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"Procedural" unconscionability is now the battleground
January 28, 2006 by Ross Runkel at LawMemo

In California (and many other states) a court will find a contract clause unconscionable only if it is both "procedurally" and "substantively" unconscionable. A consumer or employee must show both in order to get the clause thrown out.

A class-action waiver clause in an arbitration agreement creates a classic situation. In Discover Bank v. Superior Court (2005), a bank included an arbitration agreement (complete with a class-action waiver) in a bill stuffer. The California Supreme Court found the waiver clause unconscionable - both procedurally and substantively.

Banks that want their customers bound by such clauses will likely focus on the procedural aspect. (To focus on the substantive aspect would probably mean they would need to completely exclude the waiver clause.)

When it comes to bill-stuffers, there are two examples that illustrate the opposite ends of the spectrum.

1. The banks says that you have to either agree to the waiver or close out your account. That is what was happening in Discover Bank. Procedurally unconscionable.

2. The bank says you have 30 days to decide whether to opt out, and you can keep your account either way. That eliminates the "take-it-or-leave-it" nature of the transaction.

How about something in between? In Jones v. Citigroup (California Ct App 01/26/2006) the bank's bill-stuffer allowed customers 26 days to opt out. Those who opted out could keep their credit card accounts until the end of the current membership year or until the expiration date on the card, whichever was longer. Then the account would be closed.

The California court held (2-1) that there was no procedural unconscionability. The primary reasoning was that the case did not involve an "adhesion" contract because the consumer was able to opt out. Therefore, no procedural unconscionability. Therefore, the waiver clause was enforceable.

The dissent would hold that procedural unconscionability existed because the customer had to either accept the waiver clause or forfeit the use of the credit card within a relatively short amount of time. The dissent did not see much difference between this case and the Discover Bank case. In addition, the dissent went beyond unconscionability analysis to say that the waiver clause violated public policy.

There is another way to view unconscionability analysis, which is followed in several states. Although the court continues to examine both the "substantive" and "procedural" aspects, neither one is considered on an all-or-nothing basis. It is a sort of balancing approach. Under that view, a clause that is "very" unconscionable substantively need not have as much procedural unconscionability.

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