OPINION

LASTER, Vice Chancellor.

Defendant National Financial, LLC ("National") is a consumer finance company that operates under the trade name Loan Till Payday. In May 2013, National loaned $200 to plaintiff Gloria James (the "Disputed Loan"). National described the loan product as a "Flex Pay Loan." In substance, it was a one-year, non-amortizing, unsecured cash advance.

The terms of the Disputed Loan called for James to make twenty-six, bi-weekly, interest-only payments of $60, followed by a twenty-seventh payment comprising both interest of $60 and the original principal of $200. The total repayments added up to $1,820, representing a cost of credit of $1,620. According to the loan document that National provided to James, the annual percentage rate ("APR") for the Disputed Loan was 838.45%.

James defaulted. After National rejected her request for a workout agreement, she filed this action seeking to rescind the Disputed Loan. She proved at trial that the Disputed Loan was unconscionable, resulting in an order of rescission. She also proved that National violated the federal Truth in Lending Act, resulting in an award of statutory damages plus attorneys fees and costs.

I. FACTUAL BACKGROUND

Trial took place on September 21, 22, and 24, 2015. The parties submitted seventy-two exhibits, introduced live testimony from six fact witnesses, called two expert witnesses, and lodged five depositions. The following facts were proven by a preponderance of the evidence.

A. Hardworking But Poor

James is a resident of Wilmington, Delaware. From 2007 through 2014, James worked in the housekeeping department at the Hotel DuPont. In May 2013, when she obtained the Disputed Loan, James earned $11.83 per hour. As a part-time employee, her hours varied. On average, after taxes, James took home approximately $1,100 per month.

James' annualized earnings amounted to roughly 115% of the federal poverty line, placing her among what scholars call the working poor.1 Contrary to pernicious stereotypes of the poor as lazy, many work extremely hard.2 James exemplified this attribute. She got her first job at age thirteen and has been employed more or less continuously ever since. Her jobs have included stints in restaurants, at a gas station, as a dental assistant, as a store clerk, and at a metal plating company. In 2007, she obtained her position with the Hotel DuPont. She was laid off on December 31, 2014, when the hotel reduced its part-time staff.

B. James' Use Of Credit

James is undereducated and financially unsophisticated. She dropped out of school in the tenth grade because of problems at home. Approximately ten years later, she obtained her GED.

Around the same time she obtained her position with the Hotel DuPont, James attempted to improve her skills by enrolling in a nine-month course on medical billing and coding. For seven months, she worked from 8:00 a.m. to 4:00 p.m. at the hotel, then attended classes starting at 5:00 p.m. She was also taking care of her school-age daughter. Two months before the end of the program, the schedule became too much and she dropped out. James thought she received a grant to attend the program, but after dropping out she learned she actually had taken out a student loan. She eventually repaid it.

James does not have a savings account or a checking account. She has no savings. She uses a Nexis card, which is a pre-paid VISA card.

In May 2013, when she took out the Disputed Loan, James had been using high-interest, unsecured loans for four to five years. She obtained loans from several finance companies. She used the loans for essential needs, such as groceries or rent. On at least one occasion, she used a loan from one provider to pay off an out-standing loan from another provider.

Before the Disputed Loan, James had obtained five prior loans from National. James believed that she repaid those loans in one or two payments. The payment history for the loans shows otherwise.

For her first loan from National, James borrowed $100 on September 1, 2011. She repaid a total of $205 by making five payments over the course of two months.

For her second loan, James borrowed $100 on August 22, 2012. She again repaid a total of $205, this time by making four payments over the course of two months.

For her third loan, James borrowed $150 on October 31, 2012, less than two weeks after repaying her second loan. She repaid a total of $252 by making three payments over the course of two months.

For her fourth loan, James borrowed $100 on December 20, 2012, one week after repaying her third loan. She repaid it the next day by making a single payment of $102. The prompt repayment suggests that James refinanced her loan through another provider.

For her fifth loan, James borrowed $200 on December 27, 2012, less than one week after repaying her fourth loan. James failed to make the second payment, failed to make the fourth payment, and finally repaid the loan two months later. Her repayments totaled $393.

Despite James' difficulty in repaying her fifth loan, National sent her text messages soliciting her interest in another loan. A text message on March 29, 2013, stated, "Loan Til [sic] Payday welcomes you with open arms. If you ever need a loan again we want to be your source!:)" A text message on April 5, 2013, stated, "Loan Til [sic] Payday misses you! Call NOW and receive $20 off your first payment."

C. The Disputed Loan

On May 7, 2013, James needed money for food and rent. She went to National's "Loan Till Payday" storefront operation at 1935 West Fourth Street in Wilmington, Delaware. At the time, National operated fourteen stores in Delaware.

James dealt with Ed Reilly, National's general manager. In that capacity, Reilly oversaw National's business operations and supervised its loan approvals. He also filled in at stores from time to time. He happened to be working in the store at 1935 West Fourth Street when James came in for a loan.

James told Reilly that she wanted to borrow $200. Reilly looked up James in the computer program that National uses to track its customers and their loans, which is known as the "Payday Loan Manager." It has a main page for each customer that provides identifying information and the account's status. It also has tabs that allow the user to review information about current or past loans, including the payment history, and to enter and review notes about the loans.

James was a customer in good standing, meaning that she did not have to fill out a new loan application. She provided Reilly with her Nexis card, two recent paystubs, and her driver's license.

Using the internet, Reilly pulled up James' Nexis card account history for the preceding sixty days and printed out a copy. It showed that James started the period with a positive balance on her card of $384.70. During the sixty days, she received direct deposit credits totaling $2,216.58 and incurred debits totaling $2,594.38, for negative cash flow of $377.80. Her ending balance was $6.90, and she had a pending authorization for that amount. Her available cash was zero.

During the sixty day period, James' Nexis card was declined fourteen times. Reilly testified at trial that if someone's transaction history showed three or four declines, then they probably should not receive a loan.

After reviewing her transaction history, Reilly offered to loan James $400 rather than $200. The $400 would have represented almost 40% of James' after-tax monthly income. Reilly offered that amount because National has a policy of loaning borrowers up to 40% of their after-tax monthly income, regardless of their other expenditures. National only checks to "make sure they're positive on payday." Tr. 244 (Vazquez); see Tr. 472 (Reilly) ("[S]he started with a surplus.").

James declined the offer of $400. She only wanted $200, and she did not believe she could repay $400.

James thought she was getting a payday loan with a block rate of "$30 on $100." As James understood it, this meant she would pay $60 to borrow the $200.

Lenders developed the block rate concept to describe the finance charge for a traditional payday loan, which was a single-payment loan designed to be repaid on the borrower's next payday. National's trade name — Loan Till Payday — embodies this concept. Because the loan was technically intended to be outstanding only for a single block of time, payday loan companies described the finance charge by identifying the dollar amount per $100 borrowed that the customer would owe at the end of the period. A block rate of "$30 on $100" meant that a customer who borrowed $100 would repay $130 on her next payday.

In May 2013, when James approached National for a $200 loan, National was no longer making traditional payday loans. Effective January 1, 2013, the General Assembly amended Delaware's statutory framework for closed-end consumer credit to impose limits on payday loans. See 78 Del. Laws ch. 278 (2012) (codified at 5 Del. C. §§ 2227, 2235A, 2235B, & 2235C) (the "Payday Loan Law").

In response to the Payday Loan Law, National recast its payday loans as non-amortizing installment loans that were structured to remain outstanding for seven to twelve months. The Payday Loan Law only applied to loans designed to be out-standing for sixty days or less, so by making this change, National sidestepped the law. Throughout this litigation, National insisted that it no longer made payday loans.

Despite shifting to longer-dated installment loans, National continued to frame its finance charges using a block rate. National adhered to this practice for a simple reason: It made a high cost loan product sound cheaper than it was. On an annualized basis, a customer who repays $100 by making an interest-only payment of $30 every two weeks followed by $130 at the end of a year pays $810 in interest for an annualized rate of 838%. By framing the interest as a block rate, National's employees could tell customers that the interest rate was 30%. Although National's customers eventually saw an APR on the loan agreement, National's employees followed a practice of telling customers that the APR had "nothing to do with the loan." Tr. 335 (Carter). As National pitched it, the APR was "irrelevant" unless the customer kept the loan outstanding for an entire year; if the customer only planned to keep the loan outstanding for a few weeks, National's employees said that the APR "means nothing."3

When James obtained the Disputed Loan, she focused on the block rate and the concept of $30 in interest per $100 borrowed, just as National intended. She thought she would have to pay back $260. She told Reilly that she would repay the loan in two payments of $130 each. She planned to pay $130 on her next payday of May 17, 2013, and another $130 on May 31.

James told Reilly that she wanted to make her payments in cash and that she did not want to have her Nexis card debited. James viewed this as important because she knew from past experience that she could incur additional charges if a lender debited her account when there were insufficient funds to make a payment, particularly if the lender attempted to debit her account multiple times. Reilly entered a note in the Payday Loan Manager reflecting that James did not want to have electronic debits from her account. The note stated "No ACH debits," using the abbreviation for the automated clearinghouse for electronic payments operated by the Federal Reserve and the National Automated Clearing House Association. JX 29B at 659. He entered another comment stating, "Customer wants to walk in cash payments." Id.

