Adventures in Arbitration: A New Consumer Act Case Reaches What Is Getting To Be An Old Result.

After thirty renewals of the same loan with an interest rate exceeding 500% annually, you'd think a payday lender would have called it quits in trying to get the borrower to pay them back.

Not The Cash Store, though. After they lent Darcie Estes $1,400, and then extended the loan 30 different times (about once every two weeks), The Cash Store wasn't about to let Darcie get out of paying them back. So when she finally defaulted on the loan, The Cash Store filed a small claims suit against her, leading to the case of Cottonwood Financial LLC v. Estes.

By that time, Estes had herself a lawyer and she countersued, claiming that The Cash Store had violated the Wisconsin Consumer Act in some undisclosed way. That's not to say that Darcie didn't disclose how she thought The Cash Store had violated the WCA; I'm saying that the Court of Appeals, in ruling on the case, didn't bother to specify what claims Darcie brought against The Cash Store.

The Court of Appeals, in fairness, didn't necessarily have to specify Darcie's allegations, because it wasn't deciding the merits of those claims, but instead was focusing on a side issue that had become a main issue: Whether Darcie could be forced to arbitrate her claims. The Court of Appeals had to decide whether Darcie could be forced to arbitrate her claims because The Cash Store wanted to force Darcie to arbitrate, and after Darcie resisted arbitrating her claims, The Cash Store won the right to force her to do so, and then arbitrated, and then had to go back to confirm the award, and then after the award was confirmed, Darcie appealed and claimed arbitration was unconscionable, and she won... so The Cash Store had lost, and Darcie couldn't be forced to arbitrate, and the parties had to go back to court to litigate her claims all over again, and all of this is over an original loan of $1,400.

Arbitration is supposed to be a quick and easy alternative to litigation -- a quick-and-easy alternative that is favored by the courts, or at least those courts whose judges have never sat down to consider what would happen to their jobs if private resolution of legal issues becomes commonplace (let alone what happens to the concepts of common law and stare decisis, among others, if private, unreported, unprecedential resolutions of legal issues becomes common place.)

Arbitration here was neither quick, nor easy... nor effective, given that to get the right to arbitrate, The Cash Store had to first file an action and then move to compel arbitration, over a fight, then defend against a request for leave to file an interlocutory appeal, then arbitrate, then face a confirmation fight over the arbitration award, and then fight (and lose) an appeal. That sequence of events raises this question:

Why would The Cash Store have not simply litigated in small claims court? Rather than face fight after fight after fight, in a situation where it cannot be awarded its fees and it's fighting over $1,400 -- about which I'll say more later -- why not simply fight in state court? Has nobody at The Cash Store (and none of their lawyers) ever said "Is this fight cost-effective and what do we get out of it?" Had The Cash Store done that -- litigated in state court -- then the sole issue on which Darcie's entire fight was based would have gone away.

I say that knowing that Darcie made some unspecified claims of WCA violations -- but those claims didn't seem to go very far with the circuit court, or the arbitrator, and they weren't discussed by the Court of Appeals. What Darcie fought over -- and fought very well over -- was whether she could be forced to arbitrate.

Had The Cash Store simply said "Oh, you don't want to arbitrate? Okay, then," and gone ahead with litigation, they may have won on all issues -- just as they did in arbitration -- but they would definitely have avoided all the delay and expense of litigation over the arbitration question.

And a second thought sprang to mind: Why wouldn't the Court of Appeals have allowed this as an interlocutory appeal? The opinion -- issued as case number 2009 AP 760 on May 25, 2010 -- notes that the Court previously denied leave to appeal from the order compelling arbitration. So the Court of Appeals required Darcie to go arbitrate -- and incur that expense -- and then said, after the fact that arbitration was not required -- that arbitration was unconscionable -- and reversed.

In other words, The Cash Store decided to spend a lot of time and money arguing about what forum the fight would be in, and the Court of Appeals then forced a consumer to go through something it later found to be unconscionable because of The Cash Store's decision.

At any point, either of the two could have saved a lot of time and trouble. (As for those who say Darcie could have saved time and trouble, too, by agreeing to arbitrate, remember: Darcie won: she was right that arbitration was unconscionable, here.)

