Free Order - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Pending before the Court is a Remand Order of the Ninth Circuit directing the Court 17 to determine whether certain provisions of an arbitration agreement are unconscionable. 18 (Dkt. 27). On July 8, 2005, the Court held a hearing to discus s t he issues relating to the 19 Remand Order. 20 Background 21 Plaintiff was employed by Defendant. (Dkt. 1). On July 17, 2002, Defendant 22 terminated Plaintiff. (Dkt. 1). On September 18, 2002, Plaintiff filed a complaint in the 23 M aricopa County Superior Court alleging wrongful termination. (Dkt. 1). Defendant 24 removed the case to Federal Court based on diversity. (Dkt. 1). On December 30, 2002, 25 Defendant filed a M otion for Summary Judgment seeking, among other things, to 26 compel binding arbitration pursuant to an agreement Plaintiff signed in connection with 27 the Great Indoors Dispute Resolution Program ("DRP"). (Dkt. 7). Plaintiff argued that 28 ) ) Plaintiff, ) ) ) vs. ) ) Sears, Roebuck and Co., a New York) corporation, d.b.a. "The Great Indoors,",) ) Defendant. ) ) ) Kenneth A. Batory, No. CV 02-2026-PHX-EHC ORDER IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

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the DPR was unenforceable because it was a contract of adhesion, lacked mutuality, was illusory and was not signed by Defendant. (Dkt. 17). After consideration, the Court granted Defendant's M otion in part and ordered the parties to proceed to arbitrate Plaintiff's claims pursuant to the DRP. (Dkt. 23). Plaintiff appealed that Order. (Dkt. 25). On appeal, the Ninth Circuit affirmed the Court's Order in part, but held that the DRP was a contract of adhesion. (Dkt. 27). The Ninth Circuit noted that such a finding did not render the DRP unenforceable unless it was also unconscionable. (Dkt. 27). Indicating that the agreement and DRP may be unconscionable under Arizona law, the Ninth Circuit remanded the case to the Court for a determination of whether certain provisions were unconscionable. (Dkt. 27). Discussion The Ninth Circuit directed the Court to consider whether the agreement and DRP are unconscionable because: (1) t here exists an "overall imbalance in the obligations and rights imposed by the bargain" in that, although Sears is obligated to arbitrate all " Covered Claims," these Covered Claims consist only of "claims against the Company" to the exclusion of claims that Sears may initiate against its employees, Maxwell, 907 P.2d at 58; see also Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669 (2000); (2) alt hough Sears "reserves t he right to modify or terminate [the] DRP upon sixty (60) days notice," it affords no equivalent pow er t o its employees, see Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir.2003), cert. denied, 540 U .S. 1160, 124 S.Ct. 1169, 157 L.Ed.2d 1204 (2004); and (3) the fee provision, which requires employees to pay the lesser of $150 or t he filing fee if the claim had been filed in court, does not provide for waiver in cases of indigence, see id. at 1177. (Dkt. 27 at 5-6). A federal court sitting in divers it y must assess how a state's highest court would resolve the state law issue. Tick nor v . Choice Hotels Int'l, Inc., 265 F.3d 931, 939 (9th Cir. 2001). T he court must "look to existing state law without predicting potential changes in

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that law."

Id.

Arizona courts have held that unconscionability can be either procedural Maxwell v . Fidelity Financial Service, Inc., 907 P.2d 51, 59 (Ariz. 1995).

or substantive.1

They have further held that substantive unconscionability alone is sufficient to render a contract unconscionable. Id. Substantive unconscionability requires an examination of the actual terms of the contract and the relative fairnes s of the obligations assumed by each party. Id. "Indicative of substantive unconscionability are contract terms so one-sided as t o oppress or unfairly surpris e an innocent party, an overall imbalance in the obligations and rights imposed by the bargain, and significant cos t -p rice disparity." standard to each provision in turn. Covered Claims Provision The DRP obligates Defendant to arbitrate all "Covered Claims ." (D kt. 37, ex. #3). Id. at 58. The Court will apply this

The Covered Claims consist only of claims that Defendant's employees may have against D efendant . (Dkt. 37, ex. #3 at 4). Thus, while Defendant's employees are required t o

arbitrate certain claims that they may have against Defendant, Defendant does not have to arbitrate claims it may have against its employees. O n July 8, 2005, the Court held a hearing pursuant to Ariz. Rev. Stat. § 47-2302. A t that hearing, Defendant solicited the testimony of Tammy Lenzy, an attorney that helped draft the DRP. Lenzy testified mostly about the rights that Plaintiff retained under the DRP. Lenzy did not discuss the reasons the DRP had been drafted to only cover claims t hat employees may have against Defendant.