Reilly also entered a note in the Payday Loan Manager reflecting James' plan to repay the loan in two payments. But Reilly's note contemplated different payments than what James understood she would be making. Reilly recorded that James would make one payment of $150 on May 17 and a second payment of $143 on May 31. Reilly's note thus had James repaying $293. James thought she was repaying $260.

Reilly printed out a copy of National's standard form loan document and showed James where to sign. The loan document was titled "Delaware Consumer Installment Loan Agreement." JX 19 at 1 (the "Loan Agreement"). In a box labeled "Type of Contract," it said "FlexPay." The repayment schedule did not reflect either the two repayments that James wanted to make or the two repayments that Reilly entered in the Payday Loan Manager. The Loan Agreement instead contemplated twenty-six interest-only payments of $60 each, followed by a balloon payment comprising a twenty-seventh interest payment of $60 plus repayment of the original $200 in principal. The total amount of interest was $1,620. According to the Loan Agreement, the APR for the loan was 838.45%. Using Reilly's planned repayment schedule, the APR was 1,095%.

James signed the Loan Agreement, and Reilly gave her a check. From the time James walked into the store, the whole process took about twenty minutes.

D. James Cannot Repay The Loan.

On May 8, 2013, the day after obtaining the Disputed Loan, James broke her hand while cleaning a toilet at the Hotel DuPont. After missing an entire week of work, she asked her supervisor to allow her to return because she could not afford to remain out any longer. As James explained at trial: "I don't get paid if I don't work." Tr. 34 (James). Her supervisor agreed that she could work two or three days per week on light duty.

On May 17, 2013, James went to the Loan Till Payday store and made the first interest payment of $60. She spoke with Brian Vazquez, the store manager. She told him that she had broken her hand and would not be able to work, and she asked him to accommodate her with some type of arrangement. Vazquez told her that she would have to make the scheduled payments and that National would debit her account if she did not pay in cash. Vazquez then suggested that James increase her payment from $60 to $75. James was nonplussed and asked him, "How can I pay $75 if I can't pay $60 interest." Tr. 36 (James). Vazquez responded that being able to work fewer hours was not the same as losing her job.

At trial, Vazquez recalled that when James asked for help, he suggested that she increase her payment. He tried to portray this as an accommodation that was advantageous to James, because the additional money would pay down principal. Leaving aside the obvious problem that his proposal contemplated James paying more when she could not pay less, it was not an accommodation. James had the right to pre-pay principal at any time. Vazquez offered James something that she already had.

Vazquez also testified that he wanted James to make payments to "keep[] her active, not past due, so she was still in good standing with our company and able to get loans with us in the future." Tr. 257 (Vazquez). Yet Vazquez testified later that if a customer missed a payment, then National would stop charging interest and only add a late fee of 5%. This meant that Vazquez proposed an arrangement that kept interest accruing, whereas if James had defaulted, then interest would have stopped and she only would have owed a $3 late fee.

At bottom, Vazquez refused to lower James' payments or give her any kind of accommodation. His proposals tried to get National more money and faster.

E. James Defaults.

On May 31, 2013, National attempted on four separate occasions to debit James' Nexis account for $60. Each time, the debit was declined. At trial, Vazquez justified the debits by distinguishing between an electronic debit from a Nexis card and an ACH withdrawal from a bank account. Vazquez claimed that James only told National not to make ACH withdrawals.

Despite being a stickler for this distinction, Vazquez was less punctilious when it came to National's authority for taking the debit. For that purpose, Vazquez relied on a provision found on the last page of the Loan Agreement, which was titled "Credit Card Authorization." Vazquez asserted that this provision applied because a credit card payment and a debit card payment were "the same thing." Tr. 287 (Vazquez). It is true that from a consumer's perspective, they are functionally the same thing, but so are a bank account and a Nexis card.4 National tried to have it both ways, taking a legalistic approach when that advanced its purposes, then taking a functional approach when that was advantageous.

On June 3, 2013, National tried twice more to debit James' Nexis card, each time for $60. Both debits were declined. On June 7, National tried twice more. At that point, the attempted debits were for $63, which included a $3 late fee. Both were declined.

On June 8, 2013, an unidentified National employee called James at the Hotel DuPont and left a message with her employer. National also sent her a "Collection Text" stating, "Gloria, to avoid further occurrences on your account, you must call Tracey, at Loan Till Payday."

On June 13, 2013, an unidentified National employee again called James at the Hotel DuPont and left a message with her employer. That same day, National successfully made an ACH withdrawal of $63, comprising $60 in interest plus a $3 late fee. Recall that James had told National not to make electronic withdrawals, and that Reilly had entered a note on the account stating "No ACH debits." Recall also that National justified debiting her Nexis card on the theory that a debit was different than an ACH withdrawal. At this point, however, National made an ACH withdrawal.

On June 14, 2013, the notes in the Payday Loan Manager indicate that an unidentified National representative spoke with James. On June 27, National debited her Nexis account for $75. National also sent James an automated text: "Refer a friend and get $20 credit on your next payment! Call now! Loan Till Payday."

F. James Hires Counsel And Files Suit In Federal Court.

After her discussion with Vazquez on May 17, 2013, James decided to contact counsel. On June 14, James sent a letter to National opting out of the arbitration provision in the Loan Agreement. On July 1, James filed suit in the United States District Court for the District of Delaware. James v. Nat'l Fin., d/b/a Loan Till Payday LLC, C.A. No. 13-CV-1175-RGA (D. Del. filed July 1, 2013).

Tim McFeeters is the sole owner of National. On July 8, 2013, after being served with the federal action, he entered a note in the Payday Loan Manager: "DONT WORK DONT CALL DONT TAKE ANY $ $ $." JX 29B at 662.

As of July 8, 2013, James had repaid National $197. She has not made any payments on the Disputed Loan since then.

G. This Litigation

On September 20, 2013, after voluntarily dismissing her federal action, James filed this lawsuit on behalf of herself and other similarly situated borrowers. Count I of the complaint sought a permanent injunction barring National from collecting on the loans made to James and other class members. Count II sought a declaration that the terms of National's loan documents were unconscionable. Count III alleged that National breached the implied covenant of good faith and fair dealing inherent in the loan agreements. Count IV alleged that National unjustly enriched itself at the expense of the class members. Count V alleged violations of the Delaware Consumer Fraud Act, 6 Del. C. §§ 2511-2527. James later dropped Counts IV and V.

On October 10, 2013, National moved to compel arbitration. National also sought to dismiss the complaint under the creative theory that James could not state a claim for a class action. I denied the motion to dismiss, noting that James had opted out of arbitration and that National's arguments against class certification were premature.

When National moved to compel arbitration, it knew that James had opted out. National had made that point affirmatively as a ground for dismissing her federal action. Because National knew that their motion to compel arbitration had no factual basis, James moved for Rule 11 sanctions. I granted the motion.

H. Problems With Discovery

During discovery, James sought documents and information relating to the loans offered by National since September 20, 2010, including an electronic copy of the data from any database containing the loan information. National moved for a protective order, contending that the discovery was overbroad. I partially granted National's motion, but I also required National to respond to particular requests or narrowed versions. See Dkt. 44 (the "First Discovery Order"). Most pertinently, I required National to provide specified categories of information about loans made between September 20, 2010, and September 30, 2013 (the "Loan History Information").

On February 28, 2014, National produced an Excel spreadsheet that purported to provide the Loan History Information (the "Initial Spreadsheet"). The Initial Spreadsheet did not include all of the Loan History Information.

Using the few loan documents he had, James' counsel checked the APRs for those loans against the limited data provided on the Initial Spreadsheet. The figures did not match. He then deposed McFeeters, who suggested that the Initial Spreadsheet contained errors. McFeeters also testified that the Delaware State Banking Commission had audited National between four and ten times after he purchased the company and had expressed concerns about inaccurate APRs.

On May 6, 2014, James filed an amended complaint that added a claim that National violated the federal Truth in Lending Act ("TILA"), 15 U.S.C. § 1501 et seq., by failing to accurately disclose APRs on its loan agreements. James sought further discovery regarding the APR issue. On July 17, James again moved to compel production of the Loan History Information. I entered a second order requiring National to provide it. Dkt. 120 (the "Second Discovery Order").

National did not comply with the Second Discovery Order, resulting in a written decision granting James' motion for sanctions. See James v. Nat'l Fin. LLC, 2014 WL 6845560, at *1 (Del. Ch. Dec. 5, 2014). The decision held that because of National's discovery misconduct, it was established for purposes of trial that the APRs disclosed on an updated spreadsheet of Loan History Information were incorrect and fell outside the tolerance permitted by TILA. Id.

On March 25, 2015, I denied James' motion for class certification. The case proceeded to trial solely on James' individual claims.

II. LEGAL ANALYSIS

James proved at trial that the Loan Agreement was unconscionable, and the Disputed Loan is rescinded on that basis. Because the Disputed Loan is invalid, this decision need not consider whether National breached the implied covenant of good faith and fair dealing. James also proved that National violated TILA.

