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October 26, 2022 Practice Points

Unconscionability Challenges: Enforceability vs. Formation

The court ruled that the plaintiffs’ unconscionability challenges went to enforceability, not formation, and thus must be decided in the first instance by the arbitrator.

By Christopher S. Moore

In Nanberg v. 21st Century Flooring, LLC, No. 21 C 6623, 2022 WL 4482761 (N.D. Ill. Sept. 27, 2022), the court enforced an arbitration agreement’s delegation clause and stayed litigation pending arbitration, ruling that plaintiffs’ unconscionability challenges went to enforceability, not formation, and thus must be decided in the first instance by the arbitrator.

Plaintiffs, a salesperson and the company he had formed, filed suit against defendants, the salesperson’s employers. The suit, which had been removed to federal court, asserted various federal and state causes of action arising from alleged “wrongful conduct, fraud and discrimination.” After removal, defendants moved to dismiss/stay pending arbitration. Plaintiffs opposed the motion, arguing that the parties’ arbitration agreement was “unenforceable” because it was both procedurally and substantively unconscionable.

Plaintiffs asserted the agreement was procedurally unconscionable because the salesperson received no notice prior to being asked to sign, he was not allowed to consult with an attorney prior to signing it, it was offered under a threat of the salesperson losing his job, it was offered on a take-it-or-leave it basis, and the salesperson had impaired vision and cognitive limitations. Plaintiffs argued the agreement was substantively unconscionable because it unreasonably shortened the statute of limitations period, recited “one-sided” consideration, provided for “abridged” discovery, and failed to advise plaintiffs that both sides would have to pay the arbitrator’s fees. Id. at *5.

The court granted the motion to compel arbitration, holding that an arbitrator—not the court—was required to decide these issues in the first instance. The court acknowledged that “[b]y default, the [gateway] determination of whether the parties had agreed to arbitrate” was decided by courts. Id. at 3. But, it noted, as had long been recognized, the default rule could be changed when there was a “clear and unmistakeable” intent of the parties to do so. Id. (citing Henry Schein, Inc. v. Archer White Sales, Inc., 139 S. Ct. 524, 530 (2019).)

Here, there was such evidence, the court held. For one thing, the arbitration agreement contained a “robust” delegation clause giving the arbitrator authority to decide these issues in the first instance. For another, the arbitration agreement incorporated the rules of the American Arbitration Association, which rules empowered “an arbitrator to decide gateway arbitrability issues” like those raised by plaintiffs. Id. at 4.

Plaintiffs tried to sidestep this rule, arguing that they weren’t raising a “gateway” issue, but instead contending that the “entire Arbitration Agreement” was unenforceable, and that it thus would “put the cart before the horse” for a court to “conclude that Plaintiffs” had delegated that issue to the arbitrator. Id.

The court stated the argument was “not unreasonable,” but rejected it as “foreclosed by the Supreme Court” because plaintiffs’ challenge was directed to the arbitration agreement as a whole, and not directed specifically against the arbitration agreement’s delegation clause. Id. at 4 (“Absent a challenge to the validity of the ‘delegation provision specifically,’ the court must ‘treat it as valid. . . .’”) Id. (quoting Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 72 (2010).)

The plaintiffs also insisted that the court was obligated to decide their challenges because courts, not arbitrators, “must determine [in the first instance] whether a valid agreement to arbitrate exists.” Though that contention was “technically correct,” the court held that the plaintiffs had misapplied the rule: “The problem for Plaintiffs is that they conflate the question of contract formation . . . with the question of contract enforceability.” Id. at *5 (emphasis added).

Although plaintiffs had argued “forcefully” that no contract was formed because, among other things, the salesperson “could not read it properly” and therefore did not fully understand it, the court disagreed that the argument went to formation. Id. at *6. Instead, noting that “it is the objective manifestation of intent that controls whether a contract has been formed,” a contract had been formed when the salesperson had signed it. Id. at *5 (emphasis added). Thus, plaintiffs’ unconscionability changes went to enforceability (to be decided by the arbitrator), not formation. 

Christopher S. Moore is the founder of Chris Moore Law in Chicago, Illinois.

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