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    Sounding the Death Knell of Forced Consumer Arbitration

    Brianne F. Pagel Jr.

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    The Wisconsin Supreme Court's recent decision in Wisconsin Auto Title Loans Inc. v. Jones may have sounded the death knell of forced arbitration of consumer debt disputes in Wisconsin.

    Wisconsin LawyerWisconsin Lawyer
    Vol. 79, No. 12, December 2006

    Sound the Death Knell of Forced Consumer Arbitration

    The Wisconsin Supreme Court's recent decision in Wisconsin Auto Title Loans Inc. v. Jones may have sounded the death knell of forced arbitration of consumer debt disputes in Wisconsin. The ruling eliminates evidentiary hearings to invalidate arbitration clauses, relies on facts that will be present in most consumer creditor situations, and reasserts consumers' rights to access the courts in contract disputes.

    by Briane F. Pagel Jr.


    lthough the Wisconsin Supreme Court's ruling in Wisconsin Auto Title Loans Inc. v. Jones1 did not expressly invalidate forced consumer arbitration, an examination of the tenets of that case shows how circuit courts could determine that most arbitration agreements in consumer credit contracts are unconscionable. Circuit courts could reach that determination because the Wisconsin Auto Title ruling eliminates the need for evidentiary hearings to invalidate arbitration clauses and relies on facts that will be present in nearly every case in which creditors seek to force consumers to arbitrate.

    For consumer-debtors, Wisconsin Auto Title represents an important reassertion of consumers' rights to guaranteed access to the courts. Arbitration clauses can be found in everything from payday lenders' agreements to credit card contracts. Following the Wisconsin Auto Title decision, creditors will have a far more difficult time forcing consumers to arbitrate, while consumers and their lawyers will not have to invest as much time and money in getting arbitration clauses invalidated.


    Since Congress passed the Federal Arbitration Act (FAA) in 1925, arbitration had been gaining in popularity among creditors and in acceptance by courts. Over time, the FAA evolved from what arguably was intended as a procedural statute into a statute that grants a substantive right.2 In Southland v. Keating, the U.S. Supreme Court noted that arbitration had become a substantive right, and the Court prohibited states from passing laws aimed at invalidating arbitration clauses in specific contexts.3

    The conflict between the Southland ruling and state consumer protection laws was presaged by judicial protests, including Justice O'Connor's argument that the FAA "should have no application whatsoever in state courts."4 State courts wanting to invalidate arbitration agreements had two options: either pick a direct fight with the U.S. Supreme Court or take advantage of the FAA's provision allowing a state to invalidate arbitration clauses on the same basis as any other contract.5 In Wisconsin Auto Title, the Wisconsin Supreme Court chose the second option, noting the potential for conflict with federal statutes and case law, but sidestepping that issue by holding that the court's Wisconsin Auto Title ruling was merely applying, in a consumer context, contract defenses of general applicability.6

    The Wisconsin Auto Title Case

    The Wisconsin Auto Title dispute began when Jones borrowed $800 from the plaintiff in December 2001.7 To secure his loan, Jones signed a loan agreement granting the lender a security interest in his car. The loan agreement clearly stated that almost any disputes must be arbitrated and that by entering the agreement, the borrower was giving up rights such as to bring class actions or have a trial by jury.

    Jones defaulted on the loan, and the lender filed a consumer replevin action.8 Jones answered and counterclaimed for violations of the Wisconsin Consumer Act. The lender then moved to compel arbitration on the debtor's claims (but not on the lender's claims) pursuant to the contract. The circuit court, the Wisconsin Court of Appeals, and ultimately the Wisconsin Supreme Court all held that the clause requiring forced arbitration of the debtor's claims was unconscionable.9

    Given the growing use and acceptance of arbitration, those three courts' rulings alone were significant. But the supreme court decision in Wisconsin Auto Title is even more noteworthy, because that ruling reduced the burden of invalidating arbitration agreements by eliminating the need for an evidentiary hearing and instead permitting the circuit court to rely on the pleadings. And, this reduced burden could apply to every consumer credit agreement covered by the Wisconsin Consumer Act.