A. The Regulatory And Public Policy Backdrop

This case was about the Disputed Loan, but both sides litigated against a backdrop of regulatory and public policy issues that numerous jurisdictions are confronting. Put mildly, widespread controversy exists over high-interest credit products that are predominantly marketed to and used by lower-income, credit-impaired consumers. Products falling into this category include traditional payday loans, pawnbroker loans, installment loans, subprime credit cards, automobile title loans, income tax refund products, and credit substitutes like rent-to-own financing. Labels for the category include "fringe products" and "alternative financial services." The products fall within the larger heading of subprime credit.

An extensive and growing body of scholarship exists about alternative financial products, with the bulk focusing on traditional payday loans. The empirical evidence to date, however, has considerable gaps. Studies have reached different findings, and researchers have drawn different inferences.5 Moreover, although the total volume of scholarship is large, much of it seems repetitive and polarized.

Consumer groups uniformly condemn alternative financial products.6 The Pew Charitable Trust has published a series of reports that criticize the payday loan industry.7 The Department of Defense and representatives of the armed services also have opposed payday lending.8 Aligned with these groups are scholars who write from the consumer perspective. Nathalie Martin, a law professor from the University of Arizona, is a leading critic of alternative financial products.9 She testified as an expert for James at trial.

Championing a competing view is the industry's national trade organization, the Community Financial Services Association of America, and a group of scholars who draw heavily on economic theory. Todd J. Zywicki, a law professor from George Mason University, is a prominent defender of alternative financial products and a co-author of a recent treatise on consumer credit. See Thomas A. Durkin et al., Consumer Credit and the American Economy (2014) [hereinafter Consumer Credit]. He testified as an expert for National at trial.

This court's task is not to regulate the payday loan industry in Delaware. It is only to rule on the Disputed Loan. Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 51 (Del. 1994) ("It is the nature of the judicial process that we decide only the case before us...."). Nevertheless, in the course of evaluating the record, I have read Martin's and Zywicki's expert reports, as well as many of the works that they cited. I agree with both experts that although the Disputed Loan was not technically a traditional payday loan, the literature provides helpful background.

B. Unconscionability

The doctrine of unconscionability stands as a limited exception to the law's broad support for freedom of contract. "Delaware courts seek to ensure freedom of contract and promote clarity in the law in order to facilitate commerce." ev3, Inc. v. Lesh, 114 A.3d 527, 530 n. 3 (Del. 2014). "There is ... a strong American tradition of freedom of contract, and that tradition is especially strong in our State, which prides itself on having commercial laws that are efficient." Abry P'rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1059-60 (Del. Ch. 2006) (Strine, V.C.). "When parties have ordered their affairs voluntarily through a binding contract, Delaware law is strongly inclined to respect their agreement, and will only interfere upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract." Libeau v. Fox, 880 A.2d 1049, 1056-57 (Del. Ch. 2005) (Strine, V.C.), aff'd in pertinent part, 892 A.2d 1068 (Del. 2006). "As a matter of ordinary course, parties who sign contracts and other binding documents, or authorize someone else to execute those documents on their behalf, are bound by the obligations that those documents contain." Official Comm. of Unsec. Motors Liquid. Co. v. JPMorgan Chase Bank, N.A., 103 A.3d 1010, 1015 (Del. 2014).

But as with many areas of the law, there are countervailing principles that prevent an indisputably important and salutary doctrine from operating as a tyrannical absolute. One such ground is unconscionability, traditionally defined as a contract "such as no man in his senses and not under delusion would make on the one hand, and no honest or fair man would accept, on the other." Tulowitzki v. Atl. Richfield Co., 396 A.2d 956, 960 (Del. 1978) (quotation marks and citation omitted). It would be difficult to improve on Chancellor Allen's incisive summary of the interplay between the core concept of contractual freedom and the residual protection against unconscionability:

Ryan v. Weiner, 610 A.2d 1377, 1380-81 (Del. Ch. 1992) (Allen, C.) (citations and footnote omitted).

In Ryan, Chancellor Allen delineated the history of the doctrine of unconscionability, describing it as "old when Justice Story summarized it in 1835" as part of his Commentaries on Equity Jurisprudence. Id. at 1381. After citing a range of cases from the twentieth century, Chancellor Allen observed that

Id. at 1383. Delaware's version of Section 2-302 states:

6 Del. C. § 2-302. Although technically limited in scope to sales of goods, Delaware decisions have applied Section 2-302 more broadly.10

This estimable pedigree does not mean that the doctrine of unconscionability will be invoked freely. "Unconscionability is a concept that is used sparingly." Ketler v. PFPA, LLC, 132 A.3d 746, 748, 2016 WL 192599, at (Del. Jan. 15, 2016). Chancellor Allen's words again capture the essential point:

Ryan, 610 A.2d at 1381. A finding of unconscionability generally requires "the taking of an unfair advantage by one party over the other." Tulowitzki, 396 A.2d at 960 (quotation marks omitted). "A court must find that the party with superior bargaining power used it to take unfair advantage of his weaker counterpart." Graham v. State Farm Mut. Auto. Inc. Co., 565 A.2d 908, 912 (Del. 1989). "For a contract clause to be unconscionable, its terms must be so one-sided as to be oppressive." Id. (quotation marks and citation omitted).

Whether a contract is unconscionable is determined at the time it was made. Lecates v. Hertich Pontiac Buick Co., 515 A.2d 163, 173 (Del. Super. 1986); see Restatement (Second) of Contracts § 208 (1981) ("If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract...."). The outcome turns on "the totality of the circumstances." Tulowitzki, 396 A.2d at 962; see Restatement (Second) of Contracts § 208, cmt. a ("The determination that a contract or term is or is not unconscionable is made in light of its setting, purpose and effect.").

This court has identified ten factors to guide the analysis of unconscionability. See Fritz v. Nationwide Mut. Ins. Co., 1990 WL 186448 (Del. Ch. Nov. 26, 1990). In the language of the Fritz decision, they are:

Id. at *4-5 (citations omitted). Although this opinion uses the ten Fritz factors, it analyzes them in a different order and under two broader headings: substantive unconscionability and procedural unconscionability.

The concept of substantive unconscionability tests the substance of the exchange. An agreement is substantively unconscionable if the terms evidence a gross imbalance that "shocks the conscience." Coles v. Trecothick, 32 Eng. Rep. 592, 597 (Ch. 1804). In more modern terms, it means a bargain on terms "so extreme as to appear unconscionable according to the mores and business practices of the time and place." Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 450 (D.C. Cir. 1965) (quoting 1 Arthur L. Corbin, Corbin on Contracts § 128 (1963)).

The concept of procedural unconscionability examines the procedures that led to the contract with the goal of evaluating whether seemingly lopsided terms might have resulted from arms'-length bargaining. Courts focus on the relative bargaining strength of the parties and whether the weaker party could make a meaningful choice. The concept is "broadly conceived to encompass not only the employment of sharp bargaining practices and the use of fine print and convoluted language, but a lack of understanding and an inequity of bargaining power." 1 E. Allan Farnsworth, Farnsworth on Contracts § 4.28, at 583-84 (3d ed. 2004) (footnotes omitted).

The two dimensions of unconscionability do not function as separate elements of a two prong test. The analysis is unitary, and "it is generally agreed that if more of one is present, then less of the other is required." Id. § 4.28, at 585.

1. Factors Relating To Substantive Unconscionability

Six of the Fritz factors relate to the concept of substantive unconscionability. They are:

• A significant cost-price disparity or excessive price.

• The denial of basic rights and remedies.

• Penalty clauses.

• The placement of disadvantageous clauses in inconspicuous locations or among fine print trivia.

• The phrasing of disadvantageous clauses in confusing language or in a manner that obscures the problems they raise.

• An overall imbalance in the obligations and rights imposed by the bargain.

Within this lineup, the first factor tests for a threshold indication of fundamental unfairness. The second and third factors examine two types of contract terms where overreaching may occur. The fourth and fifth factors ask about other types of contract terms and whether they are adequately disclosed and comprehensible. The sixth factor examines the agreement as a whole.

a. A Threshold Indication Of Unfairness

The first Fritz factor considers whether there is a threshold indication of unfairness, such as "a significant cost-price disparity or excessive price." Fritz, 1990 WL 186448, at *4. "[G]ross disparity between price and value can be used to demonstrate unconscionability."11 "Inadequacy of consideration does not of itself invalidate a bargain, but gross disparity in the values exchanged may be an important factor in a determination that a contract in unconscionable...." Restatement (Second) of Contracts § 208, cmt. c. "Such a disparity may also corroborate indications of defects in the bargaining process...." Id. "[A]n unreasonably high or exorbitant price at the very least is a factor to be considered in determining whether a particular provision is harsh and whether one party has in fact been imposed upon by another party in an inequitable or unconscionable manner." 8 Williston on Contracts § 18:15 (4th ed. 2015).

