Yesterday, the California Court of Appeals reversed a trial court’s ruling that the plaintiffs who had filed an investment fraud lawsuit against Monex Deposit Company had to go through arbitration instead because of the mandatory arbitration provisions that were included in the investors’ contracts. Per Monex’s arbitration provisions, three arbitrators from JAMS were to participate in the proceedings. Also, the provisions prohibit the joinder or consolidation of claims.
While the trial court sided with Monex’s motion to compel arbitration, the appeals court said that the provisions were unconscionable and therefore could not be enforced. It found that the court-not the arbitrator-should decide whether arbitration provisions are enforceable. The court said that Monex’s arbitration provisions failed to “clearly and unmistakably” reserve to the arbitration panel the matter of whether the provisions are enforceable. It also noted that because arbitrators charge healthy fees for their services, there exists a conflict of interest whenever they are asked to make a decision about arbitrability.
The California appeals court called Monex’s arbitration provisions substantively and procedurally unconscionable-especially considering that calling for a panel of three JAM arbitrators would cost $9,600/day, with each party sharing in the cost.
Because Monex contracts don’t allow for joinder or consolidation of claims (a prohibition that the court says the company doesn’t justify or explain), each plaintiff would have to take part in a separate arbitration and pay at least $20,800 in fees for a four-day session. The court speculated that such restrictions and financial consequences may be intended to discourage customers from exercising their rights.
The court says that since Monex’s entire arbitration clause is now void, the plaintiffs can pursue their claims in court.
The enforceability of mandatory arbitration clauses in consumer contracts is an issue that’s been generating a lot of attention lately. In July, the Minnesota Attorney General settled its lawsuit against the National Arbitration Forum. The complaint accused NAF of being a little too friendly with the credit card industry even though it oversaw numerous credit card disputes as a supposedly “neutral” party. To settle the allegations, NAF said it would stop handling consumer credit arbitrations by July 24. A couple of days later, the American Arbitration Association says it was following suit until new guidelines are set up.