    Reducing the Burden of Production

    The Wisconsin Supreme Court in its decision first lowered the burden of production for debtors. A party challenging the validity of a contract arbitration provision is entitled to have a court decide10 whether an arbitration provision is procedurally and substantively unconscionable and therefore is invalid.11 Determining a provision's invalidity requires the existence of sufficient facts to prove the agreement unconscionable as a matter of law.12 In the past, an evidentiary hearing had been necessary to prove unconscionability, but no such hearing was held in Wisconsin Auto Title.13 Rather than remand for an evidentiary hearing, the supreme court started its analysis by limiting the old rule, holding that "an evidentiary hearing may not always be necessary to support a determination of unconscionability."14 Instead, the court determined that no evidentiary hearing need be held if there are facts supporting unconscionability either somewhere in the record or otherwise available to the court.

    Procedural Unconscionability

    Eliminating the need for evidentiary hearings significantly reduces the burden on debtors, because they no longer will have to resort to depositions, discovery, and trials to prove their case. And the "facts in the record" on which the Wisconsin Supreme Court relied in Wisconsin Auto Title lower the bar a little further for all debtors challenging these agreements, because the relied on facts will appear in the majority of these cases.

    The circuit court in Wisconsin Auto Title made nine findings of fact, seven of which the Wisconsin Supreme Court held to be supported by the record. It is the way that the majority found support for those factors that will allow the factors to be found in almost every consumer credit case.

    The circuit court found that the borrower had obtained a loan that contained various conditions and that the loan was not repaid.15 These findings would be necessary pleadings and inferences from the pleadings in the Wisconsin Auto Title case, would be supported by the contract and pleadings in the record, and are not controversial at all.16

    The next set of findings of fact are problematic because they will exist in every case and because they do not necessarily flow from the facts of record. The circuit court found, and the supreme court agreed, that the lender was "experienced in drafting loan agreements," had "a position of greater bargaining power," and had presented the loan in a "take it or leave it" manner.17 The supreme court upheld those findings in part by looking at the company's name and slogan (both showing the company was experienced in lending).18 Further, the loan documents used were preprinted, standardized, fill-in-the-blank forms, and the supreme court therefore inferred that the lender was "experienced in drafting documents"19 and that the contract was "take-it-or-leave-it" in nature.20 The lender's greater bargaining power was shown from the fact that the lender is in the business of lending, whereas the borrower was deemed "indigent."21

    The indigency finding was derived from bits and pieces in the record. Although the borrower had received a poverty-based waiver of fees, the supreme court did not rest its finding on the affidavit of indigency; rather, the court determined it was "unlikely that a person with financial means and a strong bargaining position would agree to borrow money on the terms" of the loan in that case.

    These findings, which the Wisconsin Supreme Court upheld to invalidate the arbitration clause, were deemed sufficient to support a conclusion of procedural unconscionability. A closer look at the findings shows six of the factors will apply in every consumer credit case:

    1) Every case seeking to force arbitration will involve a contract with arbitration provisions.

    2) Every case will involve a loan that was not repaid.

    3) Every case will include a written application with written loan terms, because no consumer creditor today operates without a written application and written terms.

    4) Every lender will be deemed to be experienced in lending so long as they use written agreements and make consumer loans.

    5) Every case will involve a "take-it-or-leave-it" loan, since the only criterion used to make that determination was the use of preprinted written agreements by an experienced lender.

    6) Every case will involve a disparity in bargaining power because the lender will always have money, while the borrower will always need money.