In this case, there are obvious indications of unfairness. The Loan Agreement called for finance charges of $1,620 for a $200 loan, resulting in a disclosed APR of 838.45%. That level of pricing shocks the conscience. Even defenders of fringe credit have recognized that "[a]t first glance, it would seem irrational for any consumer to borrow money at an interest rate exceeding 400% under any circumstance."12 Zywicki conceded that "to a layman in some sense, it just looks kind of shocking to see a price this high."13 More broadly, Zywicki and his co-authors admit in their recent book that the finance charges for fringe products "are indeed high when expressed in terms of [APR]." Consumer Credit, supra, at 352. When making this observation, they cited APRs that "often exceed 100 percent." Id. The rate for the Disputed Loan was eight times that level.

Zywicki recognized that the interest rate on the Disputed Loan was high in other ways as well. He testified that the APRs for unsecured consumer installment loans generally cluster around 150%.14 Unlike the Disputed Loan, consumer installment loans "are amortized with part of each payment repaying principal so that the loan is paid in full by the last scheduled payment." Consumer Credit, supra, at 355. The Disputed Loan was a twenty-six period interest-only loan culminating in a balloon payment at the year mark.

The rate charged for the Disputed Loan exceeded even the rates charged for traditional payday loans. Zywicki testified that the industry average for payday loans is a block rate of $15 per $100, half what National charged. Tr. 589-90, 594 (Zywicki). Other sources cite similar figures.15 The rate for the Disputed Loan also far exceeded what Zywicki and his co-authors report as typical rates for other fringe products.16

National's efforts to explain the cost of the Disputed Loan were unconvincing. McFeeters would not say what would be an excessive price for a loan. He only would say, "I follow the state laws, and that's what I follow." Tr. at 435 (McFeeters). Delaware does not impose any cap on interest rates, so McFeeters effectively was saying that no price is too high.17

Zywicki advanced two types of arguments to explain the price of the Disputed Loan. First, he contended that an APR of 838% could, in theory, result from a competitive market. Second, he argued that there could be situations where it would be rational for a consumer to use a high-interest credit product.

i. Arguments About Market Pricing

To support his claim about market pricing, Zywicki cited academic studies which have observed that some features of the alternative financial product market are consistent with meaningful price competition, such as low barriers to entry and a large number of stores. Like many aspects of the industry, however, evidence on this issue is mixed, and other researchers have identified evidence consistent with a variety of strategic pricing practices.18 Importantly for this case, Zywicki did not conduct any analysis of the Disputed Loan itself, nor did he assess the competitiveness of the Wilmington market. At the same time, he admitted that prices in Wilmington were higher than the ranges he expected. He also recognized that consumers who use fringe products generally lack meaningful alternatives.

In a variant of his market pricing argument, Zywicki contended that the price of the Disputed Loan should not be viewed as excessive unless National was able to generate supra-normal economic profits, which he equated with monopoly rents. Zywicki emphasized one study that has questioned whether payday loan companies generate supra-normal economic profits.19 The broader evidence is again mixed, with the authors of a study on payday-loan profitability noting that "a recent private analysis for potential investors ... asserts that a store set up for $30,000 will generate more than $258,000 in operating cash flow over its first five years of operation, which implies an extraordinary average annual pretax rate of return — around 170 percent — on the initial investment." Flannery & Samolyk, supra, at 4 (citation omitted). In their own study, the same authors found that "mature stores appear to earn quite healthy operating profits — on average $18.73 per loan made, or approximately $1.89 per average dollar of loans outstanding." Id. at 19. They declined to take a position on whether this level of returns could be described in the abstract as "high" or "reasonable." Id. Opponents of fringe products point to other indicators, such as marketing materials from payday loan franchisors that describe high profit levels and the rapid expansion of the industry, which suggests attractive returns.20 For purposes of this case, Zywicki again did not conduct any analysis specific to Wilmington or National, and he could not offer any opinion as to whether National enjoyed supra-normal profits.

As a third basis for his market-pricing claim, Zywicki posited that high-interest loans are very costly to make, due in part to high default risk. He contended at trial that default rates "are usually in the range of 15, 20, to 25 percent." Tr. 505 (Zywicki). A study by the Pew Charitable Trust found that loan loss rates for payday loans are only 3%. See How Borrowers Repay, supra, at 6. Zywicki again did not do any analysis specific to this case. He did not analyze default rates in the Wilmington area, nor did he examine National's default rates.

Zywicki's opinion that an APR of 838% could, in theory, result from a competitive market was just that — a theoretical possibility. It was not a persuasive response to the facially shocking price of the Disputed Loan.

ii. Arguments About Hypothetically Rational Uses

Zywicki's second explanation for the price of the Disputed Loan rested on the sensible claim that the price of a consumer product should be assessed, among other things, "by reference to the utility of the loan to the consumer." JX 46 at 43. This approach posits that there can be situations where it is rational and wealth-enhancing for consumers to use high-cost loans. Zywicki touched on these justifications at trial when he explained that consumers can use alternative credit products "to avoid what might kind of be bigger catastrophes like eviction and that sort of thing." Tr. 541 (Zywicki).

In their book on consumer credit, Zywicki and his co-authors offer an expanded version of this argument which asserts that high-interest, small-dollar loans "can facilitate the accumulation of household assets even when they are not used directly to finance the household investment by enhancing overall liquidity, even at high cost." Consumer Credit, supra, at 369; accord Lawrence & Elliehausen, supra, at 302. They provide two examples of situations where it could be rational for a consumer to take out a $200 payday loan at a block rate of $15 per $100 (half the rate of the Disputed Loan).

The simplest scenario involves a looming bill, such as a utility payment, where non-payment will trigger a late fee exceeding the finance charge for the loan. Assuming the borrower can repay the loan on schedule, the borrower does better by paying the lower finance charge rather than the higher late fee. A slightly more complex variant involves a late fee that may not exceed the finance charge, but where failing to pay the bill will generate other hardships, such as the loss of electricity for a period of time. Again assuming the borrower can repay the loan on schedule, the borrower does better by paying the finance charge and avoiding the combination of the late fee and the negative consequences. See Consumer Credit, supra, at 369.

A second and more nuanced scenario posits a borrower who can use the loan proceeds to make a net-present-value-positive choice, such as repairing an automobile immediately instead of delaying the repair while saving the money to pay for it. To construct a viable example, Zywicki and his co-authors assume that until the repair is completed, the consumer will (i) pay fees for public transit and (ii) lose leisure time to commuting, which they value at the consumer's hourly wage. Depending on the assumptions, the model supports scenarios where it makes sense for the consumer to use a payday loan with a nominally high APR of 309% to repair the car sooner rather than later. See id. at 370-72.

In each of these cases, the viability of using high-cost credit rationally depends on the consumer having a use for the funds which generates monetary and non-monetary returns that exceed the price of the loan. To their credit, the authors recognize that the ability of a consumer to overcome a high APR (309% in their model) depends largely on "the very short term to maturity" for a single-period payday loan. Id. at 371. They observe that "[t]his would not be the case for a long-term loan," and that "[e]xtended use of this sort of credit is where it becomes most highly controversial." Id. at 372.

And there's the rub. The Disputed Loan was not structured as a short-term loan. It was a twelve-month, interest-only installment loan. The Disputed Loan also charged an interest rate that was more than double what Zywicki and his co-authors modeled (838% vs. 309%). Zywicki did not identify any scenarios in which it could be rational for a consumer to borrow on the terms contemplated by the Disputed Loan.

Perhaps anticipating this disconnect, Zywicki attempted at trial to re-characterize the Disputed Loan as a short-term loan by pointing out that James had the option to prepay. The decision to prepay parallels the decision to pay a traditional payday loan on time. Consumer groups have modeled the likelihood that a typical user of high-cost credit will repay a traditional payday loan in a single period and avoid a cycle of long-term indebtedness. The Center for Responsible Lending provides the example of a borrower making $35,000 per year who obtains a payday loan for $200 plus a finance charge of $20. Assuming average levels of consumer expenditures for food, housing, utilities, transportation, healthcare, and other essentials, and excluding costs such as childcare and clothing, the borrower finishes the next pay period with a $96 deficit, forcing a loan rollover. See Borné et al., supra, at 8-9. The same report examines how a payday loan affects the account balance of a typical borrower on a fixed income, such as social security. It demonstrates that although the loan temporarily boosts the customer's bank balance, the combination of the balloon payment and fees makes the borrower worse off and necessitates another loan.21 A report by the Pew Charitable Trust concludes that the lump-sum repayment model appears to make it difficult for borrowers to avoid renewal. Pew's analysis of state and industry data indicates that borrowers are indebted for an average of about five months of the year. According to one study, 76 percent of these loans, including renewals, are borrowed within two weeks following an existing payday loan's due date, meaning the borrower could not pay back the loan and make it to the next payday without another loan. In addition, Pew's analysis of data from Oklahoma finds that more borrowers use at least 17 loans in a year than use just one.

