Is unconscionability becoming a stronger basis for denying enforcement of arbitral awards?

Guest blogger, Rick Freeman, wrote yesterday about a recent San Antonio Court of Appeals case upholding a finding that the AAA‘s estimate of costs and fees was so high as to make the requirement of arbitration unconscionable. Today the U.S. District Court for the Western District of Missouri found an arbitration procedure developed by Amway and JAMS was substantively unconscionable.

Judge Dorr could not accept (see p.24) the defendants “choosing the arbitrators in a hand-picked selection process, training them and then requiring the arbitration process with no exceptions”. He also found the program procedurally unconscionable and spent 26 pages in a judicious, detailed, careful trashing of the entire compulsory arbitration system. Interestingly, Judge Dorr cited Hooters of America v. Phillips, 39 F.Supp.2d 582 (S.C. 1198) as authority in the detailed analysis of substantive unconscionability. The connection between scantilly clad waitresses and household products is not immediately apparent but surely there is a lesson here.

For a fairly recent discussion of unconscionability as a means of avoiding the enforcement of arbitral awards in Texas, please see a paper we did for the State Bar.

Commenting on Judge Dorr’s opinion lawdawg writes:

On “procedural unconscionability”:

In this case, the Amway arbitration provision was offered in a take it or leave it manner. The hallmark of unequal bargaining position is clear –to continue to be an Amway distributor, the agreement must be accepted. While Defendants contend that distributors had ample time to review the arbitration provisions before renewing or allowing the automatic renewal to occur, they do not refute that the arbitration provisions were given in a manner that required the distributors to accept the arbitration agreement as written or to quit the business all together.

There was no other entity with which Plaintiffs could contract to participate in a similar business. Moreover, negotiation of the arbitration clause was unheard of. Defendants admit that a distributor could not sign the distribution agreement without the arbitration provision.

Defendants’ position is that there was only one contract with all of its distributors . . . The above discussion concerns the procedural unconscionability based on the take it or leave it option presented to Amway distributors. The plaintiff tools businesses are one step removed from this procedure as their involvement is vicarious at best. Thus, if Plaintiffs were held to be bound by Amway’s arbitration agreement, it would be the result of a procedure where Plaintiffs never had a choice. Accordingly, the arbitration requirement is procedurally unconscionable.

On “substantive unconscionability”:

Plaintiffs in this case have raised grave doubts as to the fairness of the hearing they would receive if in arbitration with JAMS and the neutrality of the arbitrators that would be chosen. Mainly, Plaintiffs oppose the selection of the arbitrators by Defendants and the training Defendants provide to the arbitrators. Plaintiffs have submitted videos and DVD’s of Defendants’ training sessions with the arbitrators and these exhibits show Defendants counseling the arbitrators on the nature of their business. It is this Court’s opinion that the procedure utilized by Defendants to screen, train and ultimately hand-pick their panel of arbitrators does not come close to passing any reasonable test of fairness and neutrality required for a legitimate arbitration proceeding.

Amway’s training covered a two day period and then a third day of interviews. The training covered subjects including profiles of the people who started and now run Amway, the benevolent and independent culture of Amway, procedures to the utilized in arbitration, and a summary of various complaints the arbitrators could anticipate. The arbitrator candidates even participated in some role playing as successful Amway distributors. Also included throughout the two days were assurances that Amway was not a pyramid scheme and that the business was legitimate. Defendants claim, however, that the training was not out of the ordinary nor improper as the panel was not specifically told how to resolve possible issues they would see. On the videos, the Defendants state they will not discuss the meaning of the Rules of Conduct that are not absolutely black and white.

It was most interesting that the issue presently before this court was included in a particular training discussion at one point, complete with diagrams from Defendants’ counsel regarding what was appropriate and inappropriate in the scenario. The videos run almost ten (10) hours, but suffice it to say that it appears clear to this court that the training atmosphere and content of the discussions was designed to produce a very favorable view of Defendants. Coupled with the training session was the selection process being utilized by Defendants, both to select its initial group for training, then after personal interviews, to pick the final panel of arbitrators from which all arbitrators for Amway disputes would be chosen.

While there can be basic education of arbitrators regarding specialized subject matter, there is a point where basic education can be extended to subtle manipulation on issues which could be expected to be considered by the arbitrators. This limit has been passed by Amway’s preparation of the arbitrators at JAMS. While JAMS may be a respected organization, the Defendants have called the neutrality of this particular arbitration arrangement into question. Also telling is the fact that Defendants have never lost in arbitration, with the exception of a few counterclaims. . .

While the parties are allowed to choose their own arbitrators, the pool of candidates for this choice is limited by Defendants to those arbitrators whom Defendants have already pre-selected in a process that involves an initial screening, then training with a heavy dose of goodwill for Defendants and their manner of operation, then after personal interviews, being hand-picked to be on the list of arbitrators (so long as Defendants deem them to be acceptable). Arbitrators are to be neutral, and allowing such training and influence over the arbitrators as Defendants have in this situation is both unreasonable and unfair.

Although this court has found that none of the Plaintiffs have submitted to arbitration, the court also finds that, in the alternative, arbitration with pre-selected JAMS arbitrators as presently set up by Defendants is unconscionable.