CORMAC J. CARNEY, District Judge.
Defendant FedEx Ground Package System, Inc. ("FedEx") moves to compel Plaintiff John Robert Openshaw to arbitrate his claims for wrongfully terminating his written agreement with FedEx to serve as a small package pick-up and delivery driver. FedEx's agreement with Mr. Openshaw contains several arbitration provisions that are incredibly favorable to FedEx. It has a provision drastically reducing the time by which Mr. Openshaw must file a claim for wrongful termination
FedEx is a national provider of small package information, transportation, and pick-up and delivery services. Mr. Openshaw has a B.A. from California State University of Fullerton and has previously served as a business consultant. (Openshaw Decl. ¶ 2.) Through his consulting, he learned about the opportunity to serve as a delivery contractor for FedEx. (Openshaw Decl. ¶ 3.) Prior to his dealings with FedEx, he had no experience negotiating with large, sophisticated business entities. (Openshaw Decl. ¶ 8.)
Mr. Openshaw invested his time and life savings into becoming a FedEx contractor.
After he had invested substantial time and financial resources into becoming a FedEx contractor, FedEx's regional manager, Judy Western, presented Mr. Openshaw with a "sample" of the Pick-Up and Delivery Contractor Operating Agreement ("COA") and told him that it was nonnegotiable. (Openshaw Decl. ¶ 6.) A few days later, Ms. Western summoned Mr. Openshaw to the Palm Springs Terminal to sign the agreement. (Openshaw Decl. ¶ 7.) He was never given any opportunity to question or negotiate any of the COA's terms. (Openshaw Decl. ¶¶ 7, 8.)
Under the COA, Mr. Openshaw would be required to submit to arbitration should he wish to assert a claim of wrongful termination against FedEx. (Def.'s Req. Judicial Notice ("DRJN"), Ex. A § 12.3.) The COA included a number of provisions that were favorable to FedEx. First, the COA had a very short statute of limitations for Mr. Openshaw to file an arbitration demand. The COA required:
(DRJN, Ex. A § 12.3(a).) The COA also curtailed discovery, with the following limitation:
(DRJN, Ex. A § 12.3(c).) The COA also imposed significant financial hurdles to initiating and participating in arbitration. Specifically, the COA dictated:
(DRJN, Ex. A § 12.3(e).) The COA also limited Mr. Openshaw's ability to recover damages incurred as a result of a wrongful termination:
(DRJN, Ex. A § 12.3(e).) Finally, the COA prohibited the arbitrator from issuing a written opinion explaining his or her findings. Specifically, the COA provided:
(DRJN, Ex. A § 12.3(f).)
Mr. Openshaw could not afford to pay an attorney to review the COA. (Openshaw Decl. ¶ 8.) He went ahead and signed the COA on May 11, 2009, clearly not understanding or appreciating the one-sided nature of the COA's arbitration provisions. (Openshaw Decl. ¶¶ 7-9.)
Just four months later, FedEx unilaterally terminated the COA. (Openshaw Decl. ¶ 9.) By this time, Mr. Openshaw was saddled with more than $346,000 in debt, which he had incurred as a result of fulfilling FedEx's requirements for the delivery contract. (Openshaw Decl. ¶ 9.) Shortly after the contract was terminated, Mr. Openshaw lost his FedEx trucks and drivers because he could not afford paying for them. (Openshaw Decl. ¶ 12.)