Who Borrows, supra, at 7 (footnotes omitted). A follow-up study found that "[o]nly 14 percent of borrowers can afford enough of their monthly budgets to repay an average payday loan," although most could afford to pay the interest-only fee to roll over the loan. How Borrowers Repay, supra, at 6. The study observed that "[a]verage borrowers end up indebted for five months, paying $520 in finance charges for loans averaging $375."22

It may be that a consumer with the wherewithal to repay a high-cost loan after one period could rationally use some high-cost products in a wealth-enhancing way, but that thought experiment does not persuasively justify the pricing and terms of the Disputed Loan. The loan James obtained was a twenty-six period, interest-only loan followed by a twenty-seventh period balloon payment at an APR of 838%. As noted, Zywicki and his co-authors recognize that it is difficult to imagine a situation where it would make sense for a consumer to use a multi-period loan at the interest rates charged for payday loans. See Consumer Credit, supra, at 370-72. Zywicki's testimony about the hypothetically rational use of some high-cost credit products failed to legitimize the Disputed Loan's facially disturbing price.

iii. Fundamental Unfairness

The economic terms of the Disputed Loan are so extreme as to suggest fundamental unfairness. The price of the Disputed Loan is particularly egregious given its multi-period, non-amortizing structure. The finance charges incurred over the course of the loan are so high that no rational borrower would agree to pay them, unless under duress or operating under a misapprehension of fact. The first Fritz factor is satisfied.

b. Contract Provisions Suggesting Unfairness

The next four Fritz factors focus on contract provisions that can contribute to a finding of unfairness. They include provisions that deny or waive "basic rights and remedies," "penalty clauses," and "disadvantageous" clauses that are hidden or difficult to identify and understand. 1990 WL 186448, at *4. The more general question is whether the contract provisions evidence "[a]n overall imbalance in the obligations and rights imposed by the bargain." Id. at *5. Specific provisions might not be unconscionable in isolation or under different circumstances, yet still may contribute to a finding of unconscionability in a given case.23

The Loan Agreement contains provisions that raise concerns, but they are not sufficiently onerous to support a finding of unconscionability standing alone. They contribute to the overall assessment of the Loan Agreement, but as a secondary factor.

One category of provisions called out in Fritz encompasses waivers and denials of basic rights and remedies that a consumer otherwise would possess. The Loan Agreement included a waiver of the right to a jury trial, which extended to "any dispute you may have against us or a related third party." JX 19 at 3. It did not define what it meant by "related third party." The Loan Agreement also contained an arbitration provision in which the borrower gave up the right to sue in court (other than in small claims court) and the right to arbitrate on a class-wide basis. The Loan Agreement did give James sixty calendar days to opt out of the arbitration provision, and it contained some procedural features to make arbitration less onerous. Had James moved forward with arbitration, her greatest disadvantage would have been limited discovery. As shown by National's conduct in this case, it took a determined attorney with the benefit of court-ordered discovery to obtain responsive information from National, and even then National did not produce all of its responsive information.

The jury waiver and the arbitration provision fall within the meaning of the Fritz factor that focuses on waivers of rights and remedies, but they do not contribute meaningfully to a finding of unconscionability. The same is true for penalty clauses, which is another category of provisions that Fritz identifies. 1990 WL 186448, at *4. The Loan Agreement contemplates a late fee "on any installment not paid in full within 5 days after its due date as originally scheduled, in the amount of 5% of the unpaid amount of the delinquent balance." JX 19 at 3. A 5% late fee is authorized by statute. See 5 Del. C. § 2231(2). The Loan Agreement also gives National the right to declare a default after a missed payment and to cause all outstanding amounts to accelerate, and it obligates the borrower "to pay the actual expenditures, including reasonable attorneys' fees, for legal process or proceedings to collect the amounts owing hereunder." JX 19 at 3-4. This type of attorneys' fee provision is also permitted by statute. See 5 Del. C. § 2236. As with the discussion of waivers of rights and remedies, these provisions satisfy the Fritz factor that focuses on penalty clauses, but they do not contribute meaningfully to a finding of unconscionability.

The Fritz decision also calls for consideration of "disadvantageous" clauses that are "inconspicuous," as well as "language that is incomprehensible to a layman" or seems designed to "divert his attention from the problems raised by them or the rights given up through them." 1990 WL 186448, at *4. Two aspects of the Loan Agreement warrant mention.

The first involves the provisions addressing ACH withdrawals. Comprising fifteen single-spaced paragraphs and subparagraphs, and written in what appears to be eight-point font, the provisions span a full page of the six-page agreement. These provisions are highly favorable to National, but the Loan Agreement portrays them as beneficial to the consumer. At one point, it states that "THIS ACH AUTHORIZATION IS FOR YOUR CONVENIENCE IN PAYING AMOUNTS OWED AND RECEIVING THE LOAN PROCEEDS." JX 19 at 3. Elsewhere the Loan Agreement states, "For your protection, this form authorizes Loan Till Payday to automatically collect each periodic payment due under the terms of this Contract." Id. at 6. The provisions are actually a form of security interest that is for National's protection and convenience.

The provisions governing ACH withdrawals are confusing because they speak of making "ACH" transfers from "the checking or savings account specified in your Application/Data Verification form (`Your Bank Account')." Id. at 2. National, however, treats the authorization as covering debits from a pre-paid debit card like James' Nexis card, and National repeatedly debited James' account. Further complicating matters, the signature page where the borrower specifically authorizes the withdrawals appears under the heading "Credit Card Authorization." Id. at 6. Despite this language, National does not accept credit cards, and James did not have a credit card; she had a debit card.

The inconsistent language in the Loan Agreement could easily confuse an unsophisticated customer like James. The difficulties with National's language had particular salience for this case, because when James obtained the Disputed Loan, she told Reilly that she did not want electronic withdrawals made from her account. Reilly made two notes in the Payday Loan Manager. One stated "No ACH debits," and another stated, "Customer wants to walk in cash payments." JX 29B at 659. Yet National debited James' Nexis card and made at least one ACH withdrawal from her Nexis account.

James' instruction and National's acknowledgement catches National on the horns of a dilemma. To the extent that National's witnesses took a narrow and legalistic view at trial by arguing that James only opted out of ACH withdrawals and not debits from her Nexis card, then the same logic meant that James only granted "Credit Card Authorization," not debit card authorization. To the extent that National's witnesses argued broadly at trial that the "Credit Card Authorization" encompassed all types of electronic withdrawals, then James' insistence that she did not want ACH withdrawals should have been sufficient to opt out. In neither case did National get the authorization it needed to debit James' account.

The debate over whether James validly opted out of ACH transfers identifies a second problem with the ACH provisions: they make it extremely difficult for a customer to avoid granting National the authorization it wants. In the fourteenth of fifteen paragraphs and subparagraphs addressing ACH transfers, the Loan Agreement does say that the ACH authorization is optional, but the borrower can opt out only "BY MANUALLY CROSSING OUT ALL ACH AUTHORIZATION LANGUAGE IN THIS AGREEMENT." JX 19 at 3. The formal authorization then comes three pages later, under the heading "Credit Card Authorization," in a paragraph that makes no, reference to ACH debits and does not contain the abbreviation "ACH." See id. at 6. There is nothing to alert customers to the fact that by signing the language under the heading "Credit Card Authorization," they are agreeing to ACH transfers.

Once a customer has authorized ACH transfers, it is difficult to terminate them. According to the Loan Agreement,

Id. at 3 (emphasis added). McFeeters testified that he would insist on full compliance with the language of the contract before terminating an ACH authorization, meaning that a customer only could terminate ACH withdrawals by calling the phone number and confirming in writing.

The Loan Agreement skews the ACH withdrawal provisions in National's favor in another way as well: National can withdraw whatever amount it wants from a customer's account, up to the full amount of the outstanding loan plus fees and charges, without prior notice to the customer that a higher amount will be debited. The operative language states:

JX 19 at 3. National relied on this paragraph to debit James' account for amounts greater than her scheduled payment, without prior notice to James. For National's cash-constrained customers, a higher withdrawal easily could overdraw their account or sweep up the bulk of their available cash.

In my view, the provisions governing ACH withdrawals are "disadvantageous," drafted in "language that is incomprehensible to a layman," and appear designed to "divert [the customer's] attention from the problems raised by them or the rights given up through them." Fritz, 1990 WL 186448, at *4. As drafted and implemented, the ACH provisions support a finding of unconscionability.

The same is true for the provisions governing rescission and prepayment, which the Loan Agreement combines confusingly in a single paragraph. The Delaware Code addresses these concepts separately. One statutory section addresses prepayment. See 5 Del. C. § 2234. A separate statutory section requires a right of rescission. See id. § 2235A(a)(3). The Loan Agreement, by contrast, shoves the right of rescission into the middle of six sentences addressing prepayment. The paragraph in question states:

JX 19 at 2 (emphasis added). As structured, the first three sentences address prepayment, including the customer's right to prepay any amount at any time. The italicized portion shifts to the customer the right to rescind the loan agreement within the first twenty-four hours after obtaining the loan. The last three sentences return to the concept of prepayment.

In my view, this is another provision that is "disadvantageous," drafted in "language that is incomprehensible to a layman," and designed to "divert [the customer's] attention from the problems raised... or the rights given up." Fritz, 1990 WL 186448, at *4. As drafted and implemented, it supports a finding of unconscionability.

