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The Court of Appeals of Wisconsin held that an arbitration clause in a credit card agreement was unconscionable due to its class waiver and choice of law provisions, which deprived cardholders of remedies available under Wisconsin consumer protection statutes.
In Coady v. Cross Country Bank, No. 2005AP2770, 2007 WL 188993 (Wis. App. Jan. 25, 2007), Coady sued Cross Country Bank on behalf of a putative class, alleging illegal debt collection practices. Cross Country Bank moved to compel arbitration, but the lower court refused, declaring the arbitration agreement unconscionable.
The Court affirmed and refused to compel arbitration of Coady's claims. Wisconsin employs a sliding scale of unconscionability, requiring evidence of both procedural and substantive unconscionability, but allowing the excess of one to compensate for a lack of the other. Wisconsin Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155 (Wis. 2006). Cross Country Bank's arbitration agreement was procedurally unconscionable because it denied Coady a "meaningful choice," due to the gross inequality of bargaining power and the agreement's take-it-or-leave-it nature.
The agreement was substantively unconscionable because of its choice of law and class waiver provisions. While courts generally uphold choice of law provisions in arbitration agreements, parties are not free to contract away a state's important public policies. Bush v. National School Studios, Inc., 407 N.W.2d 883 (Wis. 1987). Here, the agreement called for the application of Delaware law, which effectively defeated Coady's rights under the Wisconsin Consumer Act, Wis. Stat. § 427.104. See Kett v. Community Credit Plan, Inc., 596 N.W.2d 786 (1999) (portraying the Act as one of the strongest consumer protection laws in the country).
With regards to the class waiver, the Court noted that while the vast majority of courts do not view class waivers as unconscionable, a "growing minority" of courts have adopted this view. See Muhammad v. County Bank, 912 A.2d 88 (N.J. 2006); Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005). Accordingly, the Court identified a sufficient degree of procedural and substantive unconscionability to invalidate the arbitration agreement.
This case should not be misconstrued as the ruin of class waivers in Wisconsin because Coady did not have an opportunity to opt out of the arbitration agreement, and an opt-out provision generally precludes the requisite finding of procedural unconscionability. See, e.g., Kinkel v. Cingular Wireless LLC, 857 N.E.2d 250, 274 (Ill. 2006) (noting “a class action waiver will not be found unconscionable if the plaintiff had a meaningful opportunity to reject the contract term”).
Moreover, by directing the parties to address Atkins v. Swimwest Family Fitness Center, 691 N.W.2d 334 (Wis. 2005), the Court indicated that an opt-out provision would preclude a finding of unconscionability. In Atkins, the court explained that the enforceability of an exculpatory clause turns largely on whether there was an opportunity to negotiate the clause. Id. at 340. An opt-out provision is the quintessential opportunity to negotiate because it gives final say to the party with inferior bargaining power.
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