    Only the finding of indigency might vary from case to case; clearly, not every case will involve an indigent person taking out a loan at 300 percent interest.22

    In short, of the seven findings of fact found to be supported by the record in Wisconsin Auto Title, six will exist in every single consumer credit case. Any debtor using only the complaint and answer should be able to establish six of the seven Wisconsin Auto Title factors to support a finding of procedural unconscionability, without having to resort to discovery or an evidentiary hearing.23

    Substantive Unconscionability

    That near-universal applicability also is true of the supreme court's analysis of substantive unconscionability. The court recognized that substantive unconscionability already is fairly easy to establish in consumer transactions.24

    The primary flaw from which the Wisconsin Auto Title arbitration clause suffered was the "save-and-except" clause whereby the lender preserved its, and only its, right to go to court - a reservation necessary to enforcement because replevins cannot be arbitrated.25 That reservation troubled the supreme court because Wisconsin Auto Title could go to court for any purpose, while the borrower could go to court only if the lender agreed to do so.26

    If the court had stopped there, the potential impact of Wisconsin Auto Title might have been lessened, because lenders could always require arbitration for both parties (in nonreplevin situations). But the court did not stop with the save-and-except clause. The court noted there were other factors supporting its finding of substantive unconscionability.

    Those other factors were: the clause raised the possibility of imposing an undue burden on the borrower through dual-forum litigation in which a borrower must present an affirmative defense in one arena but seek substantive enforcement in another, being forced to litigate the same issue twice;27 the clause included a self-help remedy otherwise prohibited by statute;28 and the clause limited a borrower's remedies by forbidding such things as class actions.29 The court held that those factors combined with the save-and-except clause established the substantive unconscionability of the arbitration clause.

    These additional factors make Wisconsin Auto Title universally applicable to consumer credit transactions because most, if not all, consumer credit card agreements contain virtually identical clauses posing similar problems.

    Agreements usually require arbitration of claims against a debt collector who is named in the same suit as the creditor (with the result that a debtor must choose to arbitrate against both the creditor and the debt collector, or pursue separate suits, one of which will be sent to arbitration).30 Many consumer credit agreements contain a forum selection clause setting venue outside of Wisconsin, while federal and state laws, for the most part, require actions to be filed where the debtor lives.31 Consumer credit agreements contain provisions allowing the creditor, but not the debtor, to modify the agreement terms.32 Each of these provisions creates dual forum problems by splitting identical claims between arbitration and litigation, or between states. For example, a debtor who sues a creditor and a collector for illegal collection practices under Wis. Stat. chapter 427 would have to either arbitrate all those claims (despite not having any contract with the debt collector to do so) or sue the debt collector and arbitrate with the creditor.

    Many consumer credit agreements contain provisions that are outlawed by Wisconsin, such as terms allowing a creditor to choose how to allocate payments,33 illegally threatening to collect attorney fees,34 or claiming that another state's law (usually Delaware's) applies to the contract.35 An illegal threat to collect fees is no less a violation than is an illegal reservation of the right to self-help.

    And all arbitration agreements will deny the consumer not just the ability to bring class action claims, but a variety of rights that are otherwise available when litigating in a local court, such as having public records easily available in a location that is accessible (arbitration records are not public and the arbitration forum's offices may be geographically distant from Wisconsin consumers), mandatory discovery procedures, and an in-person trial by a jury.

    Finally, most arbitration agreements impose higher burdens on consumers than do courts. The supreme court in Wisconsin Auto Title was troubled by the requirement that the borrower might be forced to pay a $125 filing fee but most arbitration organizations require a per request fee, not just the initial filing fee required by a court. So each request for discovery, each motion, and each notice can impose a cost on the debtor that would not exist in state or federal courts.36

    Potential Impact

    Creditors prefer arbitration for a variety of reasons including reduced discovery, shorter hearings, and the ability to engage in arbitration with a resident of a given state without having to be licensed to practice law in that state.

    Arbitration of issues between debtors and creditors arises and is presented to the courts in one of a limited number of ways. Either the creditor files an arbitration claim, which the consumer then goes to court to stop (before or after an award is made), or the consumer sues the creditor (via a complaint or counterclaim) and faces a motion to compel arbitration.

    A fairly standard case might involve a credit card company commencing arbitration against a debtor by filing a claim with the arbitration forum. Previously, a debtor would have to retain an attorney, who would have the option of arbitrating the case or simultaneously going to court to attempt to invalidate the agreement. The litigation in court would require an evidentiary hearing, necessitating depositions and discovery, a time-consuming and expensive process conducted against a backdrop of cases declaring a strong preference for arbitration.

