Arbitration can significantly impact the outcome of a case. Arbitration agreements must be worded precisely so as not to create procedural unconscionability, and arbitration agreements within adhesion contracts must be carefully scrutinized because they create complex legal issues.
In Cornelius v. Alpha Kappa Lambda, plaintiff attended Rush week at his university, where he received five offers to join various fraternities.[i] Plaintiff’s first event at the fraternity was on August 20, 2017, where he was hazed and later required hospitalization for acute alcohol consumption.
On August 28, 2017, the fraternity had plaintiff create a profile on the fraternity’s website during a study period. On August 30, during another study period, fraternity members directed plaintiff “to ‘sign off’ on ‘some paperwork’ on the online portal.” Plaintiff was rushed through the process and told he could not leave the table until he completed the approval. No one provided an explanation as to what the approval was for.
The portal contained a four-page document titled “New Member Agreement” (“NMA”). Plaintiff’s approval bound plaintiff to the NMA and waived his right to a jury trial. Plaintiff signed into the portal at 11:20 p.m. and signed out at 11:32 p.m., approving the NMA at some point in between.
Plaintiff sued his fraternity for negligence based on his hospitalization for acute alcohol consumption. The fraternity moved to compel arbitration under the agreement plaintiff signed when joining the fraternity. The court found the agreement unconscionable and denied the motion. The fraternity appealed. Claim and Dispute Resolution Plan and Rules were incorporated into the agreement and were available on the fraternity’s website. The Plan stated the Federal Arbitration Act (FAA) applied to the agreement.
When a meaningful choice is absent from an agreement, procedural unconscionability is present.[ii] To discover its presence, courts analyze “(1) the manner in which the contract was entered, (2) whether the signatory had a reasonable opportunity to understand the terms of the contract, and (3) whether the important terms were hidden in a maze of fine print.”[iii] Applying the factors should not be mechanical to whether in truth a mechanical choice existed.[iv]
Adhesion contracts containing an arbitration agreement are procedurally unconscionable, but an adhesion contract is not necessarily procedurally unconscionable.[v] Unfortunately, evidence was lacking in the record as to whether plaintiff had a reasonable opportunity to understand the terms (time to consider the agreement, explanation of the agreement, and questions about the agreement), whether important terms were hidden in the agreement, and whether or not the agreement was an adhesion contract (take-it-or-leave-it basis, unequal bargaining power), and whether he had a meaningful choice. The case was remanded for an evidentiary hearing.
The agreement was signed after the hazing event which landed plaintiff in the hospital. He argued even if the court found the agreement to be valid after the evidentiary hearing, the agreement was not retroactive. The fraternity emphasized FAA’s policy favoring arbitration and argued the agreement was broad, encompassing claims prior to execution.
The court found interpretation of an agreement covered by the FAA must be given due regard to the federal policy favoring arbitration.[vi] Doubts about potential arbitrable issues are to be resolved in favor of arbitration.[vii] Here, the agreement did not specifically permit retroactive application, and plaintiff argued the application of the FAA was prohibited. However, the court found the agreement equally did not prohibit retroactive application, creating a potential arbitrable issue. The court also found case law supported retroactive application of arbitration agreements.
Arbitration clauses are often incorporated into agreements to shorten the litigation process. However, as seen above, significant complications may arise. Of significant interest is the availability for an arbitration agreement to be retroactive. According to the court, Washington courts had not yet addressed retroactivity of an arbitration agreement. However, it found “absent language in an agreement to the
contrary, the retroactive application of an arbitration agreement is permitted.”[viii] Defense attorneys eagerly await the case which will lay the foundation for this law in Washington.
[i] Cornelius v. Alpha Kappa Lambda, 2021 WL 6622382.
[ii] Cornelius v. Alpha Kappa Lambda, 2021 WL 6622382, Zuver v. Airtouch Commc’ns, Inc., 153 Wn.2d 293, 303, 103 P.3d 753 (2004) (quoting Nelson v. McGoldrick, 127 Wn.2d 124, 131, 896 P.2d 1258 (1995)).
[iii] Cornelius, citing Burnett v. Pagliacci Pizza, Inc., 196 Wn.2d 38, 46–47, 470 P.3d 486 (2020).
[iv] Cornelius, Zuver, 153 Wn.2d at 303.
[v] Burnett, 196 Wn.2d at 54–55.
[vi] Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62, 115 S. Ct. 1212, 131 L. Ed. 2d 76 (1995).
[vii] Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 445, 123 S. Ct. 2402, 156 L. Ed. 2d 414 (2003)
[viii] Cornelius, See Allbaugh v. Perma-Bound, No. C08-5713-JCC, 2009 WL 10676437, at *1, 10 (W.D. Wash. Aug. 14, 2009) (applying an arbitration agreement retroactively under Washington law where the agreement stated that it applied to any claim “arising out of or relating to this Agreement, or the breach, termination, or invalidity thereof”); see GR 14.1; In re Verisign, Inc., Derivative Litig., 531 F. Supp. 2d 1173, 1224 (N.D. Cal. 2007) (retroactively applying an arbitration agreement that covered “not just services provided under the agreement, but also ‘any other services provided by KPMG,’” and rejecting plaintiffs’ contention that the agreement must contain explicit language authorizing retroactive application); Zink v. Merrill Lynch Pierce Fenner & Smith, Inc., 13 F.3d 330, 331–32 (10th Cir. 1993) (holding that an arbitration agreement applying to any controversy “arising out of your business or this agreement” was “clearly broad enough to cover the dispute at issue despite the fact that the dealings giving rise to the dispute occurred prior to the execution of the agreement.”); Smith/Enron Cogeneration Ltd P’ship, Inc. v. Smith Cogeneration Int’l, Inc., 198 F.3d 88, 99 (2d Cir. 1999) (“As the arbitration clause here similarly does not contain any temporal limitation, the relevant inquiry is whether SCI’s claims ‘relat[e] to any obligation or claimed obligation under’ the 1994 Agreement, not when they arose.” (alteration in original)); Kristian v. Comcast Corp., 446 F.3d 25, 33–34 (1st Cir. 2006) (rejecting an argument against retroactive application of an arbitration agreement because “the phrase ‘or the services provided’ covers claims or disputes that do not arise ‘out of this agreement’ and hence are not
limited by the time frame of the agreements.”); Levin v. Alms & Assocs., Inc., 634 F.3d 260, 267 (4th Cir. 2011) (“Although the arbitration clause does not specifically state that it applies to claims accruing before the 2007 Agreement, courts have generally applied broad ‘any dispute’ language retroactively, especially when combined with language that refers to all dealings between the parties.”).