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It's All in the Drafting of the Agreement

Submitted by Steve Tjaden, Director of Compliance, Reynolds and Reynolds From Spot Delivery, Hudson Cook LLC


Dealers and finance companies are embracing arbitration agreements as a first line of defense against class action lawsuits and runaway courts and juries. Those who haven't adopted arbitration agreements often say "courts won't enforce arbitration agreements." We hear that all the time. It just isn't so, but you can't kill the myth with a hammer.


Want proof? Look at this month's crop of reported cases. Industry won four of the eight cases, and consumers won four. That sounds like a bad outcome from the industry side, but when you take a look at the cases, you'll see that usually when industry loses an arbitration case, it's because the arbitration clause under consideration was too one-sided, because whoever drafted the clause didn't do a good job, or because someone (in one case below, a dealer didn't sign the arbitration agreement then tried to enforce it) did something boneheaded. Here's this month's crop of cases.


Arbitration Agreement Did Not Contravene
Consumer's Rights, Was Not Fraudulently Induced,
and Was Not Unconscionable


Cornelia Wilson sued Mike Steven Motors, Inc. and Toyota Motor Credit Corp., claiming she did not receive a $500 rebate promised to her when she bought her new car. Mike Steven Motors moved to stay proceedings and compel arbitration, claiming the sales contract included an arbitration agreement that applied to every claim arising out of the negotiation and sale of the vehicle.


Wilson responded by contending that the dealer's deceptive and unconscionable acts rescinded the contract, making the agreement moot. The trial court denied the motion to compel arbitration, and the dealership appealed.


The Kansas Court of Appeals reversed the trial court. Reasoning that Wilson 's contract was arguably voidable, as opposed to void per se, the appellate court concluded that it should permit arbitration of the question of rescission of the entire contract unless it decided that the arbitration agreement, standing alone, was unenforceable. The appellate court examined the arbitration agreement to determine whether it was fraudulently induced, contravened the consumer's rights, or was unconscionable.


Wilson claimed the contract as a whole was fraudulently induced. The appellate court found the evidence insufficient to conclude that the arbitration agreement was unenforceable on the basis of fraudulent inducement.


Wilson also argued that the arbitration agreement's prohibition on class actions contravened the Kansas Consumer Protection Act because the Act expressly provides that an aggrieved consumer may participate in a class action and that a consumer cannot forego rights under the Act. In finding that the arbitration agreement did not contravene rights granted under the KCPA, the appellate court noted that Wilson did not bring a class action. The appellate court said it could not perceive how the prohibition against class actions resulted in Wilson giving up any damages she could may have received under her KCPA claim, either individually or as a member of a class. Rather, the court concluded, Wilson 's claims would simply be heard in a different forum. Finally, the appellate court ruled that the arbitration agreement's procedures were not unconscionable.


The arbitration agreement was not unduly one-sided, as Wilson could bring claims in small claims court, the dealer agreed to pay most of the arbitration fees, and Wilson had a right under the arbitration agreement to recover attorney fees and arbitrator fees.


Score one for the good guys. Mike Steven Motors, Inc. v. Toyota Motor Credit Corp., 2005 WL 1277948 ( Kan. App. May 27, 2005 ).


Arbitration Agreement that Carved Out All Actions Dealer Could Take Against Customer Was
Unenforceable for Lack of Consideration


Write this down – when you get too greedy, a court will not enforce your arbitration agreement. Have it made into a bumper sticker; stitched on your baseball cap; printed on your T-shirt, because it is a universal truth.


When Nadejda Vassilkovska bought a 2000 Nissan from Woodfield Nissan, she signed a purchase contract and an arbitration agreement. The arbitration agreement defined the term "dispute" in a manner that carved out every action the dealer might take against the customer, meaning that Woodfield could resort to court for any action against Vassilkovska, but Vassilkovska was obligated to arbitrate all claims against Woodfield. The trial court refused to compel arbitration, and Woodfield appealed.


The Illinois Court of Appeals affirmed the trial court's decision not to enforce the arbitration agreement on the ground that there was no consideration on Woodfield's part to support the agreement to arbitrate. In plain English – the customer promised to arbitrate all her claims and the dealer promised nothing. Legal "consideration" to support a contract requires mutual promises.


Oops. Score one for the other side. Whoever drafted this arbitration obviously doesn't subscribe to Spot Delivery. Vassilkovka v. Woodfield Nissan, Inc., 2005 WL 1225463 ( Ill. App. May 24, 2005 ).