The Ninth Circuit res t rict ed its Remand Order to a determination of the unconscionability of certain provisions of the DRP . (Dkt. 27 at 5). Substantive unconscionability involves the actual terms of a contract. Maxwell v . Fidelity Financial Ser v ice, Inc., 907 P.2d 51, 58 (Ariz. 1995). Procedural unconscionability does not. Id. T hus , t he Court will only consider substantive unconscionability and its application to t he three provisions addressed by the Ninth Circuit. -3Filed 10/13/2006

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There is an "overall imbalance in t he obligations and rights imposed" by this bargain. Id. An agreement to arbit rate presents certain disadvantages. Pursuant to the

DPR, Plaintiff would give up his right to a jury t rial. Additionally, Plaintiff would loose his right to appeal the arbitrator's decision except in limited circumstances. See Ariz. Rev. Stat. § 12-1512. In cont ras t , Defendant retains all of these rights for any claims it has against This provision simply gives

Plaintiff (even claims arising out of the same occurrence).

Defendant an advantage and creates an overall imbalance of rights and obligations. Maxwell, 907 P.2d at 58. The Court finds the provision substantively unconscionable. Termination and Modification Provision The DRP allows Defendant t o modify or terminate the DRP upon sixty (60) days notice. (Dkt. 37, ex. #3 at 6). The employees of Defendant do not have that same right. In United Steelworker s of America v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582 (1960), it was held that "arbitrat ion is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." hearing, At t he J uly 8, 2005

Lenzy testified that t he D RP did not allow an employee to modify the DRP

because such a provision would result in inconsistent agreements that would be impossible to implement. terminate the agreement. The DRP's sixty days notice provis ion is insignificant because it does not allow the employee to negotiate any modificat ion or termination. Defendant has effectively taken She did not explain why the employee would not be able t o

away Plaint iff's ability to consider and negotiate the terms of his contract. This is further emphasized by the fact that the DRP was a contract of adhesion in the first p lace. T his

provis ion effectively oppresses Plaintiff and creates an "overall imbalance of rights and obligations imposed by the bargain." Maxwell, 907 P.2d at 58. The Court therefore finds that the provision of the DRP permitting Defendant to unilaterally modify or terminate the DRP is substantively unconscionable. //

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// Fee Provision The DRP contains a fee provision requiring employees to pay the lesser of $150 or the filing fee if a claim is filed in court. (Dkt. 37, ex. #3 at 13). The fee provision does not provide for waiver in cases of indigence. In Harrington v. Pulte Home Corp., 119 P.3d 1044 (Ariz. 2005), the Arizona Supreme Court considered whether an arbitration agreement was substantively unconscionable because of the potentially applicable fees. They adopted a case-by-case approach in determining whether fees imposed under an arbitration agreement denied a potential litigant the opportunity to vindicate his rights. Id. at 1055 (citing Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 92 (2000)). The court placed the burden of proving that the fees were prohibitively expensive on the party seeking to invalidate the agreement. Id. In the end, the court upheld the arbitration agreement because the plaintiffs who sought to invalidate the agreement failed to demonstrate with specific evidence that the costs and fees were prohibitively expensive. Id. Plaintiff has not set forth specific facts proving that the $150 filing fee was prohibitively expensive. Applying the reasoning of the Arizona Supreme Court in Harrington, the fee provision is not substantively unconscionable because Plaintiff has failed to demonstrate with specific evidence that the $150 filing fee is prohibitively expensive. The Court therefore finds this provision is not substantively unconscionable. Remedy The Court has three options in the event it determines that a clause of a contract is unconscionable as a matter of law. See Ariz. Rev. Stat. § 47-2302(A). The Court may: (1) refuse to enforce the contract; (2) enforce the remainder of the contract without the unconscionable clause; or (3) limit the application of the unconscionable clause as to avoid any unconscionable result. Id. Plaintiff has not argued that he has been -5Filed 10/13/2006

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negatively affected by the termination and modification provision. With respect to this provision, the Court would exclude it and enforce the remainder of the DRP. However, Plaintiff is bound to arbitrate certain claims, while Defendant is not. The DRP cannot be saved by excluding the provision nor by limiting its application. The Court therefore refuses to enforce the DPR as a whole. Accordingly, IT IS ORDERED that Defendant's M otion for Summary Judgment is DENIED. (Dkt. 7). IT IS FURTHER ORDERED that the Court recuse itself from further proceedings in this case, with the case to be randomly reassigned. DATED this 12th day of October, 2006.

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