Antkowiak v. Taxmasters

JOSEPH A. ANTKOWIAK, on behalf of himself and all others similarly situated

v. TAXMASTERS; TAXMASTERS, INC.; TMIRS ENTERPRISES LTD; TM GP SERVICES, LLC;TM GP SERVICES, LLC, d/b/a Taxmasters; PATRICK R. COX; JEFFREY AARON STEINBERG, Appellants

No. 11-1882

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Filed : December 22, 2011

NOT PRECEDENTIAL

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Civil No. 2:10-cv-03331-LS)

District Judge: Honorable Lawrence F. Stengel

Submitted Pursuant to Third Circuit L.A.R. 34.1(a)

December 06, 2011

Before: HARDIMAN, BARRY, and VAN ANTWERPEN, Circuit Judges.

OPINION OF THE COURT

VAN ANTWERPEN, Circuit Judge.

Appellants TaxMasters, TaxMasters, Inc., TMIRS Enterprises, Ltd., TM GP Services, LLC, Patrick R. Cox, and Jeffrey Aaron Steinberg (hereinafter "TaxMasters")appeal the District Court's denial of its motion to compel arbitration. For the reasons that follow, we will vacate and remand.

I. Facts

Because we write solely for the parties, we recount the facts and proceedings only to the extent required for resolution of this appeal. TaxMasters, a "tax resolution" firm based in Houston, Texas, advertises on national television that it can "solve" delinquent taxpayers' problems with the IRS. TaxMasters's advertisements encourage distressed taxpayers to call the company's toll-free number for a "free consultation" with a "tax consultant." On December 29, 2008, Appellee, Joseph Antkowiak, called the toll-free number to obtain assistance with his tax problems. During the consultation, Antkowiak was told that TaxMasters could represent him for $4,000 and that, if he couldn't afford to pay in one lump sum, he could make an initial down payment and pay through an installment plan. Antkowiak agreed to the installment plan, under which he was required to make an initial down payment of $500. Although the parties dispute when Antkowiak actually made this down payment,¹ TaxMasters has taken the position with othercustomers that the initial phone call creates a "legal binding agreement" under which the customer is liable for the full contract price.² App. 189.

After the December 29 phone consultation, TaxMasters sent Antkowiak a copy of the "Engagement Agreement," a written document containing an arbitration clause as well as other specific terms and conditions of the contract. Based on the documented experience of other customers, TaxMasters does not always disclose all of these terms and conditions, including the arbitration clause, during the phone consultation. See App. 118-75. For example, TaxMasters's representatives do not always disclose that the down payment is non-refundable, see id., or that the Engagement Agreement relieves TaxMasters of any orally professed obligation to begin working on the customer's case "immediately" upon receiving the first payment. See App. 166. The arbitration clause contains the following four conditions: (1) a requirement that Antkowiak, but not TaxMasters, use arbitration to resolve all claims;³ (2) a bar on class action arbitration; (3) a forum-selection clause specifying Harris County, Texas, as the forum for all disputes; and (4) an expense provision requiring Antkowiak to "bear all costs of arbitration."Consistent with the experience of other customers, Antkowiak states that TaxMasters did not disclose the arbitration clause during his phone consultation.⁴

On January 7, 2009, Antkowiak faxed a signed copy of the Engagement Agreement to TaxMasters and thereafter made two additional payments of $500. Antkowiak stopped making payments, however, when it became apparent that TaxMasters was not working on his case. After TaxMasters threatened to take legal action if Antkowiak did not pay the remaining $2,500 due on his account, Antkowiak filed a class action suit alleging deceptive sales practices and improper debt collection activities in violation of the Truth in Lending Act, the Fair Debt Collection Practice Act, and various Pennsylvania statutes. TaxMasters responded by filing a motion to compel arbitration pursuant to the arbitration clause. The District Court denied TaxMasters's motion based on its conclusion that the arbitration clause is unconscionable under Pennsylvania law.⁵ Although the District Court did not expressly find any of the four individual arbitration terms to be specifically unconscionable, it found that, when bundled together, the four terms created an unconscionable agreement. Antkowiak v.TaxMasters, 779 F. Supp. 2d 434, 446-47 (E.D. Pa. 2011). Thereafter, TaxMasters filed a timely appeal.

