On Monday, the 9th U.S. Circuit Court of Appeals aptly undermined a procedural mechanism increasingly utilized by the financial industry to limit the ability of consumers to challenge unfair practices: arbitration clauses. The Court ruled the take-it-or-leave it nature of the arbitration clause imposed by the law firm O’Melveny and Meyers onto its employees to be procedurally unconscionable due to the employer’s enormous bargaining power.

The decision has potentially significant implications for credit card, mortgage and payday companies, who often employ such clauses to drastically limit the ability of their customers to access the judicial system when customers discover that they have been lied to, mislead or cheated. Such clauses are deeply embedded in most initial contracts between financial services providers and consumers seeking loans, mortgages, credit cards or payday advances. The clauses are used to preemptively deny consumers access to a neutral court of law when challenging the company’s practices, forcing them instead to pursue binding arbitration with an arbiter of the company’s choice. Just initiating the process involves substantial and uncertain fees, discouraging many potential plaintiffs. The process itself provides extremely limited procedural protections, such as limited discovery, limited judicial review, limited remedies, no public record of the process and a general bar to class action suits. Forbidding consumers to mount class action suits impedes system-wide reform from occurring through the judicial process, as it has in other arenas.
Can the logic of the 9th Circuit decision be used to challenge these practices? At the very least, the decision is a cause of optimism because the court appropriately interpreted the doctrine of procedural duress to center around an analysis of the bargaining power of each party agreeing to an arbitration clause, as opposed to only notice. As large companies increasingly use such clauses to limit the ability of both consumers and employees to access the courts, the court’s use of such an analysis is a critical first step to preserving the courts as an institution that can protect middle class consumers.