National argues that because James did not read the Loan Agreement, none of its terms should matter in the unconscionability analysis. When a business relies on a contract of adhesion, a court does not take into account whether the consumer has read the document: "Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing." Restatement (Second) of Contracts § 211(2) (emphasis added). "[C]ourts in construing and applying a standardized contract seek to effectuate the reasonable expectations of the average member of the public who accepts it." Id. § 211, cmt. e. This approach rests on the rationale that

Id., § 211 cmt. b.

The final factor relating to the contract terms is whether the agreement evidences "[a]n overall imbalance in the obligations and rights imposed by the bargain." Fritz, 1990 WL 186448, at *5. Some insight into this factor can be gleaned from the degree to which the Loan Agreement devoted attention to particular subjects.

The Loan Agreement covered six pages. Five contained substantive provisions. The sixth was a signature page. Of the five substantive pages, one full page of text (spanning most of page one and part of page two) created the most significant imbalance in the agreement: the financial terms. In return for a loan of $200, James agreed to repay National $1,820, structured as twenty-six non-amortizing, interest-only payments of $60 followed by a balloon payment of $260. Another full page (spanning part of page two and most of page three) detailed National's ability to make ACH withdrawals. A page and a half (spanning the bulk of page four and the bulk of page five) addressed the arbitration provision.

In total, the Loan Agreement devoted nearly two-thirds of its contents to these three subjects, evidencing their importance to National. Through these provisions, National imposed onerous financial terms and gave itself the right to collect unilaterally from James any amount it wished, up to the full amount of the loan plus fees and charges. National ensured that in any challenge to the Disputed Loan, James would not be able to represent a class. She would have to challenge National alone, based on a loan where the amount in question would make the representation economically irrational for a lawyer unless he could recover his fees from National. Moreover, unless James opted out of the arbitration provision within sixty days — something that no customer other than James has ever done — then James would have to challenge the Disputed Loan in arbitration, which was National's chosen forum. Taken as a whole, for purposes of the Fritz factors, the Loan Agreement evidences "[a]n overall imbalance in the obligations and rights imposed by the bargain." Id.

2. Factors Relating To Procedural Unconscionability

The next four Fritz factors shed light on the concept of procedural unconscionability. They are:

• Inequality of bargaining or economic power.

• Exploitation of the underprivileged, unsophisticated, uneducated, and illiterate.

• The use of printed form or boilerplate contracts drawn skillfully by the party in the strongest economic position, which establish industry-wide standards offered on a take it or leave it basis to the party in a weaker economic position.

• The circumstances surrounding the execution of the contract, including its commercial setting, its purpose, and actual effect.

As I see it, these factors help a court test the degree to which a seemingly disproportionate outcome could have resulted from legitimate, arms'-length bargaining. The first and second factors plumb this issue by considering the extent to which the parties to the agreement were capable of bargaining at arms'-length. A court rarely will intervene when the contracting parties are both commercial entities or otherwise sophisticated. By contrast, a court may be more concerned where the contracting process involved significant inequalities of bargaining power, economic power, or sophistication, particularly between a business and a consumer. An aggravated version of this scenario arises when one of the parties is an individual who is underprivileged, uneducated, or illiterate.

The third and fourth factors similarly contribute by examining the degree to which actual bargaining took place. The third factor considers whether the agreement is a contract of adhesion. The fourth factor takes into account the contracting environment, including the commercial setting and the purpose and effect of the disputed agreement.

Together, these factors weigh an initial showing of unfairness against the bargaining dynamic. If the contract resulted from legitimate negotiation, then a court should not intervene. "There is a significant distinction between an unconscionable contract and a bad bargain." Obaitan v. State Farm, 1997 WL 208959, at *3 (Del. Ch. Apr. 17, 1997). "Parties have a right to enter into good and bad contracts, the law enforces both." Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010). But if the contract appears fundamentally unfair and there are valid reasons to suspect that the outcome did not result from legitimate negotiation, then a different picture emerges.

a. The Attributes Of The Parties

The first two factors that fall under the heading of procedural unconscionability examine the relative attributes of the parties and whether they were capable of bargaining. The first of the two factors examines whether there is an "inequality of bargaining or economic power." Fritz, 1990 WL 186448, at *5. The second considers whether the contract involved "exploitation of the underprivileged, unsophisticated, uneducated and the illiterate." Id. To my mind, the second is an aggravated version of the first.

These factors do not mean that the law censures every power imbalance. To the contrary, "[a] bargain is not unconscionable merely because the parties to it are unequal in bargaining position, nor even because the inequality results in an allocation of risks to the weaker party." Restatement (Second) of Contracts § 208, cmt. d. After all, "bargaining power will rarely be equal." Progressive Int'l Corp. v. E.I. Du Pont de Nemours & Co., 2002 WL 1558382, at *11 (Del. Ch. July 9, 2002) (Strine, V.C.) (quoting Farnsworth on Contracts § 4.28 (2d ed. 2000)). Consequently, a "mere disparity between the bargaining power of parties to a contract will not support a finding of unconscionability." Graham v. State Farm Mut. Auto. Inc. Co., 565 A.2d 908, 912 (Del. 1989); accord Tulowitzki v. Atl. Richfield Co., 396 A.2d 956, 960 (Del. 1978) ("Superior bargaining power alone without the element of unreasonableness does not permit a finding of unconscionability or unfairness.").

"But gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, ... may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms." Restatement (Second) of Contracts § 208, cmt. d. The inequality must be sufficiently great such that one side is placed at a meaningful disadvantage, and the court must find as part of its overall analysis that the stronger party used its position "to take unfair advantage of his weaker counterpart." Graham, 565 A.2d at 912.

This approach manifests itself in a judicial reluctance to invalidate contracts between business entities or other sophisticated parties. For example, Delaware courts are "particularly reluctant to find unconscionability in contracts between sophisticated corporations." Reserves Mgmt., LLC v. Am. Acq. Prop. I, LLC, 86 A.3d 1119, 2014 WL 823407, at *9 (Del. Feb. 28, 2014) (ORDER). By contrast, courts are more willing to step in when a contract involves a business and a consumer.24 Delaware decisions also exhibit sensitivity to situations in which a sophisticated actor has taken advantage of someone who is underprivileged, unsophisticated, uneducated, or illiterate. In the Ryan decision, for example, Chancellor Allen recognized that a constellation of attributes such as poverty, financial distress, and lack of sophistication can make an individual vulnerable. Ryan v. Weiner, 610 A.2d 1377, 1385 (Del. Ch. 1992) (Allen, C.). He noted that although these disadvantages do not prevent a person from making a valid contract, they are factors that a court can take into account. See id.

The Disputed Loan was a contract between a business and a consumer. It therefore falls within the category of contracts where courts are relatively more likely to invoke the unconscionability doctrine.

More importantly, the Loan Agreement was a contract between (i) a specialized business addressing a target market of underprivileged, cash-constrained, and credit-rationed consumers, and (ii) an unsophisticated member of the target market. The Disputed Loan thus raises concerns about predatory lending.25 Indeed, the experts and the supporting literature on alternative financial services find rare agreement on two points. First, the consumers who use the products tend to be cash-constrained and credit-rationed, meaning that they have limited resources and few, if any, credit alternatives.26 Second, consumers typically use high-interest financial products for necessities, such as food, rent, utility bills, and mortgage payments,27 meaning that they face an urgent need for funds.28 Defenders and critics of high-interest products differ only in how they spin these facts. Defenders view fringe products as virtuous because they provide a form of credit, albeit at high cost, to consumers who otherwise would not have any. Critics charge that high-interest lenders take advantage of people in economic duress.

i. National

National specializes in providing high interest loans to underprivileged consumers who are cash-constrained and lack alternative sources of credit. When McFeeters acquired National, he applied to have National's banking licenses renewed. See JX 4 (the "Licensing Application"). National disclosed in its Licensing Application that many of its customers "have had credit problems in the past or have reached the maximum limit on their bank cards." Id. at 510; see Tr. 371-72 (McFeeters).

National is a well-funded operation. The Licensing Application projected that National's business model would generate free cash flow of $1.5 million to $2 million per year. Its actual performance has been on the order of $1 million per year.

National's owner and its personnel are sophisticated and knowledgeable. McFeeters acquired National after working in the payday loan industry for approximately ten years. In 2013, National had fourteen stores throughout Delaware, which it ran using a centralized model. At trial, National maintained that it had a manual setting out its policies and procedures. Tracey Annand, a District Manager at National, trained all of National's personnel. National employed legal counsel to draft its loan agreements.

National's employees recognize that its customers have difficulty predicting how long their loans will be outstanding and virtually never estimate correctly when they will be able to repay their loans. Customers who believe they will have a loan outstanding typically end up keeping the loan for "a couple months." See Tr. 341 (Carter).

ii. James

James is unsophisticated and undereducated. She dropped out of school in the tenth grade, then obtained her GED approximately ten years later. She tried to improve her skills through a nine-month course on medical billing and coding, but she stopped two months short of graduation. Evidencing her lack of financial sophistication, she believed that the financial aid she received for the program was a grant. It was actually a loan that she struggled to pay back.

