Tuesday, August 31, 2010

Brewer v. Missouri Title Loans, Inc.[1]

Opinion handed down August 31, 2010
Link to Mo. Sup. Ct. Opinion

The Supreme Court of Missouri affirmed the trial court’s finding that a class arbitration waiver was substantively unconscionable but reversed the judgment allowing the action to proceed to arbitration. The court ruled that the only appropriate remedy was to strike the entire arbitration agreement.

I. Facts and Holding

Beverly Brewer borrowed $2,215 from Missouri Title Loans (Lender) and secured the loan with the title to her 2003 Buick Rendezvous.[2] Brewer signed a promissory note, security agreement, and a loan agreement that included language waiving the right to class arbitration of claims against the Lender.[3] Brewer filed a class action suit against the Lender alleging violations of Missouri’s merchandising practices act because the annual percentage rate on the loan was 300 percent.[4] The Lender moved to compel Brewer to arbitrate her claims individually because she had signed a waiver of her right to class arbitration.[5] The trial court ruled that the class arbitration waiver was unconscionable and thus unenforceable.[6] Additionally, the court ordered the claim to proceed to arbitration to determine whether the case was suitable for class arbitration.[7] The Lender appealed from this decision.[8]

II. Legal Background

A. Federal Arbitration Act

“[W]here an arbitration agreement is silent with respect to class arbitration, the parties cannot be compelled to submit the dispute to class arbitration.”[9] Without the express consent of the parties, an arbitrator has no authority to decide such claims.[10] In Brewer, by including the waiver of class arbitration claims, the Lender expressly withheld consent for such claims to be decided by an arbitrator.[11] Without consent, the Lender could not be compelled by the court to participate in class arbitration.[12]

Furthermore, the court found that Brewer could not be forced to submit to individual arbitration, since it determined that the class arbitration waiver was unconscionable.[13] After the trial court severed the class arbitration waiver and determined that individual arbitration was not economically or practically feasible, the only possible option was a class action in a court of law.[14] As such, the trial court erred when it severed the class arbitration waiver and required an arbitrator to determine whether class arbitration was proper.[15]

B. Unconscionability

Several cases from the Missouri courts of appeals indicate that a successful claim of unconscionable contract terms requires a showing of both procedural and substantive unconscionability.[16] In contrast, the Supreme Court of Missouri’s decision in State ex rel. Vincent v. Schneider supports the conclusion that it is unnecessary to prove both procedural and substantive unconscionability in order to prove unconscionable contract terms under Missouri law.[17] Thus, the court reasoned that unconscionability may be proven by procedural unconscionability, substantive unconscionability, or both.[18]

In the present case, the court found evidence of procedural unconscionability because the loan was non-negotiable and the average consumer would not understand that the Lender was in a superior bargaining position.[19] Additionally, the court found evidence of substantive unconscionability.[20] If arbitrated as an individual claim, Brewer was unlikely to be able to retain counsel.[21] Without access to counsel, Brewer was left with no viable manner of redress for her legal claims against the Lender.[22] This fact, combined with the inability to arbitrate the claim as a class, rendered the class arbitration waiver substantively unconscionable under Missouri law.[23]

C. Exculpatory Clause

“A defendant cannot exculpate itself from liability under contract with waiver unless [its] language is clear and unambiguous.”[24] The issue in the present case was not whether Brewer realized she was giving up class arbitration but that she was effectively immunizing the lender from all liability by waiving class arbitration.[25] Unless the language was clear that Brewer was effectively giving up the ability to bring a claim against the Lender, it was not a valid waiver.[26] Given that the waiver did not inform the consumer of this effect in unambiguous terms, the court ruled that the lender cannot be exculpated by the class arbitration waiver clause.[27]

D. Majority Holding

The court held that the class arbitration waiver was unconscionable and affirmed the judgment of the trial court.[28] However, the court reversed the decision of the trial court requiring arbitration on the issue of whether class arbitration was appropriate.[29] As noted above, the Supreme Court of Missouri reasoned that the trial court’s requirement of individual arbitration was contradictory to its decision that the class arbitration waiver was unconscionable.[30] The case was remanded to the trial court.[31]

E. Dissenting Opinions

Judge Price dissented in the case.[32] He reasoned, in contrast to the majority opinion, that both procedural and substantive unconscionability must be shown under Missouri law in order to prevail on a claim of unconscionability.[33] Brewer did not prove procedural unconscionability and hence, did not satisfy the requirements for an unconscionability claim in Missouri.[34] Specifically, Brewer did not prove that coercive tactics were used to compel her agreement.[35] She considered twenty competitor lending options before choosing the Lender, and the waiver of her right to class arbitration was printed in bold capital letters in her agreement.[36] Judge Price argued that, since Brewer lacked proof that her agreement with the Lender was procedurally unconscionable, her claim of unconscionability fell short of the requirements of Missouri law and the trial court’s decision should have been reversed.[37]

In a separate dissenting opinion, Judge Breckenridge wrote that the court did not have to decide the issue of whether a showing of both procedural and substantive unconscionability was required in Missouri.[38] In her view, Brewer did not show unconscionability of either kind, and the class arbitration waiver should have been enforced as written.[39]

III. Comment

Brewer is important to arbitrations in Missouri for two reasons: (1) the application of federal law regarding consent to arbitration and (2) the determination of Missouri law regarding unconscionability in arbitration agreements. Regarding the first point, the Federal Arbitration Act requires express consent to arbitrate a dispute in order for the claim to be heard by an arbitrator.[40] Affirming the rule established in Stolt-Neilsen, Brewer confirms that arbitrators in Missouri do not have authority to hear issues when the arbitration agreement is silent on those subjects.[41]

Regarding the second point, Brewer sets a clear precedent for unconscionability in arbitration agreements. Before this case, appellate courts in Missouri had generally ruled that both types of unconscionability were required.[42] However, Brewer has established that a showing of unconscionability in arbitration agreements does not require both procedural and substantive unconscionability.[43] While the long-term outcome of this ruling remains to be determined, the immediate outcome is clear – the Supreme Court of Missouri has decided a contestable issue in arbitration law in favor of consumers. Relaxing the requirements for a showing of unconscionability will prevent some parties from engaging in business practices that were previously protected by unconscionable arbitration terms. The overall effect should be an increase in consumer protection in the marketplace.

-Ronald K. Rowe II

[1] No. SC90647, 2010 WL 3430411 (Mo. 2010) (en banc).
[2] Id. at *1.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id. (citing Stolt-Nielsen v. Animal Feeds Intl. Corp., 130 S. Ct. 1758, 1774-75 (2010).
[10] Id.
[11] Id. at *2.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id. at *3 (citing State ex rel. Vincent v. Schneider, 194 S.W.3d 853 (Mo. 2006)).
[17] Id.
[18] Id.
[19] Id. at *4.
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] Id. at *5 (citing Alack v. Vic Tanny Int’l of Mo., Inc., 923 S.W.2d 330, 334 (Mo. 1996) (en banc).
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id.
[30] Id.
[31] Id.
[32] Id.
[33] Id. at *6.
[34] Id. at *7.
[35] Id.
[36] Id.
[37] Id. at *8-9.
[38] Id. at *9.
[39] Id. at *10.
[40] Id. at *1 (citing 9 U.S.C. § 1, et seq.).
[41] Id. at *1.
[42] Id. at *6.
[43] Id. at *3.