Agreement to Arbitrate Enforced in the Face of Substantive and Procedural Unconscionability Challenges

Agreement to Arbitrate Enforced in the Face of Substantive

and Procedural Unconscionability Challenges

 

      The Kentucky Court of Appeals has determined that an agreement to arbitrate set forth in a two-page (front and page) college admission form would be enforced, rejecting challenges that the agreement is substantially and procedurally unconscionable.  Daymar Colleges Group, LLC v. Dixon, 2012 WL 4335393 (Ky. App. Sept. 21, 2012) (Not To Be Published).

      A number of students of Daymar Colleges sued, asserting that false and misleading statements had been made regarding the transferability of credits earned at Daymar institutions and the availability of jobs in the various fields of study subsequent to graduation.  In response, Daymar sought to refer the matters to arbitration pursuant the arbitration clause set forth on the backside of the admissions application document, it providing:

Any dispute … arising out of or related to my enrollment at the College, this Agreement, or the breach therefore, shall be resolved by arbitration in the city in which the campus I attend is located in accordance with the commercial rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction.

The same paragraph of the agreement provided:

All determinations as to the scope or enforceability of this arbitration provision shall be determined by the arbitrator and not by a court.

      This agreement to arbitrate was set forth on the reverse side of a one-page document; each student signed the front of the document under a provision providing:

This Agreement and any applicable amendments which are incorporated herein by reference are the full and complete agreement between me and the College.  By signing this Agreement, I confirm that no oral representations or guarantees about enrollment, academics, financial aid or career employment prospects have been made to me, and that I will not rely on any oral statements in deciding to sign this Agreement.

The agreement went on to provide that:

I have read both pages of this Student Enrollment Agreement before I signed it, and I received a copy of it after I signed it.

      Each student affixed their initials next to this particular sentence of the enrollment agreement. 

      Substantively, the document went on to provide that the students would be responsible for one-half of the cost of the arbitration, including the fees of the individual arbitrators, and that any student bringing an action against Daymar must pay their own attorney fees.

      The trial court refused to give effect to the provision that the arbitrator, not the court, would determine the scope and enforceability of the agreement to arbitrate, finding it unconscionable “to require the Students to pay an arbitrator’s fees to determine the enforceability of the arbitration provision.”  2012 WL 4335393, *3.  In addition, the trial court found that the arbitration agreement “was unconscionable [as it required] the students to pay part of the cost of arbitration when many had an income at or below the national poverty threshold.”  Id.  In furtherance of a determination of unconscionability, it was noted that “the signed arbitration agreements were imposed as a condition of enrollment and were non-negotiable.”  Id.

      Daymar appealed this determination to the Court of Appeals.

Delegation to the Arbitrator to Determine the Scope/Enforceability of the Arbitration Agreement

      The question as to whether the delegation to the arbiter the question of the scope of the arbitration agreement as well as its ultimate enforcement would be played out against the directions of the United States Supreme Court in AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986), wherein it stated that “Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agree to arbitrate is to be decided by the court, not the arbitrator,” which language had been referenced Rent-A-Center v. Jackson, 130 S.Ct. 2772, 2778 (2010).  Ultimately distinguishing the facts from the Rent-A-Center decision, the Court of Appeals determined that the delegation to the arbitrator was ineffective.  The opinion, however, is ambiguous as to the basis for holding the delegation clause invalid, especially as it noted in footnote 16 of the opinion that the language of the delegation provision in the Rent-A-Center decision and that at issue in this case were without “significant” difference.

Procedural Unconscionability

      As to the general topic of unconscionability, and largely dictating the ultimate outcome of the case, the court wrote:

The law is clear that a written agreement, duly executed by the party to be held, who had opportunity to read it, will be enforced according to its terms.  Conseco Finance Servicing Co. v. Wilder, 47 S.W.3d 335, 334 (Ky. App. 2001).  While the doctrine of unconscionability does provide a narrow exception to that rule, we find nothing unconscionability about the form of the agreement in this instance.  2012 WL 4335393, *9.

       Focusing on the question of procedural unconscionability, the court noted that relevant factors include whether the contract’s terms are conspicuous and comprehensible, whether those terms are of themselves oppressive, and whether the parties seeking to avoid the contract had a meaningful choice about whether to sign it.  Curiously, the court found “we do not find that these circumstances were present in this instance,” notwithstanding that the factors identified above included the affirmative “whether the contract’s terms are conspicuous and comprehensible.”  Further, the court noted the prior law that, even where the contract is one of adhesion, the arbitration provision therein is not per se unconscionability.  Rather, “‘The fact that the clause appeared on the back of a preprinted form did not render it procedurally unconscionability’,” citing Conseco, 47 S.W.3d at 342-43.

Substantive Unconscionability

      The trial court, in determining that the arbitration agreement was procedurally unconscionability, employed a cost prohibitive analysis, finding that the imposition of the cost of arbitration upon the students was unfairly burdensome.  The Court of Appeals rejected that path of analysis, holding:

[W]e must disagree with the conclusion of the court below that it would be unconscionable for Students to be required to pay fees which they could incur in arbitration including discovery and expert fees.  In review of the law of this Commonwealth reveals that no Kentucky court has held that expert [and] discovery costs incurred during the course of arbitration can render an arbitration provision unenforceable.  Regardless, these are expenses that would be incurred by the Students regardless of whether they proceeded against Daymar through arbitration or in court. 

Ultimately, were we to uphold the cost prohibitiveness analysis of the court below, a very large portion of the citizenry of this Commonwealth would be able to avoid a contractual commitment to arbitrate merely by showing the court that they made less than a certain salary.  Quite simply, the law of this Commonwealth does not support the conclusion that the costs of arbitration can render an arbitration provision unenforceable.  Having so found, we are compelled to reverse.  2012 WL 4335393, *10.

Vis-à-Vis Schnurle

      It bears noting (and it is curious) that this court’s assessment of the issues of procedural and substantive unconscionability did not cite the analysis employed in Schnurle v. Insight Communications Co., L.P., __ S.W.3d __, 2012 WL 39631378 (Ky. Aug. 23, 2012).