May 26, 2010 – A consumer contract that prohibits the prospect of class-wide relief is substantively unconscionable, the appeals court recently held.

In Cottonwood Financial v. Estes, 2009AP760 (May 25, 2010), Darcie Estes borrowed money under contract from Cottonwood Financial, a payday lender. Estes eventually defaulted on the loans.

Cottonwood moved to compel arbitration after Estes alleged violations of the Wisconsin Consumer Act. The Pierce County Circuit Court granted Cottonwood’s motion. Estes appealed, claiming the arbitration clause was unenforceable.

Both substantive and procedural unconscionability must be present to render contract provisions unenforceable, the appeals court wrote.

The factor-based analysis to determine both, the court noted, are identified in Wisconsin Auto Title Loans, Inc. v. Jones, 2006 WI 53, 290 Wis.2d 514, 714 N.W.2d 155. Under Wisconsin Auto Title, the determination of substantive unconscionability focuses on whether the contract terms were “commercially reasonable.”

The circuit court determined that substantive unconscionability was not present, and therefore did not make factual findings to determine the existence or non-existence of procedural unconscionability, since both are required.

However, the appeals court determined that the contract’s arbitration clause was substantively unconscionable because “it precluded Estes from proceeding as a member of a class.”

The court pointed to Wis. Stat. section 421.110(1) of the Wisconsin Consumer Act, which recognizes a consumer’s right to “bring a civil action on behalf of himself or herself and all persons similarly situated.” The arbitration provision in this case precluded Estes from proceeding as such, requiring all claims to be resolved by binding arbitration on an individual basis.

Citing Coady v. Cross Country Bank, Inc., 2007 WI App 26, 299 Wis. 2d 420, 729 N.W.2d 732, the court concluded that expressly prohibiting a consumer from proceeding as part of a class is a “significant factor” indicating substantive unconscionability.

The court stated: “Permitting predispute waivers of class proceedings would be contrary to the Act’s purpose of protecting consumers from unfair practices.”

A "sufficient quantum" of both procedural and substantive unconscionability must be present to render a contract provision unenforceable, the court noted.

Estes asserted that procedural unconscionability existed for a number of reasons. Since the circuit did not make that determination, the appeals court remanded the case with directions to make a factual determination on that issue.