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.
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.
Agreement Did Not Contravene
Consumer's Rights, Was Not Fraudulently Induced,
and Was Not Unconscionable
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.
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rescinded the contract, making the agreement moot.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.
Kansas Court of Appeals reversed the trial court. Reasoning that
'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.
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.
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
did not bring a class action. The appellate court said it could not perceive
how the prohibition against class actions resulted in
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,
's claims would simply be heard in a different forum. Finally, the appellate
court ruled that the arbitration agreement's procedures were not unconscionable.
arbitration agreement was not unduly one-sided, as
could bring claims in small claims court, the dealer agreed to pay most of the
arbitration fees, and
had a right under the arbitration agreement to recover attorney fees and
one for the good guys. Mike Steven Motors, Inc. v. Toyota Motor Credit Corp.,
2005 WL 1277948 (
May 27, 2005
Agreement that Carved Out All Actions Dealer Could Take Against Customer Was
Unenforceable for Lack of Consideration
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.
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.
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
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 (
May 24, 2005
Loses 'No Interstate Commerce'
Argument; Nonsignatory Third-Party Beneficiary of Contract Bound by Arbitration
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.
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.
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.
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.
we're back in the win column, two to one. Title Loan Express No.-2, Inc. v.
Hooks, 2005 WL 1253863 (
May 27, 2005
Retention of Counsel
Is Not a Waiver of Right to Arbitrate
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.
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.
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.
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.
to one! Savage v. Hatcher, 2005 WL 1279244 (S.D.
May 31, 2005
Affirms Validity of Arbitration Provision in
'Accept or Return' Motor Vehicle Service Contract
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.
did not return the service contract within the 10-day period. He later submitted
a warranty claim, but Automotive Warranty Corporation of
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.
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.
to one – looking good for our side. Higgs v. Automotive Warranty
, 2005 WL 1313542 (6th Cir. (S.D.
) May 13, 2005).
Theft Claims Did Not Fall Within Scope
of Arbitration Provision
Jones sued King Motor Company of
, 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.
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.
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
v. Jones, 2005 WL 1163005 (
May 18, 2005
Loses Motion To Compel Arbitration
Where It Failed To Sign Agreement
Flanary brought a purported class action against Carl Gregory Dodge of
, 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
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.
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
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.
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
, 2005 WL 1277850 (
May 31, 2005
Focused on Solicitation of Service Contract
Did Not Fall Within Scope of Arbitration Clause in Service Contract
Stinger and Robert Johnson bought a used 1997 pickup truck from Lenherr Motors
. They also bought a service contract issued by The Ultimate Warranty
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
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.
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 (
May 18, 2005
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.
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.
© 2005 CounselorLibrary.com, LLC. All rights reserved.
This publication is designed to provide accurate and authoritative information
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advice is required, the service of a competent professional should be sought.