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Legal Memorandum: Unconscionability of an Arbitration Agreement

Issue: Is the question of whether an arbitration agreement is unconscionable or contrary to public policy subject to arbitration?

Area of Law: Alternative Dispute Resolution, Business Organizations & Contracts, Employee Law
Keywords: Arbitration agreement; Unconscionable; Contrary to public policy
Jurisdiction: Federal
Cited Cases: 110 F.3d 222; 243 F. Supp. 2d 334; 514 U.S. 938; 537 U.S. 79; 388 U.S. 395; 324 F. 3d 212; 151 F.3d 132; 133 F.3d 225
Cited Statutes: 9 U.S.C. § 2; Restatement (Second) of Contract § 178
Date: 11/01/2004

            The Third Circuit case of Great W. Mortgage Corp. v. Peacock, 110 F.3d 222 (3d Cir. 1997), does not require the court to defer matters of unconscionability and public policy to arbitration.

First, the plaintiff in Great Western never raised the issue of unconscionability.  In Great Western the plaintiff argued:

1) that the FAA does not apply to employment contracts; 2) that she did not waive her rights under the NJLAD; 3) that because Great Western’s Arbitration Agreement would deprive [her] of a two-year statute of limitations, a right to discovery, and punitive damages, it is void as a matter of public policy; 4) that Great Western waived any right to arbitration that it might have had; and 5) that the district court erred in denying her motion for a jury trial.

Great W., 110 F.3d at 225-26 (emphasis added).  Thus, the Great Western court was never asked to consider whether the arbitration agreement should have been found invalid and unenforceable on grounds of unconscionability.

Second, the Supreme Court has made it clear that “generally applicable defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening [the FAA’s strong policy in favor of arbitration].”  Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996) (emphasis added).  To evaluate the validity of an arbitration agreement, federal courts “should apply ordinary state-law principles that govern the formation of contracts.”  First Options Inc. v. Kaplan, […]

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