    Now, that same debtor's attorney has the ability to file a properly-pleaded answer or complaint and rely on those filings and the recent Wisconsin Supreme Court ruling in Wisconsin Auto Title to quickly invalidate the arbitration agreement, and thereby level the field considerably.


    The unique history of Wisconsin Auto Title will ultimately cause this case to be of singular importance in Wisconsin consumer law. The lack of an evidentiary hearing resulted in a ruling based on generalities that will appear in almost every consumer lending case. While it might not have meant to do so, the Wisconsin Auto Title case could signal the end of forced consumer arbitration.


    1Wisconsin Auto Title Loans Inc. v. Jones, 2006 WI 53, 290 Wis. 2d514, 714 N.W.2d 155.

    2Southland v. Keating, 465 U.S. 1, 25 (1984) (O'Connor, J., dissenting.)

    3Id. at 10.

    4Id. at 31 (O'Connor, J., dissenting).

    59 U.S.C. § 2.

    6Wisconsin Auto Title, 2006 WI 53, ¶ 85, 290 Wis. 2d 514.

    7Id. ¶ 10.

    8Id. ¶ 20.

    9Id. ¶ 24.

    10Id. ¶ 6; compare with Buckeye Check Cashing Inc. v. Cardegna, __ U.S. __, 126 S. Ct. 1204 (arbitrators determine validity of contract as a whole).

    11Wisconsin Auto Title, 2006 WI 53.

    12Id. 25 (citing Wassenaar v. Panos, 111 Wis. 2d 5118, 331 N.W.2d 357 (1983); and Leasefirst v. Hartford Rexall Drugs Inc., 168 Wis. 2d 83, 483 N.W.2d 585 (Ct. App. 1992)).

    13Wisconsin Auto Title, 2006 WI 53, ¶ 40, 290 Wis. 2d 514.


    15Id. 43.

    16Id. ¶ 44.

    17Id. 43

    18Id. ¶ 45.

    19Id. ¶ 46.

    20Id. ¶ 53.

    21Id. ¶ 49.

    22Id. ¶ 14

    23Most complaints for consumer credit transactions must include an accurate copy of the writings evidencing the transaction. Wis. Stat. § 425.109.

    24Wisconsin Auto Title, 2006 WI 53, ¶ 60, 290 Wis. 2d 514 ("Substantive unconscionability has usually been successfully raised against commercial interests dealing with consumers.").

    25Wis. Stat. sections 425.203, 425.205, and 425.206 restrict nonjudicial enforcement of security interests.

    26Wisconsin Auto Title, 2006 WI 53, ¶ 66, 290 Wis. 2d 514.

    27Id. ¶ 70.

    28Id. ¶ 72.

    29Id. ¶ 73.

    30See, e.g., Bruesewitz v. MBNA, No. 05-C0-542- S (W.D. Wis. Nov.8, 2005) (credit card agreement required arbitration against debt collectors only if named in suit with creditor).

    31See id. for example of agreement. See also Wis. Stat. § 421.401(1); 15 U.S.C. § 1692i.

    32See, e.g., Dietzen v. Wolpoff & Abramson LLP, No. 05CV243 (E.D. Wis. __, 2005) (clause in contract allows unilateral modification of all terms of agreement).

    33Wis. Stat. section 422.203(2) sets forth a required manner of allocation for some payments.

    34Wis. Stat. section 422.411 prohibits including such a clause in any consumer credit agreement.

    35Wis. Stat. section 421.201 sets out when Wisconsin applies its law to consumer credit contracts.

    36For an example of arbitration rules, see the National Arbitration Forum Code of Procedure, www.arb-forum.com.

    Briane F. Pagel Jr., U.W. 1998, is an associate attorney with Krekeler Strother S.C., Madison, practicing in debtor and consumer law and family law. He is a frequent seminar presenter on creditor/debtor law and has frequently represented consumers in state and federal courts. He is admitted to practice in state and federal courts in Wisconsin and in the Seventh Circuit Court of Appeals.