United States Court of Appeals
Fifth Circuit
F I L E D
REVISED MAY 4, 2004 April 19, 2004
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
_______________________
NO. 03-60356
_______________________
BANC ONE ACCEPTANCE CORP.,
Plaintiff-Appellant,
versus
EDITH HILL; DEBORAH BRAND,
Defendants-Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Northern District of Mississippi
4:02-CV-66-PB
________________________________________________________________
Before JONES, EMILIO M. GARZA and BENAVIDES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
This appeal arises out of an automobile lease gone bad.
In the fall of 2000, Edith Hill leased a 2000 Ford Explorer from
the East Ford dealership located in Jackson, Mississippi. About
one year later, Banc One Acceptance Corporation, the finance
company, repossessed the Explorer, even though Hill’s payments were
current. Hill complained unsuccessfully and then filed suit in
state court against East Ford and Banc One. Banc One responded
with an action in federal court seeking to enforce the arbitration
clause in the lease documents. Hill, however, persuaded the
district court that according to a recent Mississippi Supreme Court
case interpreting identical contract language, the arbitration
clause was unconscionable and thus unenforceable under state law.
See East Ford, Inc. v. Taylor, 826 So. 2d 709, 717 (Miss. 2002).
The district court denied Banc One’s motion to compel arbitration
and granted Hill’s motion to dismiss. Banc One now appeals. We
affirm.
I. BACKGROUND
On August 14, 2000, Edith Hill signed an offer to lease
and a motor vehicle lease agreement for a 2000 Ford Explorer from
East Ford. In the offer to lease, an arbitration clause provided
that
any controversy, claim, action or inaction arising out
of, or relating to, the transaction evidenced by the
OFFER together with any resulting written agreements
including . . . any . . . lease . . . shall be settled by
arbitration administered by the American Arbitration
Association.
Exempted from the arbitration clause are “claims by [East Ford]
. . . that one or more events of default . . . has occurred on the
part of [Hill] . . . [such claims] may be pursued in any court of
competent jurisdiction.”
Hill leased the Explorer to provide a car for her niece,
Deborah Brand, but the parties dispute whether East Ford and its
employees knew this. In any event, the lease agreement signed by
2
Hill authorized only members of her “immediate family” to use the
automobile. Hill’s alleged violation of the lease terms led Banc
One to repossess the Explorer despite Hill’s being current in the
payments. This litigation followed. Banc One now appeals the
district court’s denial of its motion to compel arbitration and the
dismissal of its action.
II. DISCUSSION
This court reviews de novo a grant or denial of a
petition to compel arbitration pursuant to § 4 of the Federal
Arbitration Act (FAA). Primerica Life Ins. Co. v. Brown, 304 F.3d
469, 471 (5th Cir. 2002); 9 U.S.C. § 4 (2000). The de novo
standard of review applies when a motion to compel is denied as
part of a motion to dismiss. Snap-On Tools Corp. v. Mason, 18 F.3d
1261, 1263-64 (5th Cir. 1994).
Two principal questions arise in this appeal. The first
is whether the district court had authority under the FAA to
determine the enforceability of Hill’s arbitration agreement with
East Ford. We find that it did. The second is whether the
enforceability issue is governed by state contract law or federal
law. The answer, in this case, is that state law applied.
A. District Court’s Authority to Review Hill’s Procedural
Unconscionability Claim
A two-step inquiry governs whether parties should be
compelled to arbitrate a dispute. “First, the court must determine
whether the parties agreed to arbitrate the dispute. Once the court
3
finds that the parties agreed to arbitrate, it must consider
whether any federal statute or policy renders the claims non-
arbitrable.” R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d 534,
538 (5th Cir. 1992). In conducting this two-step inquiry, courts
must not consider the merits of the underlying action. Snap-On
Tools, 18 F.3d at 1267.
The first step of the process entails determining
“whether there is a valid agreement to arbitrate between the
parties; and . . . whether the dispute in question falls within the
scope of that arbitration agreement.” Webb v. Investacorp, Inc.,
89 F.3d 252, 258 (5th Cir. 1996). These questions are decided
according to state law. Id. While there is a strong federal
policy favoring arbitration, the policy does not apply to the
initial determination whether there is a valid agreement to
arbitrate. Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211,
214 (5th Cir. 2003). Nonetheless, once a court determines that an
agreement to arbitrate exists, the court must pay careful attention
to the strong federal policy favoring arbitration and must resolve
all ambiguities in favor of arbitration. Primerica Life, 304 F.3d
at 471 (citing Southland Corp. v. Keating, 465 U.S. 1, 10 (1984)).