In March 2010, Mr. Openshaw sought the services of an attorney, Joshua Wolff. (Wolff Decl. ¶ 2.) After reviewing the COA, Mr. Wolff believed that the arbitration provisions were unfairly one-sided in favor of FedEx, and he arranged a conference with the appointed arbitrator. (Wolff Decl. ¶ 5.) On April 2, 2010, the arbitrator held a preliminary conference with the parties. (Wolff Decl. ¶ 5.) Mr. Wolff raised his concern about the limited discovery that Mr. Openshaw was permitted to conduct, and he asked whether the arbitrator would level the "playing field." (Wolff Decl. ¶ 5.) The arbitrator ruled that he did not have the power to change the parties' arbitration provision and so would enforce the provision as written. (Wolff Decl. ¶ 6.) Mr. Wolff informed the arbitrator and FedEx that he would file an action to obtain a judicial determination as to the enforceability of the arbitration provision. (Wolff Decl. ¶ 6.) The arbitrator then issued a scheduling order setting the arbitration for October 2010. (Wolff Decl., Ex. A.) Mr. Openshaw filed a complaint in state court that includes the following causes of action: (1) Breach of Contract; (2) Breach of the Covenant of Good Faith and Fair Dealing; (3) Violation of California Unfair Practices Act; and (4) Declaratory Relief. FedEx removed the case to this Court on May 28, 2010. FedEx now moves for the Court to compel Mr. Openshaw to arbitrate his claims.
Under the Federal Arbitration Act, "[i]f a party challenges the validity under § 2 of the precise agreement to arbitrate at issue, the federal court must consider the challenge before ordering compliance with that agreement under § 4." Rent-A-Center, West, Inc. v. Jackson, ___ U.S. ___, 130 S.Ct. 2772, 2779, 177 L.Ed.2d 403 (2010). "When the crux of the complaint is not the invalidity of the contract as a whole, but rather the arbitration provision itself, then the federal courts must decide whether the arbitration provision is invalid and unenforceable ...." Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1264 (9th Cir.2006) (en banc). Arbitration agreements "may be invalidated by `generally applicable contract defenses, such as fraud, duress, or unconscionability.'" Rent-A-Center, 130 S.Ct. at 2776 (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)). Where an arbitration provision has been found unconscionable, "[t]he district court has the discretion under federal arbitration law ... to sever the unconscionable arbitration provision and enforce the remainder of the contract." Nagrampa, 469 F.3d at 1276.
The most critical inquiry when determining whether a contract is procedurally unconscionable is whether one party lacked a meaningful choice to review, negotiate and sign the agreement. Todd Heller, 754 A.2d at 700; Ostroff, 433 F.Supp.2d at 542-43 (applying Pennsylvania law); Lucey, 2007 WL 3052997, at *4 (applying Pennsylvania law). Courts have found contracts to be procedurally unconscionable when they constitute a contract of adhesion, i.e., a contract that is "prepared by a party with excessive bargaining power and presented to the other party on a `take it or leave it' basis." Ostroff, 433 F.Supp.2d at 543 (citing Parilla v. IAP Worldwide Servs. VI, Inc., 368 F.3d 269, 276 (3d Cir.2004)). Mr. Openshaw had no meaningful choice here to review, negotiate and sign the COA.
Mr. Openshaw had no prior experience negotiating with sophisticated commercial entities. (Openshaw Decl. ¶¶ 4, 5, 8.) By the time he was presented with the COA, he had already invested substantial time and resources in purchasing routes, preparing a business plan, obtaining necessary trucks, hiring drivers, acquiring supplies, and emotionally committing to the contractor position. (Openshaw Decl. ¶¶ 4, 5, 8.) Ms. Western presented the sample COA as non-negotiable, and when Mr. Openshaw signed the final COA a few days later, he was not afforded an opportunity
Nevertheless, FedEx argues that the COA is not procedurally unconscionable because Mr. Openshaw knew that he would need to enter into a COA with FedEx and could and should have reviewed the COA before purchasing the business. FedEx's argument misses the point. FedEx presented the COA to Mr. Openshaw. The COA was FedEx's standard form contract. None of the terms were drafted by Mr. Openshaw. If Mr. Openshaw wanted to be a FedEx contractor, he had to sign the COA. It was a take-it-or-leave-it situation. This was procedurally unconscionable.
