Jan. 3, 2012 – A binding arbitration provision that barred a Wisconsin consumer from pursuing a class-action lawsuit against a payday loan lender is indeed enforceable.
That’s what the District III Wisconsin Court of Appeals concluded in Cottonwood Financial Ltd. v. Estes (Cottonwood II), 2009AP760 (Dec. 20, 2011), the first Wisconsin state case impacted by the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).
Wisconsin consumer Darcie Estes took out numerous loans from a payday lender, Cottonwood Financial Ltd., which does business as The Cash Store.
Each loan agreement contained binding arbitration provisions governing disputes between the parties, except small claims disputes. Eventually, Estes defaulted on the loans.
Cottonwood sued Estes in small claims court to collect the debt, but Estes effectively removed the case to circuit court by counterclaiming that Cottonwood’s loan agreements violated the Wisconsin Consumer Act. One of Estes’s arguments was that the arbitration provisions at issue barred her from pursuing a class action lawsuit against Cottonwood.
Wis. Stat. section 426.110(1) of Wisconsin’s Consumer Act recognizes a consumer’s right to “bring a civil action on behalf of himself or herself and all persons similarly situated.”
But Cottonwood moved to compel arbitration under the arbitration provisions. The circuit court granted the motion, rejecting Estes’s argument that the arbitration provisions were unconscionable and thus unenforceable. Estes later appealed an arbitration award against her.
Federal law preempts state law
In the pre-Concepcion case of Cottonwood Financial Ltd. v. Estes (Cottonwood I), 784 N.W.2d 726 (Wis. Ct. App. 2010), the appeals court ruled that Cottonwood’s arbitration provision was substantively unconscionable because it barred Estes from filing a class action lawsuit.
However, in Concepcion, the nation’s high court ruled (5-4), that the Federal Arbitration Act (FAA), section 2, preempts state laws that classify “most collective-arbitration waivers in consumer contracts as unconscionable.” Id. at 1746, 1753.
After Concepcion, the Wisconsin Supreme Court vacated Cottonwood I and remanded for reconsideration. In Cottonwood II, the appeals court ruled that, “[i]n light of Concepcion,” the classwide arbitration waiver at issue “is enforceable and is not substantively unconscionable.”
Thus, under Concepcion and Cottonwood II, Wisconsin consumers cannot challenge similar arbitration provisions. But in a July 2011 WisBar InsideTrack article, Madison attorney Michael D. Leffel of Foley & Lardner LLP, noted that “Concepcion is not the death knell for class actions.”
Leffel explained that federal regulations and legislation could, in the future, limit or prohibit the use of similar arbitration provisions despite Concepcion.
He also pointed out that “many consumer claims arise from transactions that do not involve written agreements, and thus will not be covered by an enforceable arbitration agreement.”