The Supreme Court has held that under the FAA, the
federal courts may only consider “issues relating to the making and
performance of the agreement to arbitrate.” See Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967). In Prima
Paint, the Court held that the “making” of an agreement to
4
arbitrate was not called into question by a general allegation that
the entire contract was void because of fraudulent inducement. See
id. Because the defense asserted in Prima Paint did not attack the
“making” of the agreement to arbitrate itself, the Court ordered
arbitration and noted that the FAA reflects an “unmistakably clear
congressional purpose that the arbitration procedure, when selected
by the parties to a contract, be speedy and not subject to delay
and obstruction in the courts.” Id. at 404.
This court recently addressed the scope and application
of the Prima Paint rule and held that where the “very existence of
a contract” containing the relevant arbitration agreement is called
into question, the federal courts have authority and responsibility
to decide the matter. See Will-Drill, 352 F.3d at 218. In that
case, the party resisting arbitration attacked the essential
validity of the contract by arguing that the contract was not
signed by all of the necessary parties. Id. at 215. This
contention, if accurate, would mean that no contract ever existed,
and by proxy, that no agreement to arbitrate was ever concluded.
The arbitrator consequently would have no authority to decide
anything. Id.
Will-Drill distinguished the far more common argument
made by a party who does not challenge the existence of a contract,
but rather attacks the enforceability of the agreement alleging
that the contract is void ab initio or voidable. Id. at 218. Such
a scenario calls for application of the severability doctrine
5
contained in Prima Paint. Under this approach, “[o]nly if the
arbitration clause is attacked on an independent basis can the
court decide the dispute; otherwise, general attacks on the
agreement are for the arbitrator.” Id. (emphasis added); accord
Primerica Life, 304 F.3d at 472 (holding that “unless a defense
relates specifically to the arbitration agreement, it must be
submitted to the arbitrator as part of the underlying dispute”).
In other words, where the existence of the contract is not in
question, the court must examine whether the allegations made by
the party resisting arbitration challenge the “making of the
agreement to arbitrate itself” as opposed to “allegations regarding
the contract as a whole.” Dillard v. Merrill Lynch, 961 F.2d 1148,
1154 n.9 (5th Cir. 1992) (citing Prima Paint, 388 U.S. at 403-04)
(internal quotation marks omitted). Only if the allegations
concern solely the arbitration term and are not generally
applicable to the agreement as a whole may the district court
properly adjudicate the enforceability of the arbitration clause.
See id. (holding that by “focus[ing] specifically on the
arbitration provision as an adhesive term,” the party resisting
arbitration had met the threshold requirement to challenge the
making of the arbitration agreement). Where a defense does not
specifically relate to the arbitration agreement, however, it must
be submitted to the arbitrator as part of the underlying dispute.
See Primerica Life, 304 F.3d at 472 (holding that a claim that one
of the parties lacked the capacity to contract must be submitted to
6
the arbitrator); Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79,
84 (2002) (noting that “the presumption is that the arbitrator
should decide allegations of waiver, delay, or a like defense to
arbitrability”) (internal quotation marks and citations omitted).
Hill does not challenge the “very existence” of the
contract. Indeed, her underlying state court action seeks to
obtain damages for breach of contract, and she admits in her
affidavit before the district court that she signed the offer to
lease containing the arbitration clause. Instead, Hill asserts
that the arbitration clause is “procedurally unconscionable,” a
claim fundamentally different from the position asserted by the
party resisting arbitration in Will-Drill. Hill’s argument falls
within the Prima Paint separability doctrine, and the court must
examine whether Hill’s allegations attack the arbitration clause on
an “independent basis,” or constitute a “general attack” on the
contract. Will-Drill, 352 F.3d at 218.
In her affidavit, which recites the circumstances under
which she signed the offer to lease and lease agreement, and thus
undergirds her procedural unconscionability claim, Hill states
that she “never agreed nor intended to agree to arbitration” for
two reasons. First, Hill “did not read the documents” that the
salesman asked her to sign because the salesman did not ask her to
read them, nor did he “tell [her] that [she] needed to read the
documents.” Hill further says she did not read the documents she
signed because she trusted the salesman. Second, “no one asso-
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ciated with East Ford ever told [her] that [she] was signing an
arbitration agreement,” or that she could object to the agreement,
and no one explained the term “arbitration” to her. As this court
has held, the general assertions that she did not read or
understand the contractual documents or that East Ford did not
explain the documents do not suffice to allege fraud in the making
of the arbitration clause, but rather address the formation of the
entire contract. R.M. Perez, 960 F.2d at 538-39. Hill’s affidavit
fails to undercut the arbitration clause.