II. Legal Background

We have appellate jurisdiction over this dispute pursuant to 9 U.S.C. § 16(a)(3). When a district court rules on a motion to compel arbitration, we review the decision de novo. Kaneff v. Del. Title Loans, Inc., 587 F.3d 616, 620 (3d Cir. 2009). Motions to compel arbitration are decided under the same standard applied to motions for summary judgment. Id. Summary judgment is only proper if "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A party opposing a motion to compel arbitration bears the burden of proving the arbitration clause unenforceable. Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 92 (2000). All reasonable inferences from the evidence are to be granted to the party opposing arbitration. Kaneff, 587 F.3d at 620.

Under the Federal Arbitration Act (FAA), arbitration clauses are just as "valid, irrevocable, and enforceable" as any other contractual obligation, 9 U.S.C. § 2, and cannot be invalidated by "defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue." AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1746 (2011). Accordingly, courts may only invalidate arbitration clauses on the grounds of "generally applicable contract defenses, such as fraud, duress, or unconscionability." Id. (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996)).

In Pennsylvania, unconscionability is a general defense to contract formation. Salley v. Option One Mortg. Corp., 925 A.2d 115, 119 (Pa. 2007). For a contract to be unconscionable, it must be both procedurally and substantively unconscionable. Gay v. CreditInform, 511 F.3d 369, 392 (3d Cir. 2008). Procedural unconscionability exists when the party challenging the contractual provision had "an absence of meaningful choice in accepting [it]." Denlinger, Inc. v. Dendler, 608 A.2d 1061, 1068 (Pa. Super. Ct. 1992) (citing Witmer v. Exxon Corp., 434 A.2d 1222, 1228 (Pa. 1981)). Substantive unconscionability exists when the contractual provision is "unreasonably favorable" to the party who imposed it. Witmer, 434 A.2d at 1228.

III. Discussion

A) Procedural Unconscionability

We agree with the District Court's conclusion that, under the facts of this case, the arbitration agreement is procedurally unconscionable. Contracts of adhesion are per se procedurally unconscionable under Pennsylvania law. McNulty v. H & R Block, Inc., 843 A.2d 1267, 1273 n.6 (Pa. Super. Ct. 2004); see also Nino v. Jewelry Exch., Inc., 609 F.3d 191, 201 (3d Cir. 2010). A contract of adhesion is a "form contract prepared by one party, to be signed by the other party in a weaker position, [usually] a consumer, who has little choice about its terms." McNulty, 843 A.2d at 1273; cf. Concepcion, 131 S. Ct. at 1750 ("[T]he times in which consumer contracts were anything other than adhesive are long past."). Here, Antkowiak produced admissions showing that TaxMasters considers a customer liable for the full contract price agreed to during the phone consultationirrespective of whether the customer ever signed the Engagement Agreement.⁶ Antkowiak has also produced evidence from tape-recorded phone consultations showing that TaxMasters's representatives do not disclose the arbitration clause during the initial phone call, see App. 118-75, and Antkowiak states that he was not informed of the clause. We believe this evidence and the reasonable inferences arising therefrom are sufficient to demonstrate that the arbitration agreement was a contract of adhesion. For these reasons, we agree that the arbitration agreement is procedurally unconscionable. There remains, however, the question of whether the agreement is also substantively unconscionable.

B) Substantive Unconscionability

In its discussion, the District Court expressed significant concern with the class action waiver. This concern, however, was based on case law that has subsequently been overruled by the Supreme Court. Concepcion, 131 S. Ct. at 1748 (2011); Litman v. Cellco P'ship, 655 F.3d 225, 231 (3d Cir. 2011) (stating that Concepcion's "broad and clear" holding preempts "impos[ing] class arbitration despite a contractual agreement for individualized arbitration"). Because it is unclear to what extent the District Court's concern with the class action waiver influenced its conclusion that the arbitrationagreement is unconscionable in toto, we will remand to ensure that the disposition of this case is consistent with Concepcion.

We also believe that prior precedent demands further factual development with respect to the substantive unconscionability of the "bear all costs" provision. While the requirement that Antkowiak bear all arbitration costs is notably more one-sided than expense provisions we have previously considered,⁷ the provision is only substantively unconscionable if it prevents Antkowiak from vindicating his rights in the arbitral forum. See Green Tree, 531 U.S. at 90-91. To make this showing, we have required a party challenging an expense provision to show (1) the projected costs that would apply and (2) the party's inability to pay those costs. See Parilla v. IAP Worldwide Servs. VI, Inc., 368 F.3d 269, 283-85 (3d Cir. 2004); Alexander v. Anthony Int'l, L.P., 341 F.3d 256, 268-69 (3d Cir. 2003). Because this evidence is not...