On June 19, 2013, the West Virginia Supreme Court of Appeals (“the Court” or “WVSCA”) issued an important decision that bolsters the ability of financial institutions and other defendants to enforce arbitration agreements. Credit Acceptance Corporation v. Front, Docket Nos. 11-1646, 12-0545 (W. Va. June 19, 2013), Slip Op. Spilman consumer finance attorneys were pleased to obtain this victory on the consolidated appeal of two orders denying arbitration. The decision helps to define how a court will determine if an agreement to arbitrate is unconscionable, rendering the agreement unenforceable. This is important to defendants who have included arbitration provisions in their contract and prefer to resolve dispute by arbitration.

The Credit Acceptance decision helps to define whether a West Virginia court can determine if an agreement to arbitrate is unconscionable, rendering the agreement unenforceable. In addition, the WVSCA held that a party that is denied a request to refer a litigated dispute to arbitration does not have to wait until the conclusion of litigation to appeal that decision but may appeal it immediately to the WVSCA. This is important to defendants who have included an arbitration provision in their contract and prefer to resolve disputes by arbitration.

The Credit Acceptance decision is a further evolution in the WVSCA’s jurisprudence analyzing the enforceability of arbitration agreements post-Marmet Health Care Center Inc. v. Brown, 132 S. Ct. 1201 (2012). In Marmet, the United States Supreme Court reversed the WVSCA opinion in Brown ex rel. Brown v. Genesis Health Care Corp., 724 S.E.2d 250 (W.Va. 2011), vacated sub nom. Marmet Health Care Ctr., Inc. v. Brown, 565 U.S. __, 132 S. Ct. 1201, 182 L.Ed.2d 42 (2012) (“Brown I”), in which the WVSCA held that an agreement to arbitrate did not apply categorically to claims of negligence resulting in personal injury or wrongful death. The United States Supreme Court reversed and remanded, directing the WVSCA to consider whether “arbitration clauses . . . are unenforceable under state common law principles that are not specific to arbitration and preempted by the Federal Arbitration Act.” Marmet, 132 S. Ct. at 1204. On remand, the WVSCA held that “[a] contract term is unenforceable if it is both procedurally and substantively unconscionable,” paving a way for parties to continue to challenge the enforcement of arbitration agreements. Brown v. Genesis Healthcare Corp., 729 S.E.2d 217, 221 (2012) (“Brown II”).

In three separate cases (resulting in two opinions), consumers sued Credit Acceptance Corporation, an automobile finance company, for allegedly violating the West Virginia Consumer Credit and Protection Act, W. Va. Code §§ 46A-1-101, et seq. (“WVCCPA”). The lawsuits also alleged claims of negligence, intentional infliction of emotional distress, and invasion of privacy. Id. at 2, 5. Credit Acceptance moved to compel arbitration pursuant to its agreement with each consumer. The circuit courts denied the motions, holding that the agreements, though not procedurally unconscionable when formed, were rendered so by the subsequent unavailability of the named forums. Additionally, one of the circuit courts interpreted the WVCCPA to prohibit a consumer from waiving the right to a jury trial, thereby holding that the arbitration agreement violated a consumer’s fundamental right under the West Virginia Constitution. Id.

Credit Acceptance immediately appealed the orders, arguing the circuit courts erred by concluding that (1) the arbitration agreements were unconscionable based upon the unavailability of the designated arbitration forums and (2) the WVCCPA prohibited consumers from waiving their right to a jury trial.

On appeal, the WVSCA first addressed its jurisdiction to hear an interlocutory appeal of an order denying arbitration. It held for the first time that “an order denying a motion to compel arbitration is an interlocutory ruling which is subject to immediate appeal under the collateral order doctrine.” Id. at Syl. pt. 1. In so holding, the Court acknowledged that an order denying a motion to compel arbitration is effectively unreviewable on appeal, leaving the parties no choice but to litigate. Further, if a party must wait until the conclusion of litigation to appeal a denial of arbitration, then the party has effectively lost its right to arbitrate. Id. at 13. Hence, going forward, a circuit court order denying arbitration will be appealable as an interlocutory order to the WVSCA.