Hill’s pleadings, on the other hand, informed the
district court that the validity of an “identical arbitration
clause” was being considered by the Mississippi Supreme Court. The
impetus for Hill’s amended motion to dismiss was the court’s ruling
in Taylor, which found this “identical arbitration clause”
procedurally unconscionable under Mississippi law. Taylor, 826 So.
2d at 717. In Dillard, we held that where a party alleges that an
arbitration agreement is adhesive, “focus[ing] specifically on the
arbitration provision as an adhesive term” allows the party
resisting arbitration to meet the threshold requirements necessary
to challenge the making of the arbitration agreement itself.
Dillard, 961 F.2d at 1154. Similarly, Hill’s line of attack, aimed
at the arbitration clause alone and based on the Mississippi
Supreme Court’s analysis of an identical clause, is sufficiently
independent of her general disagreement with the contract. On this
basis, the district court had the authority and the responsibility
8
to adjudicate whether the arbitration agreement between Hill and
Banc One was procedurally unconscionable.
B. District Court’s Application of Mississippi Law
Banc One contends that the district court erred in
applying Taylor because the Mississippi Supreme Court’s decision
impermissibly discriminates against arbitration under the FAA.1
But the validity of an arbitration provision is a question of state
law, see Webb, 89 F.3d at 258, and this court recently reviewed
under state law whether an arbitration clause was unconscionable.
Carter v. Countrywide Credit Indus., Inc., ___ F.3d ___, No.
03-10484, 2004 WL 414072 at *5 (5th Cir. March 5, 2004). In this
action, the district court correctly applied the Mississippi
Supreme Court’s ruling in Taylor, which held that an identical
arbitration clause was procedurally unconscionable under
Mississippi law for a variety of reasons, including the relative
position of the parties, the nature of the contract at issue, and
the appearance and placement of the arbitration clause relative to
the rest of the contract. Taylor, 826 So. 2d at 716-17.
Although Carter suffices to justify using state law here,
we note that the purpose of the FAA is to ensure that arbitration
agreements are not treated differently from other contract
provisions under state law. See Doctor’s Assocs., Inc. v.
1
As noted above, this court reviews de novo the denial of a motion to
compel in the context of a motion to dismiss. See, e.g., Snap-On Tools, 18 F.3d
at 1263-64.
9
Casarotto, 517 U.S. 681, 687 (1996). The Supreme Court has
consistently held that “generally applicable contract defenses,
such as . . . unconscionability, may be applied to invalidate
arbitration agreements without contravening [the FAA].” Id.; see
also Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987). At the same
time, however, the Supreme Court has indicated that state courts
cannot “rely on the uniqueness of an agreement to arbitrate as a
basis for a state-law holding that enforcement would be
unconscionable, for this would enable the court to effect what we
hold today the state legislature cannot.” Perry, 482 U.S. at 492.
As such, while state courts may strike down arbitration clauses
based upon generally applicable contract principles, they “may not
. . . decide a contract is fair enough to enforce all its basic
terms (price, service, credit), but not fair enough to enforce its
arbitration clauses.” Allied-Bruce Terminix Cos., Inc. v. Dobson,
513 U.S. 265, 281 (1995). That is to say, state courts may
properly strike down arbitration clauses, but they may not treat
arbitration clauses differently than other contract terms, because
to do so would be to put arbitration clauses on “an unequal
footing” in violation of the FAA. See id. (internal quotation
marks and citation omitted).
Banc One argues that Taylor impermissibly discriminates
against arbitration agreements because the Mississippi Supreme
Court set out its particular approach to unconscionability in the
context of an arbitration dispute. Casarotto, however, held that
10
state unconscionability law may, on occasion, invalidate
arbitration clauses so long as the state’s approach is not directed
specifically at arbitration agreements but instead applies to
contract provisions generally. Casarotto, 517 U.S. at 687. If we
were to accept Banc One’s argument, a state court would find it
extremely difficult to craft a decision holding an arbitration
provision unconscionable under state law because, by setting out a
particular approach to unconscionability in the context of an
arbitration case, the state court would be impermissibly
discriminating against arbitration under the FAA. Such a result is
too broad and does not comport with Perry, Casarotto, and Allied-
Bruce.