The COA was also substantively unconscionable. A contractual provision is substantively unconscionable when the contractual terms unreasonably favor the drafter. Worman v. FedEx Ground Package Sys., Inc., 76 Pa. D. & C. 4th 292, 300 (Pa.Com.P1.2005). "Numerous factors may make an arbitration provision substantively unconscionable, including severe restrictions on discovery, high arbitration costs borne by one party, limitations on remedies, and curtailed judicial review. Essentially, an arbitration provision is substantively unconscionable if it creates an arbitration procedure that favors one party over another." Ostroff, 433 F.Supp.2d at 543 (internal citations omitted). Here, there are several arbitration provisions in the COA that unreasonably favor FedEx.
The first unconscionable arbitration provision of the COA is the 90-day statute of limitations provision. This provision only gives the contractor 90 days to file an arbitration demand or the wrongful termination claim is forever waived. Such a short fuse must be analyzed in context and with the practical realities of the situation in mind. The contractor has just lost his or her job. The contractor has also lost a considerable capital investment and may be in dire financial straits. FedEx does not have to provide the contractor with any explanation for the termination. Most, if not all, of the evidence concerning FedEx's termination is in the possession of FedEx. Needless to say, the contractor is in an extremely vulnerable position and must be given enough time to gather the relevant information, consult with a lawyer should he or she desire, and then build a well-supported claim for wrongful termination. Pennsylvania law actually provides the contractor with four years to file such a claim, but FedEx's arbitration provision provides the contractor with just 90 days to do so. 42 PA.C.S.A. § 5525(a)(8); Gustine Uniontown Assocs., Ltd. v. Anthony Crane Rental, Inc., L.P., 577 Pa. 14, 842 A.2d 334 (2004). That is simply not enough time, especially when one considers that the contractor has lost his or her job, has little or no money, and is understandably emotional and upset.
The next unconscionable provision is the COA's discovery provision. This provision provides that "[n]either party shall be entitled to written or deposition discovery from the other, except with respect to damages." (DRJN, Ex. A § 12.3(c)). A limited discovery provision must not be so restrictive that it "will prove insufficient to allow [the Plaintiff] a fair opportunity to present [his] claims." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 30-31, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). The COA's provision here is that restrictive. FedEx is permitted to terminate the contract without notice or reason, leaving contractors without any understanding as to why they were terminated. FedEx also undoubtedly possesses the information relevant to FedEx's liability for wrongful termination. A contractor's capacity to vindicate his or her claim of wrongful termination will be severely constricted without this evidence. But the discovery provision prevents the contractor from conducting any discovery as to liability, including propounding interrogatories, noticing depositions, seeking requests for admission, and requesting documents related to the COA's termination. The discovery provision requires contractors to operate in the dark and essentially guarantees that a contractor will not be able to gather the information required to support a claim for wrongful termination against FedEx.
FedEx's argument that the discovery limitation is fair because it limits both sides' ability to conduct discovery is disingenuous. FedEx would not need to conduct significant discovery as to whether its termination of a contractor was wrongful. Surely FedEx knows the reason why it terminated the COA. The only information that FedEx would need to acquire in an action for wrongful termination relates to the damages suffered by the contractor. Admittedly, the contractor likely possesses most of this information. But the COA permits FedEx to seek unlimited discovery as to those damages. Simply put, the discovery provision provides a vehicle for FedEx to obtain the information that it would need to defend itself while stacking the deck against a contractor seeking to establish liability for wrongful termination. Whether by design or effect, FedEx denies contractors a fair opportunity to develop the evidence necessary to support their claims.
Even worse, FedEx can choose to reinstate the contract despite the fact that the contractor no longer has the equipment and resources necessary to perform and does not want to be reinstated. (Compl. ¶ 30(e).) Under this scenario, FedEx can almost completely avoid paying damages. If FedEx chooses to reinstate a contractor who is no longer able to perform, the contractor will have to cancel the contract shortly after the reinstatement. Alternatively, the contractor will fail to perform and FedEx can terminate the contract for cause. In this scenario, FedEx would not have to pay any damages for the second termination, even if the first termination was, in fact, wrongful.