Further evidence of James' lack of financial sophistication comes from her testimony about why she uses a pre-paid Nexis card. At trial, James explained that she previously had a checking account with PNC Bank but switched to her Nexis card because she did not like paying a monthly fee to maintain the checking account. Before making the Disputed Loan, National obtained a sixty-day transaction history for the Nexis account. It shows that during that period, James paid Nexis a total of $127.07 in transaction fees. Each time the Hotel DuPont paid James by direct deposit, Nexis charged her a load fee equal to 2% of the direct deposit amount. The load fees totaled $44.07. Each time James used her card to pay for a transaction and authorized it with her signature, Nexis charged her a signature transaction fee of $1. She signed for twelve transactions for total signature fees of $12. Each time James used her card to pay for a transaction and authorized it with her pin number, Nexis charged her a PIN transaction fee of $1.50. She completed thirteen PIN transactions for total PIN fees of $19.50. Each time, James attempted a transaction and her card was declined, Nexis charged her a decline fee of $0.50. Her card was declined fourteen times for total decline fees of $7. Each time she withdrew cash, Nexis charged her an ATM usage fee of $2.50. She withdrew cash on twenty-one occasions for total fees of $52.50. The amounts of the cash withdrawals suggest that the ATM provider also charged a withdrawal fee that was incorporated into the amount of the debit.

James does not appear to have comprehended the magnitude of the per-transaction fees that Nexis charged her, or the reality that those fees far exceeded the flat monthly fee that a bank would charge for a no-minimum-balance checking account, particularly where the client had direct deposit. She seems only to have considered the headline fee charged for the account each month.

James' perception of the financial charge for the Disputed Loan reflected a similar short-term focus. National contended James understood the block rate she would pay, which was $30 on $100. It is true that James could recite the block rate, but that does not mean she understood its implications. To the contrary, the evidence convinced me that National used a block rate and de-emphasized the APR to mislead its customers and make them think their cost of credit was an order of magnitude lower than it really was. James did not understand how interest accrued, and she did not understand what would happen upon default.

James underestimated her likelihood of repaying the Disputed Loan quickly. She thought she could pay it off in two payments, but she failed to do so. She similarly mis-remembered her success in repaying previous loans. She thought she paid off each of her previous loans in one or two payments, but for the previous loans from National (the only loans in the record), James took longer. For the loan immediately preceding the Disputed Loan, there were seven attempted payments, four of which were declined.

James is also underprivileged. In 2013, she took home approximately $1,100 per month, and her annualized income of approximately $13,200 represented 115% of the federal poverty line for a single-person household. She lived paycheck to paycheck and had no savings to fall back on. She did not have access to alternative sources of credit. By 2013, when James took out the Disputed Loan, she had been using high-interest, unsecured loans for four to five years, perhaps longer. She did not use the loans in response to unforeseen emergencies. She used them on a relatively regular basis for essential needs. She obtained the Disputed Loan because she needed money for groceries and rent. James' frequent use of high-cost loans was a detriment and should have been a red flag to National.

At trial, National tried to turn James' weakness into a strength, arguing that she was an experienced consumer who was competent to use high-interest financial products. Zywicki stressed this point, contending that James' prior use of similar loans "suggest[ed] that she was familiar with the material terms of the loan, understood the risks, and the like." Tr. 509 (Zywicki); see id. at 523-24, 549-50. In contrast to National's arguments at trial, both defenders and critics of payday loans generally agree that frequent use is problematic.29

Given the relative attributes of National and James, the Disputed Loan involved both "inequality of bargaining or economic power" and the "exploitation of the underprivileged, unsophisticated, [and] uneducated." Fritz, 1990 WL 186448, at *5. These factors favor a finding of unconscionability.

b. A Take-It-Or-Leave-It, One-Sided Form Agreement

The next Fritz factor asks directly whether there was actual bargaining involved. As framed in Fritz, the court should consider "[t]he use of printed form or boilerplate contracts drawn skillfully by the party in the strongest economic position, which establish industry wide standards offered on a take it or leave it basis to the party in a weaker economic position." Id. at *4. The type of standardized contract that this factor describes is also called a contract of adhesion. See Worldwide Ins. Gp. v. Klopp, 603 A.2d 788, 790 (Del. 1992); Graham v. State Farm Mut. Auto. Inc. Co., 565 A.2d 908, 912 (Del. 1989).

"[A] contract of adhesion is not unconscionable per se, and ... all unconscionable contracts are not contracts of adhesion." Restatement (Second) of Contracts § 208, Reporter's Note, cmt a. Contracts of adhesion provide many benefits:

Id. § 211, cmt. a.

But standardized agreements also carry a heightened risk of unfair terms:

Id., § 211, cmt. c. This dynamic creates an "obvious danger of overreaching." Id. "The weaker party, in need of the good or services, is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly (natural or artificial) or because all competitors use the same clauses." 8 Williston on Contracts § 18:13 (quoting Weaver v. Am. Oil Co., 257 Ind. 458, 276 N.E.2d 144, 147 (1971)).

All else equal, the fact that an agreement is a contract of adhesion makes it relatively more likely that the agreement will be found unconscionable. Like the other Fritz factors, the fact that an agreement is a contract of adhesion is not sufficient, standing alone, to render an agreement unconscionable.

The Loan Agreement is a contract of adhesion. It was form agreement, drafted by National, and provided to James on a take-it-or-leave-it basis. James had no ability to negotiate the terms of the Loan Agreement. Other than to rely on the truism that a standard form agreement is not inherently unconscionable, National does not dispute this factor. National's position is correct, but this factor nevertheless favors a finding of unconscionability.

c. The Bargaining Environment

The final Fritz factor considers the "[t]he circumstances surrounding the execution of the contract." 1990 WL 186448, at *4. One pertinent attribute is the commercial setting. Id. Another is whether a party confronts "an absence of meaningful choice." Ketler v. PFPA, LLC, 132 A.3d 746, 748, 2016 WL 192599, at *2 (Del. Jan. 15, 2016) (quotation marks omitted). A third is the "purpose and actual effect" of the agreement. Fritz, 1990 WL 186448, at *4; see 6 Del. C. § 2-302(2) (instructing a court to consider "the purpose and effect" of the contract when evaluating unconscionability). For the Disputed Loan, that necessarily takes into account its relationship to the Payday Loan Law.

i. The Commercial Setting

James obtained the Disputed Loan from a small, store-front office. She was given the documents and told where to sign. Reilly's main role was to try to induce her to take out twice the loan amount she wanted ($400 instead of $200). Those were not ideal conditions, but they were not inherently oppressive. They are consistent with a standardized financial transaction accomplished through a contract of adhesion.

A more problematic issue is that National's employees denigrate the importance of the APR while describing the interest rate in simplistic ways that are designed to mislead customers. For example, National takes the position that the APR "has nothing to do with the loan." Tr. 335 (Carter). National's employees suggest to borrowers that that the APR is "irrelevant" unless the loan remains outstanding for an entire year. Tr. 337 (Carter). If a customer only plans to keep the loan out-standing for a few weeks, then National's employees discount the APR as "meaning[less]." Tr. 337-38 (Carter).

Instead of focusing on the APR, National's employees describe the interest rate in terms that make the cost of the loan seem much lower. At trial, for example, James' counsel and Vazquez had the following exchange:

Tr. 246 (Vazquez). Vazquez did not know how a 30% block rate compared to an APR.Tr. 254 (Vazquez).

These statements are highly problematic. By "describ[ing] the loan cost in terms of a misleading" bi-weekly rate, National understated the total cost of the Disputed Loan.30 Because National framed the price as "$30 on $100," James thought she would pay $60 for the $200 when she actually agreed to pay $1,620 in finance charges. James understood the simple block rate, but she did not understand the more complex financing arrangement captured by the Loan Agreement.

ii. Lack Of Meaningful Choice

A more significant aspect of the circumstances surrounding the Loan Agreement was James' lack of a meaningful choice. When affirming a finding that a contract of adhesion for membership in a fitness club was not unconscionable, the Delaware Supreme Court observed that "[t]here is no deprivation of meaningful choice if a party can walk away from the contract." Ketler, 132 A.3d at 748, 2016 WL 192599, at *2.

Unlike the choice to spend discretionary income on a fitness contract, James needed money for food and to pay her rent. She lived paycheck to paycheck, had no savings to fall back on, and did not have access to alternative sources of credit. She had reached a point where she was using high-interest, unsecured loans on a regular basis to make ends meet. As a practical matter, James' precarious financial situation meant she did not have meaningful options other than a high-interest loan like the Disputed Loan.

iii. The Purpose And Effect Of The Loan Agreement

Perhaps the most critical aspect of the bargaining environment was the purpose and effect of the Loan Agreement, which was to evade the Payday Loan Law. To reiterate, a traditional payday loan was a short-term loan designed to be repaid in a single balloon payment on the borrower's next payday, usually within two weeks or, if the borrower was paid monthly, within one month. See Consumer Credit, supra, at 356 ("A payday loan is a small, short-term, single-payment consumer loan."). Many borrowers, however, did not repay their loans when the balloon payments were due. When that happened, the payday loan company rolled the outstanding balance into a new payday loan for the total amount of unpaid principal and interest, plus fees. The short-term loan effectively became a longer term loan at the same high interest rate. Consumer advocates regarded the rollover as "[p]erhaps the most dangerous feature of the payday-loan product."31

To address the interest-only rollover problem in Delaware, the General Assembly adopted the Payday Loan Law. The synopsis of the bill stated:

Del. H.B. 289 syn., 146th Gen. Assem. (2012).

