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Arizona Adjudicator Overrules Unconscionability Objections to Arbitration Agreement: McCarthy v. Stifel, Nicolaus & Co. Inc.
Posted on Categories Court Decisions, Securities ArbitrationTags , ,

By Paul J. Dubow

*Arizona courts have held that unconscionability can be either procedural or substantive. **There is no Arizona law supporting an assertion that a finding of adhesion equates to a finding of procedural unconscionability. ***Arizona courts have rejected the argument that arbitration agreements that limit discovery are substantively unconscionable.

McCarthy vs. Stifel, Nicolaus & Co. Inc., No. 16-0581 (D. Ariz., 8/29/16).

A Contract of Adhesion

In 2011, plaintiff signed a “continuation letter” and promissory note, which provided that an $87,000 loan would be forgiven and a grant of Stifel Nicolaus shares worth $87,000 would vest if plaintiff were still an employee of Stifel after four years. Both the letter and note required arbitration before FINRA. Stifel fired plaintiff before the four years elapsed and he sued, alleging a violation of the ADA. Stifel moved to compel arbitration. Plaintiff opposed the motion, arguing that the arbitration agreement was procedurally and substantively unconscionable.

The motion is granted. Arizona courts have held that unconscionability can either be procedural or substantive. Plaintiff bases his claim of procedural unconscionability on the fact that the agreements were adhesion contracts, but Arizona law does not equate a finding of adhesion with a finding of procedural unconscionability. A contract of adhesion is only unenforceable if it does not fall within the reasonable expectations of the weaker party, but that is not true here. This is not a case of an unwary consumer signing a standard agreement in which an arbitration agreement is buried somewhere in pages of fine print. The documents in question were relatively short and the arbitration clause in each agreement was prominently displayed. Nor is there evidence to support a conclusion that plaintiff would not have signed the documents because of the arbitration clauses. The arbitration terms are not bizarre or oppressive, did not eviscerate any non-standard terms and did not eliminate the dominant purpose of the transaction.

Discovery Limitations

Arizona courts have rejected the argument, now advanced by plaintiff, that arbitration agreements that limit discovery are substantively unconscionable. First, he cites Rule 13510, which states that depositions are strongly discouraged and are only allowed if the panel grants permission in limited circumstances, but one of those limited circumstances is “in cases involving claims of statutory employment discrimination.” Next, he claims that the discovery rules will prevent him from obtaining the names of the individuals who denied him accommodation or who participated in the decision to terminate him, but Rule 13506 plainly permits him to ask for the identity of individuals. He also argues that the rules prevent him from obtaining the names of employees who had performance metrics lower than his but who were not terminated, but Rule 13506 also allows plaintiff to request documents that “relate to the matter in controversy.”

Forum Fees

Finally, plaintiff argues that the agreements are substantively unconscionable because they require him to incur costs that he would not have incurred if he litigated in court, but this claim is merely speculative. He has submitted no specific facts to establish the actual costs or his inability to pay them. Moreover, some of the fees that plaintiff contends he may incur in arbitration are also fees that he might incur if he were to litigate his claims in court. Besides deposition costs, plaintiff may also have to pay subpoena costs and transportation costs, no matter where he tries his dispute. Therefore, the Court rejects the assertions of unconscionability.

(P. Dubow: In California, a contract must be both procedurally and substantively unconscionable. An adhesion contract is procedurally unconscionable. But the outcome, if this case were in California, would be the same, because the agreements were not substantively unconscionable.)

(SLC Ref. No. 2016-36-01)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA)from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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