That's all before we even get to the merits of the case -- all of that sturm und drang about the procedural issues in this case echoes the fact that this case really was about procedure, after all: it dealt very little with issues of any substance, to any party, and dealt, more, with how companies are going to go about collecting against people that still owe them money.

The Court of Appeals, in ruling on those procedural questions, touched on some substantive questions dealing with whether forced arbitration clauses are enforceable against consumers. This is an issue that I've already said was decided once and for all about four years ago, when Wisconsin Auto Title Loans v. Jones was decided, invalidating a forced-arbitration clause. As I said back then:

An examination of the tenets of that case shows how circuit courts could determine that most arbitration agreements in consumer credit contracts are unconscionable.... [T]he 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.

(source.)(That's my article.) Many of the things that Wisconsin Auto Title, and my article, found problematic were given short shrift by the Cottonwood Financial LLC v.Estes Court -- some rightfully so (Estes, the Court noted, made arguments that weren't supported by the evidence), and some not-so-rightfully.

For example, the Court of Appeals says Estes (Darcie) was wrong to argue that arbitration agreements limit a consumer's right to a trial, noting that the Wisconsin Consumer Act declares a right to an "action," not a trial. The Court doesn't elaborate on whether action, as used in the Wisconsin Consumer Act, is synonymous with arbitration hearing, as used in the contract at issue. Many arbitrations are done "on paper," or by document, and none that I've ever seen are done in front of a jury. All are done by arbitrators who are selected by the forum, instead of appointed or elected by the public and public officials. Arbitrations are secret -- nobody can go look up records of an arbitration, and arbitrators are not subject to recall.

It may well be that the Wisconsin Consumer Act preserves a right to an action and that an action can mean "a trial or similar proceeding" but the Court of Appeals should have explained why -- and shown that the legislature intended that the right to an action be protected by an unwanted arbitration.

Likewise, the Court of Appeals held that any limits on discovery imposed by arbitration were offset by the fact that arbitrators are not bound by the rules of evidence. The prohibition on application of the rules of evidence, "which," the Court said, "simplifies and expands the presentation of evidence" serves to ameliorate any problems posed by a lack of discovery.

On the one hand, bravo to the Court of Appeals for echoing what I've long said: the rules of evidence are bunk and need not be followed. Trials would be easier and less time consuming if we simply ignored the rules of evidence. (I believe that so strongly I'll say it again, in bold: Trials would be easier and less time consuming if we simply ignored the rules of evidence.) But, on the other hand, we have the rules of evidence, and we have rules of discovery, and the Court of Appeals shouldn't (as they did here) simply say "well, if you don't have one, you don't need the other." Discovery isn't bound by the rules of evidence hardly at all; and there's nothing about the rules of evidence which makes discovery less necessary.

Discovery is there to let me prepare my case and avoid trial by ambush; it's overused by most lawyers who aren't very good litigators (criminal defense lawyers will tell you civil discovery is mostly unnecessary) but it's a procedure that's there for litigants to use to find evidence to present in court. The rules of evidence, on the other hand, exist to keep evidence out of court. Every rule of evidence is designed in some way to exclude evidence.

They're not counterweights at all. How does being able to produce anything in evidence without regard to admissibility counterweigh being able to find out what my opponents' case is before trial? Whether or not a document, say, is admissible, is not the same thing as whether or not I know of the existence of that document before trial and can find a witness to testify about it.

The Court of Appeals simply says, by fiat, that if there's no rules of evidence, limits on discovery are okay, but doesn't explain why that's true in the first place, let alone why it makes limits on discovery okay (if they exist.) And, for that matter, the Court of Appeals doesn't explain why not using the rules of evidence is itself not problematic -- doesn't a consumer have a right to rely on, say, the fact that her opponent will not simply be able to introduce a bunch of hearsay testimony at trial? The arbitration provision here arguably limits both discovery and limits the use of Wisconsin's statutory rules of evidence -- and the Court found that those two limits counterweigh each other, making both okay.