Second, the WVSCA revisited its holding in Brown II to consider whether the consumers’ arbitration agreements were procedurally unconscionable because of the unavailability of arbitration forums named in the agreement. In Brown II, the Court reaffirmed its holding in Brown I that “‘[a] contract term is unenforceable if it is both procedurally and substantively unconscionable. However, both need not be present to the same degree. Courts should apply a ‘sliding scale’ in making this determination: the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the clause is unenforceable, and vice versa.’” Id. at Syl. pt. 2 (internal citations omitted).

The Court focused on its analysis in Brown II, in which it explained that “unconscionability is concerned with inequities, improprieties, or unfairness in the bargaining process and formation of the contract.” Id. at 17-18 (quoting Syl. pt. 17, Brown II) (emphasis added in original). Accordingly the lower courts’ conclusion that “contracts [that are not unconscionable at formation] could be rendered procedurally unconscionable by subsequent events is erroneous.” Id. at 18.

Next, the Court considered whether the unavailability of the selected arbitration forums rendered the arbitration agreement unconscionable. Returning again to its analysis in Brown II, the Court noted that the factors for determining substantive unconscionability, i.e., “the commercial reasonableness of the contract terms, the purpose and effect of the terms, the allocation of the risks between the parties, and public policy concerns[,]” were not applicable to an analysis of whether the unavailability of an arbitration forum rendered an agreement unconscionable. In other words, the unavailability of an arbitration forum is not inherently unconscionable. The enforceability of the arbitration agreement instead must be determined under the Federal Arbitration Act (“FAA”).

The Court analyzed cases interpreting Section 5 of the FAA, which prescribes a process for substituting an arbitrator when the designated arbitrator is unavailable. Based upon its analysis, the Court held that the unavailability of a selected arbitration forum will not, per se, render the arbitration agreement unenforceable: “Where an arbitration agreement names a forum for arbitration that is unavailable or has failed for some reason, a court may appoint a substitute forum pursuant to section 5 of the Federal Arbitration Act, 9 U.S.C. § 5 (1947) (2006 ed.), only if the choice of forum is an ancillary logistical concern.” Id. at Syl. pt. 3. The caveat is that where the choice of forum is an integral part of the arbitration agreement, and not “merely an ancillary logistical concern,” unavailability of the chosen forum will render the agreement unenforceable.

However, the Court did not enumerate factors that would make forum selection an “integral part” versus an “ancillary logistical concern” because in this instance, the Court found that one of the arbitration forums was available. The Court found that the American Arbitration Association’s moratorium on collection actions against consumers did not make the AAA unavailable when consumers brings suit, as happened in these cases.

Finally, the Court considered whether the circuit court erred in finding the arbitration agreements unenforceable because the WVCCPA could be interpreted to prohibit consumers from waiving their right to a jury trial. Once again, the Supreme Court returned to its opinion in Brown II, in which it held that under the FAA, an agreement to arbitrate is “valid, irrevocable, and enforceable, unless the provision is found to be invalid, revocable or unenforceable upon a ground that exists at law or in equity for the revocation of any contract.” Brown II, Syl. pt. 1. The Court reaffirmed its holding that “‘[a] state statute, rule, or common-law doctrine, which targets arbitration provisions for disfavored treatment and which is not usually applied to other types of contract provisions, stands as an obstacle to the accomplishment and execution of the purposes and objectives of [section 2 of the FAA], and is preempted.’” Credit Acceptance, Slip Op. Syl. pt. 4. Because arbitration necessarily eliminates a jury trial and because statutes cannot target arbitration for disfavored treatment, the Court found the circuit court’s ruling that the arbitration agreements were invalid to be erroneous.

Spilman Thomas & Battle, PLLC is a full-service law firm with offices in West Virginia, Virginia, Pennsylvania and North Carolina. Its consumer finance litigation practice group represents financial institutions and industry participants in defending claims brought under federal and state consumer protection statutes, including the West Virginia Consumer Credit and Protection Act, the Federal Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Truth-in-Lending Act.