North Carolina Court of Appeals Upholds Arbitration Clauses in Consumer Agreements

The North Carolina Court of Appeals has recently enforced arbitration clauses in short-term “payday” loan contracts, requiring the borrowers to bring their claims in arbitration rather than in court. In doing so, the Court specifically recognized the validity of arbitration clauses (including clauses waiving a party’s right to file a class action lawsuit) in standard form contracts, even those involving consumers.

In Torrence v. Nationwide Budget & Finance No. 12-453, an out-of-state bank offered short-term consumer loans to North Carolina residents through a company called Financial Services of North Carolina, Inc. (FSNC). The loan documents contained an “Agreement to Arbitrate All Disputes” and required the borrowers to waive their right to bring or join in a class action lawsuit. 

Two borrowers filed a class action complaint against FSNC and others, contending that the loans violated the North Carolina Consumer Finance Act, the North Carolina unfair trade practices laws and North Carolina usury laws. The defendants moved to compel arbitration, but the trial court denied the defendants’ motion on the grounds that the arbitration provision was “unconscionable,” and thus unenforceable, in part because it waived the right to bring a class action lawsuit when individual arbitration was impractical (i.e., due to the complexity of the legal issues, the small dollar amounts involved in relation to the likely expense and as a result, the difficulty in retaining legal representation). The trial court also granted plaintiffs’ motion for class certification.  

The North Carolina Court of Appeals reversed the trial court, relying heavily on the supremacy of the Federal Arbitration Act (FAA) as it has been construed by two recent U.S. Supreme Court cases. The North Carolina Court of Appeals thus held that “unconscionability attacks that are directed at the arbitration process itself will no longer be tolerated.” The Court of Appeals recognized that its decision collides with a North Carolina Supreme Court decision from 2008; nevertheless, it was bound by the more recent decisions from the U.S. Supreme Court applying federal law through the FAA.

Torrence is likely headed to the North Carolina Supreme Court, so stay tuned to see if the justices try to thread the needle between their prior decision and the more recent U.S. Supreme Court cases.