In Taylor, the Mississippi Supreme Court used standard
tools of unconscionability doctrine and applied a prior Mississippi
decision outlining its general approach to procedural unconsciona-
bility under Mississippi contract law. 826 So. 2d at 715-17
(applying the framework set out in Entergy Miss., Inc. v. Burdette
Gin Co., 726 So. 2d 1202, 1207-08 (Miss. 1998)). As a result, its
approach does not appear to be aimed specifically at arbitration
clauses, but is simply a case-specific application of general
Mississippi unconscionability law.2 See Russell v. Performance
2
Banc One identifies only a single Mississippi case for the
proposition that the Mississippi courts apply a different rule of law to
arbitration provisions than to other contractual provisions. In Newton County
Bank v. Jones, 299 So. 2d 215 (Miss. 1974), the Mississippi Supreme Court upheld
a contractual provision that was characterized by the dissent as being “in small
print.” See Jones, 299 So. 2d at 218, 220. Such authority, relying on a
characterization made in dissent and decided nearly thirty years before Taylor,
11
Toyota, Inc., 826 So. 2d 719, 725-27 (Miss. 2000) (holding an
arbitration clause in an automobile purchase agreement to be
neither procedurally nor substantially unconscionable and
distinguishing Taylor). Under these circumstances, we cannot
presume that the Mississippi Supreme Court was attempting to
discriminate against arbitration in Taylor.3
Banc One points to a Third Circuit case which appears to
indicate that the federal law construing the FAA is authoritative
in determining claims of procedural unconscionability. See Harris
v. Green Tree Financial Corp., 183 F.3d 173, 182 (3rd Cir. 1999)
(indicating that “the FAA and federal law construing the Act govern
the result in this case, and this authority does not support the
. . . claim of unconscionability”). However, in Harris, the Third
Circuit only cites federal court decisions that apply state law in
support of its holding regarding the procedural unconscionability
argument. See id. In addition, this court regularly applies state
law to determine whether arbitration clauses are procedurally
can hardly carry much weight in determining whether the Taylor court crafted a
legal doctrine aimed specifically at discriminating against arbitration in
violation of the FAA. In addition, Banc One’s argument presumes that the Taylor
court held the arbitration clause at issue in that case unconscionable solely
based on the font size of the clause. However, a close reading of Taylor
indicates that the court examined a variety of other factors in reaching its
holding, including the relative position of the parties and their knowledge or
lack thereof. See Taylor, 826 So. 2d at 715-16.
3
It is important to note here that if the Mississippi courts were to
limit the applicability of the procedural unconscionability approach outlined in
Taylor to arbitration agreements only, or were repeatedly to apply a different
approach to other contractual provisions, the issue of discrimination against
arbitration under the FAA may come into play. However, absent any compelling
evidence of such an approach, and given that Taylor was decided relatively
recently, we decline to find improper discrimination here.
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unconscionable. See, e.g., Fleetwood Enters., Inc. v. Gaskamp, 280
F.3d 1069, 1077 (5th Cir. 2002) (citing four Texas cases in ruling
on a procedural unconscionability claim); accord Webb, 89 F.3d at
259. We see no reason why Mississippi law should not apply here.
Under Mississippi law, authoritatively construed by the
state supreme court, an arbitration agreement of exactly the type
that was at issue in Taylor is procedurally unconscionable. While
Banc One cites a panoply of federal cases that appear to dictate a
different result on a wide range of issues, because the arbitration
provision at issue here is identical to the one examined by the
Taylor court, these federal cases cannot help Banc One avoid
controlling Mississippi law. As a result, the district court
correctly held that the arbitration provision was procedurally
unconscionable and thus unenforceable under Mississippi law.4
III. CONCLUSION
For the reasons discussed above, the judgment of the
district court is AFFIRMED.
4
Hill also argues that this court should consider the substantive
unconscionability of the arbitration clause. Both Hill and Banc One agree that
neither the district court nor the Taylor court clearly ruled on the question of
substantive unconscionability. In addition, Hill cites no controlling authority
for the proposition that the contract is substantively unconscionable under
Mississippi law. Because we find the arbitration clause at issue here to be
procedurally unconscionable under Mississippi law, we need not reach the question
of substantive unconscionability.
13