Faulty Procedure? Fifth Circuit Vacates an Arbitration Order for Unconscionability Inquiry

By Savannah Billingham-Hemminger

The Fifth U.S. Circuit Court of Appeals has reversed, vacated and remanded an order to compel arbitration in an age discrimination case so that the federal district court can re-examine the merits of a procedural unconscionability claim.

The circuit judges in Bowles v. OneMain Fin. Grp. LLC, No. 18-60749, 2019 U.S. App. LEXIS 18414 (June 19) (available at http://bit.ly/2KBXcJf) found that the district court had erroneously referred a procedural unconscionability challenge to an arbitrator after determining that such a claim was about the enforceability of the arbitration agreement.

Senior Circuit Judge E. Grady Jolly, writing for a unanimous three-judge panel, determined that procedural unconscionability instead goes toward contract formation, not contract enforcement, under Mississippi law. Contract formation issues are to be decided by the court, while contract enforcement is to be decided by the arbitrator.

According to the case, plaintiff Cathy Bowles worked for lender OneMain Financial Group for nearly 20 years when she was terminated for “allegedly inappropriate interactions with employees under her supervision.” During her time there, she was required to “review and acknowledge” the Employee Dispute Resolution Program/Agreement on multiple occasions.

After her termination, she filed a complaint with the U.S. Equal Employment Opportunity Commission, which was unsuccessful, and then filed a federal court suit under the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964. OneMain responded with a motion to compel arbitration under the Federal Arbitration Act and pursuant to a 2016 Arbitration Agreement that Bowles had acknowledged electronically.

Bowles objected to arbitration on two grounds: that there was no “meeting of the minds” resulting in mutual assent for contract formation, and that OneMain obtained consent through misrepresentation, which was procedurally unconscionable.

The district court granted the motion to compel, finding that the necessary meeting of the minds for contract formation was met under Mississippi law. Whether Bowles did or did not understand was irrelevant because lack of diligence before her acknowledgment does not impede formation of the contract.

On the second ground, the district court ruled against her as well. “The district court found that Bowles’s procedural unconscionability challenge went to the enforceability rather than the formation of the Arbitration Agreement and therefore referred it to the arbitrator for decision, in accordance with the Arbitration Agreement’s delegation clause.”

But the federal appellate court disagreed with the trial court on the second point.  It reviewed OneMain’s motion to compel arbitration de novo. The opinion noted that in determining the validity of an arbitration agreement, state-law principles should ordinarily apply to the formation of contracts, citing First Options of Chicago Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

The panel opinion found that the district court correctly concluded that mutual assent existed because on multiple occasions the Arbitration Agreement was communicated clearly to Bowles, and she acknowledged receipt.

But citing West v. West, 891 So. 2d 203 (Miss. 2013), the panel opinion said that in Mississippi, procedural unconscionability is a claim on the formation of the contract—”it is pellucid that ‘[p]rocedural unconscionability goes to the formation of the contract.’” In such a case, the court has a duty to resolve the challenge.

The opinion examines unconscionability factors using another Fifth Circuit case, Begole v. N. Miss. Med. Ctr., 761 Fed. Appx. 248 (2019). In a footnote, the court explained that general allegations of unconscionability going to the formation of the entire contract is an issue for the arbitrator. But in challenging the specific decision to agree to arbitrate as unconscionable, the district court must weigh in.

The opinion repeats Begole’s specific distinctions “between procedural and substantive unconscionability under Mississippi law:

Under substantive unconscionability, we look within the four corners of an agreement in order to discover any abuses relating to the specific terms which violate the expectations of, or cause gross disparity between, the contracting parties. Procedural unconscionability may be proved by showing a lack of knowledge, lack of voluntariness, inconspicuous print, the use of complex legalistic language, disparity in sophistication or bargaining power of the parties and/or a lack of opportunity to study the contract and inquire about the contract terms.”

Because the trial court needs to determine the procedural unconscionability claim on the merits, the Fifth Circuit panel reversed and remanded.

The author, a Summer 2019 CPR Intern, is a law student at Pepperdine University School of Law in Malibu, Calif.

 

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