Consumer Loses 'No Interstate Commerce'
Argument; Nonsignatory Third-Party Beneficiary of Contract Bound by Arbitration Agreement


This case features a plaintiffs' argument that we often see in used car dealer arbitration cases – an argument that the transaction between the buyer and the dealer is strictly local – if no "interstate commerce" is involved, the Federal Arbitration Act doesn't apply. That argument doesn't work against car dealers, and it didn't work here against a title loan company.


Lakesia Hooks sued Title Loan Express No.-2, Inc. and a towing company, claiming that they wrongfully repossessed her car and, in the process, breached the peace and committed assault and battery. She also alleged negligent supervision, malicious conversion and a violation of the Alabama Pawnshop Act.


TLE and the towing company moved to compel arbitration under an arbitration agreement in the loan agreement between Hooks' mother and TLE. The trial court denied the motions, and TLE appealed.


The Supreme Court of Alabama reversed the trial court's decision, rejecting Hooks' arguments that no interstate commerce was involved in the loan transaction, and that as a non-signatory to the agreement containing the arbitration clause, she was not bound by it. With regard to the latter point, the high court held that as long as Hooks relied on a breach of the peace for a remedy in damages, she was a third-party beneficiary of the contract between her mother and TLE, and that in claiming the benefits of the contract she could not escape its burdens.


OK, we're back in the win column, two to one. Title Loan Express No.-2, Inc. v. Hooks, 2005 WL 1253863 ( Ala. May 27, 2005 ).


Creditor's Retention of Counsel
Is Not a Waiver of Right to Arbitrate


Just because you hire a lawyer to deal with a matter that you later elect to arbitrate does not mean that you have waived your right to arbitrate.


Lonnie Savage sued Stephen J. Hatcher, Esq., Stephen J. Hatcher Co. L.P.A. and Buckeye Check Cashing, II, Inc., d/b/a Express Payroll Advance, alleging violations of the Fair Debt Collections Practices Act and the Ohio Consumer Sales Practices Act. Express moved to stay the proceedings and compel arbitration. Savage argued that the wording of the arbitration agreement did not apply until one party demanded arbitration and the other party consented.


The U.S. District Court of the Southern District of Ohio disagreed with Savage's interpretation of the arbitration language. Savage also argued that Express waived the right to arbitrate by retaining counsel for debt collection, but the court disagreed with that contention as well.


Finally, Savage argued that Express breached the loan agreement by retaining Hatcher to collect the debt instead of demanding arbitration. The court also rejected that argument and granted the motion to compel arbitration.


Three to one! Savage v. Hatcher, 2005 WL 1279244 (S.D. Ohio May 31, 2005 ).


Court Affirms Validity of Arbitration Provision in
'Accept or Return' Motor Vehicle Service Contract


Earl Higgs bought a motor vehicle service contract by completing a "Warranty Group Registration Form" he received in the mail and returning the form with his check. The service contract later arrived in the mail. The service contract contained an arbitration clause and a provision that offered Hicks his purchase price back if he returned the warranty within 10 days.


Higgs did not return the service contract within the 10-day period. He later submitted a warranty claim, but Automotive Warranty Corporation of America denied the claim. Higgs brought individual and class claims against AWCA and several individual employees of AWCA. The defendants removed the matter to federal court and then asked the court to enforce the arbitration provision and stay the proceedings. The district court concluded that the arbitration agreement was not part of Higgs' contract with AWCA and denied the motion. The AWCA defendants appealed.


The U.S. Court of Appeals for the Sixth Circuit addressed the enforceability of provisions in an "accept-or-return" contract and concluded that the arbitration agreement was enforceable. The Sixth Circuit reversed and remanded the trial court's decision.


Four to one – looking good for our side. Higgs v. Automotive Warranty Corporation of America , 2005 WL 1313542 (6th Cir. (S.D. Ohio ) May 13, 2005).


Identity Theft Claims Did Not Fall Within Scope
of Arbitration Provision


Judith Jones sued King Motor Company of Fort Lauderdale , alleging that she became a victim of identity theft when she bought a car at the dealership. Specifically, she claimed that a King employee used information in her credit application to steal her identity and make fraudulent purchases and withdrawals from her accounts.


She sued the dealership for negligence, gross negligence, unfair and deceptive trade practices and violation of the Credit Services Organizations Act. When King tried to compel arbitration, Jones argued that her claims were not covered by the arbitration agreement. The trial court agreed with her and refused to compel arbitration. Based on limiting language in the arbitration agreement, the Florida Court of Appeals affirmed the decision.


