl, 2010 Mo. LEXIS 200 at *4.
[15] Id. (quoting Kansas City Urology, P.A. v. United Healthcare Services, 261 S.W.3d 7, 12 (Mo. App. 2008)).
[16] Id.
[17] Id. at *4-5.
[18] Id. at *5.
[19] Id.
[20] Id.
[21] Stolt-Nielsen v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758, 1775 (2010).
[22] Ruhl, 2010 Mo. LEXIS 200 at *6.
[23] Id.
[24] Id.
[25] Id. at *6-7.
[26] Id. at *6.
[27] Id.
[28] 130 S.Ct. 1758, 1775 (2010).
[29] 2010 Mo. LEXIS 202 (2010).
[30] Compare Id. with Ruhl, 2010 Mo. LEXIS 200 at *5.
[31] Volt Info. Sciences, Inc. v. Bd. of Trustees, 489 U.S. 468, 479 (1989).
[32] Stolt-Nielsen, 130 S.Ct. at 1775.
[33] Ruhl, 2010 Mo. LEXIS 200 at *5.