MVA Litigation

The North Carolina Court of Appeals recently declared the enforceability of class arbitration waivers despite the North Carolina Supreme Court’s previous decision in Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93, 655 S.E.2d 362 (2008), which invalidated an arbitration agreement based, in part, on a class arbitration waiver.  In companion cases, Torrence v. Nationwide Budget Finance, et. al., No. 05- CVS 447 (N.C. Ct. App. Feb. 4, 2014) and Knox v. First Southern Cash Advance, et.al., No. 05-CVS-445 (N.C. Ct. App. Feb. 4, 2014)**, plaintiffs had secured class certification against defendants based on allegations that defendants violated the North Carolina Consumer Finance Act, the North Carolina unfair trade practices statute, and North Carolina usury laws in connection with short-term consumer loans that plaintiffs had obtained.  In 2012, the trial court denied defendants’ motions to compel arbitration in both cases, holding that Tillman had survived the U.S. Supreme Court’s landmark decision in AT&T Mobility v. Concepcion, ___ U.S. ___, 131 S.Ct. 1740 (2011) and the arbitration agreement was substantively unconscionable.   After the U.S. Supreme Court issued American Express Co. v. Italian Colors Rest., ___ U.S. ___, 133 S.Ct. 2304 (2013), the North Carolina Court of Appeals permitted supplemental briefing on the impact of that decision on Knox and Torrence.  And on February 4, 2014, the Court of Appeals ultimately overruled the trial court and compelled arbitration based on Concepcion and Amex.  The court detailed its reasoning in the Torrence opinion and referenced that reasoning in Knox, given the nearly identical findings of fact, conclusions of law, and rulings of the trial court.  We highlight the court’s analysis below.

NC Supreme Court on Class Arbitration Waivers in Tillman 

Prior to Concepcion, the North Carolina Supreme Court addressed the enforceability of class arbitration waivers in Tillman and it relied upon the vindication of rights doctrine set forth in Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79 (2000) to invalidate an arbitration clause.  We discussed the vindication of rights doctrine at length in previous posts.  The North Carolina Supreme Court found the arbitration clause in Tillman to be substantively unconscionable, in part, because it prohibited the joinder of claims and class actions.  Recognizing that the class arbitration waiver may be insufficient alone to invalidate the arbitration agreement, the court found that it nonetheless contributed to the unconscionability of agreement because it added to “the financial inaccessibility of the arbitral forum as established by this arbitration clause because it deters potential plaintiffs from bringing and attorneys from taking cases with low damage amounts in the face of large costs that cannot be shared with other plaintiffs,” and “the one-sidedness of the clause because the right to join claims and pursue class actions would benefit only borrowers.”

Relying on Green Tree, the North Carolina Supreme Court ruled that the arbitration clause was unconscionable due to several attributes which “taken together, render it substantively unconscionable because the provisions do not provide plaintiffs with a forum in which they can effectively vindicate their rights.”  Those attributes included:

1. the prohibitively high arbitration costs borrowers may face;
2. the excessive one-sided nature of the arbitration clause and its lack of mutuality; and
3. the clause prohibits joinder of claims and class actions. 

The Viability of Tillman After Concepcion and Amex

In Torrence and Knox, the North Carolina Court of Appeals held that consideration of Concepcion, Amex, and the Federal Arbitration Act (“FAA”) require a finding contrary to Tillman.  The court noted:

Our Supreme Court analyzed Tillman solely under unconscionability. It did not address any issues under the FAA, which clearly governed the agreement. Further, the Supreme Court did not have the benefit of two cases subsequently decided by the United States Supreme Court, construing arbitration agreements under the FAA; [Concepcion] and [Amex].  

Discussing the Fourth Circuit Court of Appeals’ decision in Muriithi v. Shuttle Exp., Inc., 712 F.3d 173, 180-81 (4th Cir. 2013), which upheld a class arbitration waiver (see our Muriithi post), the North Carolina Court of Appeals illuminated the “broader theme” running through Concepcion and Amex: “unconscionability attacks that are directed at the arbitration process itself will no longer be tolerated.”  Acknowledging that “[t]his places the North Carolina Court of Appeals in the difficult position that the holdings of the North Carolina Supreme Court in Tillman conflict with those of the United States Supreme Court in Concepcion and [Amex],” the court held that it ultimately is bound by the U.S. Supreme Court’s decisions construing the FAA. 

The Court of Appeals reached the conclusion that each of the three factors that the Tillman court held contributed to unconscionability of the agreement were undermined by Concepcion and/or Amex.  The court explained:

1. Amex can only be construed “as eliminating the type of cost analysis applied by the North Carolina Supreme Court in Tillman.”
2. Concepcion dismisses the notion “that an arbitration agreement, apart from any other form of contract, could be found substantively unconscionable based solely upon its adhesive nature,” therefore, “[t]he one-sided quality of an arbitration agreement is not sufficient to find it substantively unconscionable.”
3. Concepcion and Amex “hold that a class action waiver does not render an arbitration agreement unconscionable,” and Amex “specifically holds that a party can ‘effectively vindicate’ their rights in the context of a bilateral arbitration.”

The Court of Appeals rejected the trial court’s attempt to distinguish Concepcion from Tillman based on the operation of the state laws at issue:

The trial court’s attempt to distinguish Concepcion from Tillman was in error. Concepcion, in overruling Discover Bank, made clear that the FAA preempts any state law that prevents bilateral arbitration of claims. Concepcion, ___ U.S. at ___, 131 S.Ct. at 1747, 179 L.Ed.2d at 752 (holding that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA”). This applies regardless of whether the state standard is “a rule of automatic invalidation,” as in Discover Bank, or “consideration of all facts and circumstances[,]” as in Tillman.

The Court of Appeals also found that the detailed fact-finding exercise undertaken by the trial court in Torrence to determine the evidence required for plaintiffs’ claims “is precisely the approach rejected by the United States Supreme Court” in Amex.

**Disclosure:  Moore & Van Allen, PLLC served as defense counsel in the Knox appeal.