OK, four to two, but this one would have gone the other way if the language used in the arbitration agreement had been broader. King Motor Company of Fort Lauderdale v. Jones, 2005 WL 1163005 ( Fla. App. May 18, 2005 ).


Dealership Loses Motion To Compel Arbitration
Where It Failed To Sign Agreement


Gary Flanary brought a purported class action against Carl Gregory Dodge of Johnson City , LLC, alleging that the dealership imposed an "administrative fee" in connection with his vehicle purchase in violation of the Tennessee Consumer Protection Act. The dealership moved for summary judgment, claiming that Flanary had signed an arbitration agreement and was, therefore, required to arbitrate his claims. 


The trial court, while expressing reluctance to do so, granted the dealership's motion. On appeal, Flanary argued that the car purchase did not implicate interstate commerce and, therefore, the Federal Arbitration Act did not apply. As we noted above, that argument is usually a loser, and it lost here as well.


He also argued that the arbitration agreement was presented in an adhesion contract and was, therefore, unconscionable; that his claims were not within the scope of the arbitration agreement; that the arbitration agreement constituted an unknowing waiver of his statutory and constitutional rights; and, finally, that the dealer's failure to sign the arbitration agreement meant that it was lacking in mutuality.


The Tennessee Court of Appeals rejected all of Flanary's arguments, except for the final one. Concluding that there was a genuine issue of material fact as to whether there was mutuality with respect to the obligation to arbitrate, the appellate court ruled that summary judgment was inappropriate and remanded the case to the trial court for further proceedings consistent with its opinion.


Four to three, but can you really count this one? The dealer didn't sign the arbitration agreement and then tried to enforce it. Sheeesh. Flanary v. Carl Gregory Dodge of Johnson City , 2005 WL 1277850 ( Tenn. App. May 31, 2005 ).


Claims Focused on Solicitation of Service Contract
Did Not Fall Within Scope of Arbitration Clause in Service Contract


Carolyn Stinger and Robert Johnson bought a used 1997 pickup truck from Lenherr Motors in Ohio . They also bought a service contract issued by The Ultimate Warranty Corporation.


Stinger and Johnson later sued Ultimate Warranty, alleging violations of the Ohio Consumer Sales Practices Act. They claimed that Ultimate Warranty's promotional and advertising practices in soliciting the purchase of its service contracts were unfair and deceptive. The plaintiffs sought class certification of their claims. Ultimate Warranty moved to dismiss the complaint or, alternatively, to compel arbitration in accordance with the arbitration clause in the service contract. The trial court ordered the matter to arbitration. The plaintiffs appealed that decision, and the Ohio Court of Appeals reversed, finding that the plaintiffs' claims did not fall within the scope of the arbitration clause. The plaintiffs' complaint centered on Ultimate Warranty's marketing techniques.


In a brief opinion, the appellate court concluded that the plaintiffs' complaint was "not based upon the coverage in the service contract but on the methodology of its marketing and sales pitch to the consumer." The appellate court also concluded that these allegations did not fall within the "limited" arbitration clause in the service agreement.


Tied at four, but again, this is one that looks like it would have gone into the win column if only the arbitration provision had defined the disputes to be covered as including disputes over marketing. Stinger v. The Ultimate Warranty Corp., 2005 WL 1242202 ( Ohio App. May 18, 2005 ).


Courts will enforce fair arbitration agreements. They won't enforce one-sided arbitration agreements, and they won't enforce unsigned arbitration agreements. Nor will courts require claims to be arbitrated that are beyond the scope of the arbitration agreement. All of these are reasons why it is crucial to have a well-drafted arbitration agreement. And that is this month's lesson – it's all in the drafting of the agreement.


The above article is designed by its authors to provide accurate and authoritative information.  This article is presented for informational purposes only and does not represent Reynolds’ endorsement of viewpoints or organizations associated with the article.  


* Thomas B. Hudson, Esq. is the Publisher of Spot Delivery®, a bi-monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW®, a monthly report of legal developments in all states for the auto finance and leasing industry. Spot Delivery and CARLAW are produced by CounselorLibrary.com, LLC. For information, call 410-865-5400 or visit www.counselorlibrary.com.


Copyright © 2005 CounselorLibrary.com, LLC. All rights reserved.
This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that the publisher and editor are not engaged in rendering legal counsel. If legal advice is required, the service of a competent professional should be sought.


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