By: Attorney Jon Cattey

Associate Attorney

On January 31, 2012, the Wisconsin Court of Appeals in Cottonwood Financial v. Estes issued an important decision regarding the viability of arbitration provisions in consumer credit agreements.^[1] The case stemmed from a loan granted by Cottonwood Financial, a pay day lender, to Estes.  Estes subsequently defaulted under the terms of the loan, and Cottonwood sued Estes in small claims court.  Estes filed various counterclaims against Cottonwood alleging violations of the Wisconsin Consumer Act (WCA), which required that the case be transferred to large claims civil court because the counterclaims increased the amount being sought above the small claims threshold.  At that point, Cottonwood moved to stay the proceedings and initiate arbitration under the loan agreement=s arbitration provision.  Seeking to avoid arbitration, Estes argued that the arbitration  provision was unconscionable and therefore could not be enforced.  The circuit court agreed with Cottonwood and allowed the case to proceed to arbitration.  Cottonwood prevailed at the arbitration hearing. Estes then appealed the judgment entered by the circuit court confirming the arbitration award against her.

On appeal, Estes= main argument was that the arbitration provision was substantively unconscionable because she was unable to proceed as a member of a class.  (Estes made various other arguments in favor of the unconscionability of the agreement, but the court quickly struck down each of them.)  The pertinent portion of the arbitration agreement read:

AYou are waiving your right...to participate as a member of a class of claimants, in any lawsuit filed against us...[A]ll disputes ...shall be resolved by binding arbitration only on an individual basis with you...@^[2]

Estes claimed that the above provision was substantively unconscionable because it violated the WCA, which protects a consumer=s right to bring an action as a member of a class.^[3]  The WCA also provides that consumers cannot waive any rights or benefits afforded to them under the WCA, such as the right to proceed as a member of a class.^[4]

Coincidentally, the United States Supreme Court ruled on a nearly identical issue in October 2011, as the Estes appeal was ongoing.  In AT&T Mobility LLC v. Concepcion, the Court held that state consumer protection laws requiring that consumers have the right to classwide arbitration are preempted by the Federal Arbitration Act (FAA).^[5]  AT&T=s service contract mandated arbitration for all disputes but required that consumers waive their right to proceed as a class.  Both the federal district court and the Ninth Circuit agreed with Concepcion in holding that it was unconscionable for the consumer to waive its right to classwide arbitration.  In reversing the appellate court, the United State Supreme Court concluded that the overarching purpose of the FAA is to ensure enforcement of arbitration agreements on their terms.^[6]  That purpose is frustrated by state laws requiring the availability of classwide arbitration.  Therefore, the Court held that state law could not mandate that classwide arbitration be available in arbitration agreements.^[7]