The centerpiece of the legislation was the cap on the number of payday loans that any one consumer could obtain in a single twelve-month period, combined with a provision that defined a rollover as a new loan. The pertinent statutory language stated:

5 Del. C. § 2235A(a)(1) (the "Five Loan Limit"; footnote added). The Five Loan Limit sought to help borrowers avoid being trapped in longer-term, ultra-high interest loans by capping the number of times that payday lenders could roll over payday loans.

Importantly, the Payday Loan Law only applied to short-term consumer loans, which the statute defined as "a loan of $1,000 or less made to an individual borrower that charges interest and/or fees for which the stated repayment period is less than 60 days and is not secured by title to a motor vehicle." Id. § 2227(7). But the Payday Loan Law also incorporated an anti-evasion provision, which stated:

Id. § 2235A(f) (the "Anti-Evasion Provision").

The Payday Loan Law was enacted before McFeeters acquired National. Under its prior owner, National responded to the Payday Loan Law by capping the number of times a customer could rollover a payday loan. Loan Till Payday's website described National's "Quick Payday Loan" product as follows:

JX 9 at 6. By limiting the customer to four rollovers, National stayed under the Five Loan Limit.

Once McFeeters acquired National, he caused National to stop making payday loans and switch to installment loans. The new structure built the rollover problem into the design of the loan.

In its initial manifestation, National's installment loan product was a seven-month term loan called the Flex Pay Loan. Its economic substance mirrored a one-month payday loan that was rolled over seven times (or a two-week payday loan that was rolled over fourteen times). Loan Till Payday's website described the Flex Pay Loan product as follows:

Id.; see Tr. 272-73 (Vazquez). Because it was designed to be outstanding for seven months, the Flex Pay Loan fell outside the coverage of the Payday Loan Law.

From an economic standpoint, however, the Flex Pay Loan product and the Quick Payday Loan product were functionally equivalent.33 The Quick Payday Loan product ostensibly contemplated full repayment in one period but could be extended longer with interest-only payments leading to a final balloon payment. The Flex Pay Loan product ostensibly contemplated a series of interest-only payments followed by a final balloon payment, but the customer could pay it off earlier.34

National later developed the Flex Loan product that it sold to James. The main difference was that the Flex Loan product contemplated twelve months of bi-weekly, interest-only payments before the final balloon payment.

Put simply, National designed its installment loan products to evade the Five Loan Limit. From National's standpoint, the shift was actually beneficial, because the new products built the concept of interest-only rollovers into the loans themselves.

The Anti-Evasion Provision recognized the risk that a lender might disguise "a short-term consumer loan as a revolving line of credit." 5 Del. C. § 2235A(f)(2). National took the opposite approach. It disguised a short-term consumer loan as an interest-only, non-amortizing installment loan. National's shift to interest-only installment loans as a means of evading the Five Loan Limit followed a strategy employed by payday lenders in other jurisdictions.35

3. Balancing The Factors

All of the Fritz factors point in favor of a finding of unconscionability, albeit to varying degrees. The most telling factors include (i) the economic terms of the Disputed Loan, which support a prima facie case of substantive unconscionability, (ii) the purpose and effect of the installment loan structure in circumventing the Payday Loan Law and the Five Loan Limit, and (iii) the exploitation of an underprivileged, undereducated, and financially vulnerable person. Secondary factors include (a) the use of a contract of adhesion, (b) the overall imbalance of rights and obligations, and (c) National's practices when describing the block rate finance charge versus the APR, which present a misleading picture of the cost of credit.

On balance, the Loan Agreement is unconscionable. No one would borrow rationally on the terms it contemplated unless that person was delusional, mistaken about its terms or a material fact, or under economic duress.

4. The Remedy For The Unconscionable Agreement

Because the Loan Agreement is unconscionable, it is voidable. The proper remedy is to declare it invalid. See Restatement (Second) of Contracts § 208, cmt. g.

Declaring the Loan Agreement invalid is likewise appropriate because National sought to use an interest-only, non-amortizing, installment loan to evade the Payday Loan Law. "Equity always attempts to ... ascertain, uphold, and enforce rights and duties which spring from the real relations of parties." 2 John Norton Pomeroy, Equity Jurisprudence § 378, at 41 (Spencer W. Symons ed., 5th ed. 1941). "[E]quity regards substance rather than form." Monroe Park v. Metro. Life Ins. Co., 457 A.2d 734, 737 (Del. 1983). Equity also "regards that as done which in good conscience ought to be done." Id. In substance, the Disputed Loan was a payday loan designed to roll over twenty-six times, which contravened the Five Loan Limit.

National loaned James $200. James has repaid National $197. As a consequence of rescinding the Loan Agreement, James owes National another $3. James may satisfy this obligation by setting it off against amounts that this decision orders National to pay.

James also asked for a permanent injunction barring National from collecting on similar loans it made to other customers. That relief is too broad to be granted in the current case and would embroil this court in on-going oversight of National's business.

C. The Truth In Lending Act

James separately provided at trial that National violated TILA. Originally enacted in 1968, TILA's stated goal is to "assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." 15 U.S.C. § 1601(a). The Board of Governors of the Federal Reserve System implemented this disclosure-based regime through Regulation Z, which requires lenders to calculate and disclose interest rates according to a prescribed formula. See 12 C.F.R. part 226 (2011). Consumers have standing to enforce the Federal Reserve's rules through private litigation. See 26 Causes of Action, 2d § 409 (2004).

TILA applies to closed-end consumer credit transactions like the Disputed Loan.36 A lender violates TILA if it discloses an APR on a consumer loan that is "more than 1/8 of 1 percentage point above or below" the APR determined in accordance with certain actuarial methods. 12 C.F.R. § 226.22(a)(2). There is a statutory defense for inadvertent mistakes made in good faith:

15 U.S.C. § 1640(c) (the "Bona Fide Error Defense"). For purposes of APR calculation errors, the Federal Reserve has issued a regulation providing that a creditor can establish a Bona Fide Error Defense by proving that "(1) [t]he error resulted from a corresponding error in a calculation tool used in good faith by the creditor; and (2) upon discovery of the error, the creditor promptly discontinue[d] use of that calculation tool for disclosure purposes and notifie[d] the [Federal Reserve] in writing of the error in the calculation tool." 12 C.F.R. § 226.22(a)(1) n.45d. This decision applies the regulatory test for the Bona Fide Error Defense because it speaks specifically to an APR calculation error. Cf. Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 557, 100 S.Ct. 790, 63 L.Ed.2d 22 (1980) (stating that courts should give "a high degree of deference" to the Federal Reserve's interpretation of TILA).

As a sanction for National's discovery misconduct, this court previously determined that the "APRs for the loans disclosed on the Updated Spreadsheet fell outside the acceptable range set forth in TILA." James v. Nat'l Fin. LLC, 2014 WL 6845560, at *13 (Del. Ch. Dec. 5, 2014). The Disputed Loan was one of the loans on the spreadsheet. The operative question is whether National established a Bona Fide Error Defense.

National failed to prove its Bona Fide Error Defense. Although National claims to have relied on computer software to calculate the APR, the Delaware Bank Commissioner told National on multiple occasions that it had concerns about National's APR calculations. National did not promptly discontinue its use of its computer software and did not provide notice in writing to the Federal Reserve. National only discontinued its use of the software in 2014, a year after making the Disputed Loan.

TILA contemplates an award of actual damages if the plaintiff proves that she relied on the incorrect APR. See, e.g., Turner v. Beneficial Corp., 242 F.3d 1023, 1026-28 (11th Cir. 2001) (collecting cases and analyzing TILA's history). James did not rely on the incorrect figure, so she cannot recover actual damages.

TILA also contemplates statutory damages. 15 U.S.C. § 1640(a)(2). In the event of a violation, a court should award "in the case of an individual action twice the amount of any finance charge in connection with the transaction." Id. § 1640(a)(2)(A)(i). The finance charge "is the cost of consumer credit as a dollar amount" and includes interest, transaction charges, fees, and any other charges other than repayment of principal. 12 C.F.R. § 226.4(a)-(b).

The finance charge for the Disputed Loan was $1,620. Twice this amount is $3,240. Offsetting the $3 that James still owes National results in a judgment for James in the amount of $3,237.

TILA directs the court to award reasonable attorneys' fees and costs "in the case of any successful action to enforce" liability under § 1640(a)(2)(A)(i). 15 U.S.C. § 1640(a)(3). James is entitled to a fee award.

III. CONCLUSION

The Disputed Loan is invalid. Judgment is entered in favor of James in the amount of $3,237. Pre- and post-judgment interest on this amount will accrue at the legal rate, compounded quarterly, beginning on May 7, 2013. James is awarded her attorneys' fees and costs. Counsel shall submit a Rule 88 affidavit. If the parties can agree on an amount, then they shall submit a form of final order and judgment that is agreed as to form. Otherwise they shall propose a schedule for a fee application.