The next unconscionable arbitration provision concerns the arbitrator's ability to allocate costs. The COA's cost allocation provision states:
(DRJN, Ex. A § 12.3(e).) Where "a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs." Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 92, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). Pennsylvania law provides that an arbitration provision allocating costs is unconscionable "if the costs associated with arbitration of a single claim would operate to preclude a claimant from pursuing a remedy." McNulty v. H & R Block, Inc., 843 A.2d 1267, 1273 (Pa.Super.Ct.2004), appeal denied, 578 Pa. 709, 853 A.2d 362 (2004), cert, denied, 543 U.S. 1021, 125 S.Ct. 667, 160 L.Ed.2d 497 (2004). Determining
The COA's cost allocation operates to limit a contractor's capacity to vindicate his or her claim. The initial expense of arbitration here is so high that many contractors would reasonably conclude that the expense is unmanageable, especially when contrasted with the limited remedies available under the COA. The initial filing fee for arbitration was $6,000, and the case service fee was $2,500.
FedEx contends that the arbitrator can apportion costs, so the provision is not unconscionable. But the arbitrator does not allocate costs until after the proceeding is over. Mr. Openshaw is responsible for up-front fees and must risk the possibility that the arbitrator will allocate all costs to him. Considering the limited remedies available to him even if he does win, Mr. Openshaw stands to spend thousands of dollars on a proceeding that "may or may not prove mildly successful." Lucey, 2007 WL 3052997, at *11. It is understandable, then, why Mr. Openshaw, or any other contractor, would be hesitant to proceed with an arbitration that could result in such limited recovery while contributing substantially to the significant debt he has already amassed as a result of acquiring the business.
The final unconscionable arbitration provision prohibits the arbitrator from issuing a written opinion. The COA provides that the "arbitrator shall provide the parties with only a written determination of the outcome of the arbitration, without accompanying opinion, and shall have no authority to alter, amend or modify any of the terms and conditions of this Agreement..." (DRJN, Ex. A § 12.3(e).) It would be difficult indeed for a reviewing court to perform its appellate function of judicial review if the arbitrator did not file an explanation of his decision. This provision will interfere with a reviewing court's effort to efficiently administer justice. The Court can see no reason for this prohibition except, as so aptly pointed out by another federal court, that it is "FedEx's attempt to maintain spin control" and preemptively hamper a reviewing court's ability to determine whether to vacate or otherwise correct the arbitrator's decision. Lucey, 2007 WL 3052997, at *12. While it is true that arbitrators need not be required to produce written opinions, there is a significant difference between not requiring written opinions and prohibiting them. One way provides the contractor with the possibility of obtaining a clearer record, the other explicitly prevents it.
FedEx argues that the Court may dismiss this action because Mr. Openshaw waived his right to object to arbitration by initiating arbitration and by failing to voice his objection to the arbitration proceeding until a few months into it. As the Ninth Circuit has made clear, even when a party participates in arbitration, he does not necessarily waive the right to object to it. Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1277 (9th Cir.2006) (en banc).
