Summary
The Alabama Supreme Court reviewed an order compelling arbitration in a putative class action brought by Walter and Evalina Leonard against Terminix. The court held that the arbitration clause was unconscionable and unenforceable because the adhesive contract restricted the plaintiffs to disproportionately expensive individual arbitration and effectively foreclosed practical relief through a class action. The court reversed the order compelling arbitration and remanded the case.
Topics
Practice areas
Questions Presented
- Whether the termite protection plan contained an enforceable arbitration agreement.
- Whether the transaction sufficiently affected interstate commerce to make the arbitration clause enforceable under the Federal Arbitration Act.
- Whether the arbitration clause was unconscionable and unenforceable because it required individual arbitration at costs disproportionate to the small value of the claims and effectively precluded class-action relief.
Holdings
- The arbitration clause was unconscionable and unenforceable because it was part of an adhesive contract that imposed unreasonably favorable and patently unfair terms, restricted the plaintiffs to an economically impractical individual arbitral forum, and effectively deprived them of a meaningful remedy by precluding class-action treatment for small-value claims.
- The arbitration clause was not unconscionable solely because it excluded liability for indirect, special, consequential damages, or loss of anticipated profits.
- Applying Alabama's generally applicable unconscionability principles to the arbitration clause did not violate the Federal Arbitration Act.
Key quotations
“This arbitration agreement is unconscionable because it is a contract of adhesion that restricts the Leonards to a forum where the expense of pursuing their claim far exceeds the amount in controversy.” (854 So. 2d at 539)
“The limitation upon recovery of "indirect, special, and consequential damages or loss of anticipated profits" in the arbitration clause and elsewhere in the agreement and the preclusion of eligibility for class-action treatment by inserting a provision requiring arbitration deprive the Leonards of a meaningful remedy and lead us to conclude that Terminix has extracted unreasonably favorable and patently unfair terms in its contract of adhesion.” (854 So. 2d at 538)
Factual background
The Leonards purchased a house in 1994 and acquired the seller's Terminix termite bond. Terminix mailed them a termite protection plan containing an arbitration clause, and the Leonards paid annual renewal fees in 1995, 1996, and 1997. Terminix did not inspect, repair, or retreat the property during the relevant period, and the Alabama Department of Agriculture and Industries later charged Terminix with failing to perform required annual inspections. The Leonards then filed a putative class action seeking relief for Terminix's alleged systematic failure to comply with its statutory inspection duties.
Procedural history
The Leonards filed a six-count putative class action alleging that Terminix failed to perform statutorily required annual termite inspections and seeking damages, rescission, restitution, and other relief. Terminix moved to compel arbitration under the termite-protection plan, and the trial court granted the motion on October 25, 2001. The Supreme Court of Alabama reversed and remanded. On rehearing, the court overruled the application and denied Terminix's motion to vacate the opinion and dismiss the appeal.
Remand instructions
Remand for further proceedings consistent with the opinion. On rehearing, the court indicated that Terminix could seek in the trial court, in proceedings analogous to those available under Rule 60, Ala. R. Civ. P., consideration of the effect, if any, of the AAA consumer rules.