How is limiting consumers' rights to two statutory procedures not at least an issue that has to be discussed vis a vis unconscionability?

The Court of Appeals did not that the venue provision of the contract might violate the Wisconsin Consumer Act, and therefor "arguably supports a conclusion" that the provision is ucnonscionable, before homing in on the class action rights which were prohibited by the clause in question.

This waiver of class actions ran contrary to the WCA's section 426.110(1), protecting a right to a class action in consumer cases. And it was this waiver, period, which the Court of Appeals in Cottonwood decided invalidated the arbitration clause:

Permitting predispute waivers of class proceedings would be contrary to the Act's purpose of protecting consumers... We therefore conclude the arbitration provision is substantively unconscionable.

The Court of Appeals, in doing that, significantly expanded on Wisconsin Auto Title without mentioning that it was doing so. In Wisconsin Auto Title, the Supreme Court of Wisconsin had held that waiver of class rights was a factor in determining the arbitration clause to be unconscionable. Later on, in Coady v. Cross Country Bank, Inc., 2007 WI App 26, the Court of Appeals had held "a waiver of class-wide relief is a significant factor (and in at least one instance a determinative factor) in invalidating an arbitration provision."

But now, in Cottonwood, waiver of class-wide relief was the only factor: The Court of Appeals explicitly rejected almost every other factor as not proven or not properly argued, and that one other factor (the venue provision) arguably supports a finding of unconscionability.

So Cottonwood stands not just for the incredible waste of resources in (futilely) pursuing a right to arbitrate, but also stands, now, for the proposition that one single flaw can make a contract substantively unconscionable -- no longer are there a laundry list of Wisconsin Auto Title considerations, but just the one: is class-wide relief available? If not, the contract is substantively unconscionable.

Which raises the prospect that a single other flaw is enough, too -- after all, is there anything to say the venue provision of the WCA is any less important to consumers than the class relief? So if the venue provision is flawed, that may be enough to invalidate the contract.

There's some more to note about Cottonwood. The Court of Appeals rejected, in a footnote, an argument by Darcie about whether Cottonwood had waived arbitration by going straight to court. Rejecting an argument in a footnote isn't that bad, I suppose, but the way the Court did it here, is weird. It wrote:

That argument has no merit, for the reasons stated in Cottonwood's brief.

First, I have to take issue with people saying an argument has no merit. "No merit" means no reason to exist. It's a big step from we're not persuaded by your claim to your claim has no merit, and courts and litigants should be careful about throwing around no merit if they really mean I'm not convinced.

Second, though, I can't say whether or not the Court really meant no merit, because we didn't get the reasons for rejecting the argument. The Court didn't say what the reasons were, it just referred to the brief filed by Cottonwood. So if I, or you, or that person over there (hi!) wants to see what that argument was, we have to go to the Court of Appeals and get Cottonwood's brief and read that.

Secret jurisprudence is wrong; unpublished opinions shouldn't exist, and now we have the prospect of having published opinions-- Cottonwood was recommended for publication -- that don't say why one side or the other won. We could have a published opinion that says "Plaintiff wins for the reasons stated in her brief," and what good is that? Opinions are supposed to be published to give guidance to the public and support to the Court: A court's primary strength is the strength of its reasoning, it's ability to persuade people that it's right.

As kids, we heard our parents say "I'm right because I'm Mom." That was bad enough. Now, we have the Court saying "We're right -- for the reasons that other person said, that we won't repeat here."

And the final note about this opinion: I said that Darcie borrowed, initially, $1,400 from The Cash Store and that she defaulted after renewing thirty times or so. That sounds pretty bad for Darcie, and serves as an indication why The Cash Store might have wanted to pursue her vigorously -- so vigorously that it threw logic out the window -- or at least it sounds like it does until you consider that before getting sued, Darcie had made an effort to pay back the loans, and in fact had paid The Cash Store, at the time of default, a total of $4,567 on her $1,400 loan.

Which means The Cash Store wasn't trying to get its money back; it was suing because it hadn't made enough of a profit off Darcie yet.

Maybe the legislature didn't have to do very much to regulate these lenders after all -- with business sense like that, they'll stop existing in about two months.