North Carolina Court Rejects Consumer’s “Apples to Oranges” Argument About the Costs of Arbitration Compared to Litigation

The North Carolina Court of Appeals rejected a consumer’s argument that an arbitration clause was void because the costs of arbitration were too high. The Court found that the argument examined the wrong costs and advanced only the worst case scenario for the consumer.

In Tillman v. Commercial Credit Loans, Inc., No. COA05-924, 2006 WL 1526826 (N.C. Ct. App. Jun 06, 2006), Tillman and several other consumers attempted to file a class action lawsuit against Commercial Credit, alleging several consumer protection violations. When Commercial Credit filed a motion to compel arbitration based on its agreement with the consumers, the consumers argued that the arbitration clause was unconscionable because (1) the costs of arbitration were prohibitively high; (2) the arbitration clause contained a class action prohibition; and (3) the agreement lacked mutuality.

The trial court found the arbitration clause unconscionable, but that decision was soundly rejected by the Court of Appeals, which concluded that the plaintiffs were comparing “apples to oranges” in their arguments relating to the costs of arbitration.

Citing Bradford v. Rockwell Semiconductor, 238 F.3d 549, 556 n.5 (4th Cir. 2001), the Court held that it must conduct a case-by-case inquiry of the claimant’s actual or expected costs and his or her ability to pay those costs, “measured against a baseline of the claimant’s expected costs for litigation” and the claimant’s ability to pay those costs. This strips away many “costs” from the comparison that would be paid in both arbitration and litigation, such as attorneys’ fees and witness fees.

In this case, Tillman’s lawyer filed an affidavit stating that “costs and expenses advanced by our law firm can total more than $150,000,” and that this cost would not be incurred in civil court because the case would be certified as a class action and would be reimbursed if Tillman won. The Court rejected this argument because in North Carolina, even plaintiffs who lose contingent fee cases are liable for litigation costs, and it is unethical for an attorney to agree to bear even some of those costs. Therefore, the cost of arbitration should not be measured at $150,000. Instead the Court compared the $125 initiation fee to the $95 filing fee in North Carolina courts.

The Court also called Tillman’s argument into question by noting that his assertions failed to address the costs of a lawsuit if he lost in court. The argument compared the costs of winning in litigation to the costs of losing in arbitration. Plaintiff also failed to compare costs between arbitration and a bench trial. The Court found this “apples to oranges” comparison insufficient to show that the cost of arbitration is prohibitive.