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In a case arising from an employment dispute, the Oregon Court of Appeals held that a lack of mutuality does not necessarily render an arbitration agreement unconscionable under Oregon law. Instead, unconscionability must be determined on a case-by-case basis, and courts should focus on the agreement's unilateral effect rather than its unilateral application.
In Motsinger v. Lithia Rose-FT, Inc., No. A128192, 2007 WL 987049 (Or. Ct. App. April 4, 2007), Motsinger signed an arbitration agreement when she started working as a receptionist for Lithia Rose-FT (Lithia). The arbitration agreement applied only to claims against Lithia, not to claims against Motsinger.
Following her termination, Motsinger sued Lithia for retaliatory discharge. Lithia filed a motion to compel arbitration. The trial court denied the motion on the ground that the agreement was unconscionable and therefore unenforceable.
On appeal, Lithia argued that the trial court erred in ruling that the arbitration agreement was unconscionable. In addressing this issue, the Court first examined whether the arbitration agreement was procedurally unconscionable. The Court concluded that apart from a showing of unequal bargaining power, Motsinger failed to demonstrate any indicia of procedural unconscionability.
The Court next turned to the question of whether the arbitration agreement was substantively unconscionable. Motsinger argued that the agreement was substantively unconscionable by virtue of (1) the agreement's silence on cost allocation and (2) the lack of mutuality.
Citing Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), the Court concluded that the agreement's silence on cost allocation did not render it unconscionable because Motsinger offered no evidence of the likely costs or the potential impact on her ability to pursue her claims.
Regarding the lack of mutuality, the Court surveyed the caselaw and concluded that the best approach was to "focus[] on the one-sided effect of an arbitration clause – rather than on its one-sided application – [in] evaluat[ing] substantive unconscionability." Moreover, the Court rejected the notion that unilateral arbitration agreements are per se unconscionable.
Applying those principles to the instant case, the Court concluded that the lack of mutuality did not render the arbitration agreement unconscionable because the agreement did not deprive Montsinger of any remedies or procedural protections. Accordingly, the Court remanded the case with instructions to order arbitration.
Early in its decision, the Court noted that unconscionability "must be determined based on the facts in existence at the time the contract was made." This principle of unconscionability analysis highlights a flaw in the Court's focus on unilateral effect: namely, the effect of a unilateral arbitration agreement cannot be determined until the arbitrable dispute arises, but in analyzing unconscionability, courts must confine their analysis to the facts existing when the arbitration agreement was formed.
The following hypothetical illustrates the flaw. Following the Court's approach, if an employee sued their employer for wrongful termination and the employer counterclaimed for conversion, alleging that the employee was fired for theft of company property, the employee would be forced to defend the allegations of theft in two forums, and the employer would effectively enjoy two bites at the apple.
Indeed, many courts have relied on the prospect of forum-splitting as a basis for finding that a unilateral arbitration agreement is inherently unfair. See, e.g., Wisconsin Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155, 174 (Wis. 2006) ("Requiring the borrower to litigate similar or identical claims before both a circuit court and an arbitrator is burdensome on the borrower.").
Since unconscionability must be determined based on the facts in existence when the contract was made, and since the unilateral effect of an arbitration agreement cannot be fully appreciated until an arbitrable dispute arises, a better approach is one that focuses on whether the agreement is unilateral on its face (i.e., unilateral in application).
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