In Nagrampa, the plaintiff participated in the arbitration by seeking a 90-day continuance from the arbitrator, sending a letter objecting to the validity of the arbitration provision, participating in one conference call that resulted in a scheduling order, unsuccessfully attempting to file a counter-demand, and propounding a set of discovery requests. Nagrampa, 469 F.3d at 1277-78. The Ninth Circuit held that even though the plaintiff had participated in the arbitration, the plaintiff had voiced an objection to its validity and so did not waive the right to object in a later court proceeding. Id. The Ninth Circuit also contrasted the Nagrampa case with prior cases in which parties had participated extensively in litigating the merits of the arbitration and the objecting party had never previously raised an objection. Id. at 1279 (citing Nghiem v. NEC Elec., Inc., 25 F.3d 1437, 1440 (9th Cir.1994); Fortune, Alsweet & Eldridge, Inc. v. Daniel, 724 F.2d 1355 (9th Cir.1983) (per curiam)). For example, in Nghiem, the plaintiff was not permitted to challenge the arbitrator's authority after-the-fact because the plaintiff had "initiated the arbitration, attended the hearings with representation, presented evidence, and submitted a closing brief of fifty pages" before filing suit in state court. Nghiem, 25 F.3d at 1440. In Daniel,
Analogizing to the plaintiffs' involvement in Nghiem and Daniel, FedEx argues that since Mr. Openshaw initiated the arbitration, he waived his opportunity to object to it. This is not a fair comparison. It is quite clear that Mr. Openshaw filed his arbitration demand quickly in response to the 90-day statute of limitations. He was concerned about preserving his rights and would not have been able to obtain a ruling as to the enforceability of the arbitration provision until the 90-day statute of limitations had already passed. No person in Mr. Openshaw's position, especially one unrepresented by counsel, would risk giving up any chance of redress by failing to file for arbitration when it appeared from the face of the COA that arbitrating the wrongful termination claim was mandatory. Furthermore, Mr. Openshaw's involvement in the arbitration thus far is much more like the plaintiffs involvement in Nagrampa than the plaintiffs' involvement in either Nghiem or Daniel. The substantive merits of Mr. Openshaw's claim have not been addressed, either through evidence or briefing. The arbitrator has certainly not made a final determination as to Mr. Openshaw's claim and damages have not been assessed nor have fees been calculated. Even though the parties have been engaging in discovery, so too had the plaintiff in Nagrampa, and the Ninth Circuit did not find that the plaintiff in that case had waived the right to contest the arbitration.
FedEx alternatively argues that by filing an arbitration demand, Mr. Openshaw created an independent, second agreement to arbitrate. FedEx cites to an unpublished district court case from Pennsylvania as support for the proposition that where a party files an arbitration claim, a second, separate agreement to arbitrate has been created. A.G.K. Sarl v. A.M. Todd Co., 2008 WL 724607, at *8 (E.D.Pa. March 18, 2008). This is not what the district court in A. G.K. said. The district court said, "[a]lthough a party usually indicates its intent to arbitrate by signing a contract that includes an arbitration clause, it can also indicate its consent by bringing and prosecuting an arbitration proceeding." A.G.K., 2008 WL 724607, at *7 (emphasis added). The court then cited to a Third Circuit case, in which parties had previously demanded arbitration, fully participated in it, and were represented by counsel, as an example of a situation where a party demonstrated an unmistakable intent to arbitrate the dispute by initiating the arbitration. A.G.K., 2008 WL 724607, at *8 (citing United Indus. Workers, Local No. 16 v. Gov't of the V.I., 987 F.2d 162 (3d Cir.1993)). Mr. Openshaw was not indicating his unmistakable intent to arbitrate by filing an arbitration demand, he was merely preserving his right to relief by filing within the excessively short limitations period. By stating his objection to arbitration and then filing this complaint, he clearly did not indicate his intent to create a separately enforceable agreement to arbitrate.
For the foregoing reasons, FedEx's motion to compel arbitration is DENIED.
(DRJN, Ex. A § 12.3(e).) As the Third Circuit has held, restricting access to the courts by only one party is not, standing alone, unconscionable. Harris, 183 F.3d at 183. FedEx directs the Court to a Pennsylvania Court of Common Pleas decision in which the court determined that it was convinced that this arbitration provision is not unconscionable because it clearly was meant to preserve FedEx's right to maintain the company's status quo and protect its property interests during the course of the arbitration. Worman, 76 Pa. D. & C.4th at 308-09. The Court agrees. It is not unreasonable for FedEx to attempt to preserve its property interests if a former contractor initiates an arbitration proceeding against it and threatens to keep customers' property.
