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Rejecting the reasoning of two decisions by the Pennsylvania Superior Court, the 3rd U.S. Circuit Court of Appeals has ruled that arbitration agreements cannot be deemed “unconscionable” solely on the grounds that they require consumers to waive their right to pursue class action claims. In its 41-page opinion in Gay v. CreditInform, a unanimous three-judge panel said it recognized that the two Superior Court opinions gave the plaintiff support for her claim that the arbitration provision is unconscionable. But the 3rd Circuit found that the Superior Court rulings in Lytle v. CitiFinancial Services Inc. and Thibodeau v. Comcast Corp. conflict with the Federal Arbitration Act and therefore cannot be followed. “The federal law is controlling here and the Pennsylvania law must conform with it,” U.S. Circuit Judge Morton I. Greenberg wrote. In the suit, plaintiff Mary Gay claims that Intersections Inc. violated its obligations under the federal Credit Repair Organizations Act (CROA) and the Pennsylvania Credit Services Act (CSA). Gay had entered into agreement with Intersections for the purchase of services related to monitoring and improving her credit history. U.S. District Judge James T. Giles granted a motion by Intersections to compel arbitration of Gay’s claim on an individual basis. On appeal, Gay’s lawyers argued that Giles should be reversed because, under both the CROA and the CSA, Gay has a right to assert her claims in a judicial forum, and that the federal law explicitly gives her the right to bring her case as a class action. Plaintiff’s attorneys James A. Francis of Francis & Mailman and David A. Searles of Donovan Searles also argued that both statutes prohibit consumers from waiving the rights to sue in court and to pursue a class action. The arbitration provision in Gay’s agreement was therefore unenforceable, they argued, and should also be deemed unconscionable because she agreed to it at a time when she lacked any bargaining power to negotiate its terms. Intersections’ lawyers � Carleton O. Strouss and David R. Fine of K&L Gates in Harrisburg � argued that the arbitration clause was valid and suffered from none of the flaws that courts have declared to be unconscionable. Greenberg, in an opinion joined by Judges D. Michael Fisher and Ruggero J. Aldisert, rejected all of the plaintiff’s arguments. The mere fact that both statutes “contemplate consumers’ actions being brought in a judicial forum” is not enough to show that Congress or the Pennsylvania General Assembly intended to exclude such claims from arbitration agreements, Greenberg said. “Identification of a court as a forum for an allegedly wronged party to seek relief adds nothing to the � resolution of the issue before us, i.e., whether a party consensually may bind herself to arbitrate her claims for injuries resulting from violation of the statutes,” Greenberg wrote. The plaintiff’s lawyers, Greenberg said, have “not identified anything in the legislative history of either statute that clearly expresses legislative intent to preclude the ability of parties to engage in arbitration.” Greenberg also found there was no “irreconcilable conflict” between requiring a consumer to arbitrate her claims and the enforcement of either statute. “If this case proceeds to arbitration instead of litigation in a judicial forum,” Greenberg wrote, “Gay will retain the full range of rights created by the statutes, and these rights remain available in individual arbitration proceedings.” Greenberg also rejected the plaintiff’s argument that the arbitration clause was unconscionable under Pennsylvania law. Francis and Searles argued that the arbitration provision was unconscionable because it was drafted by Intersections and “lacking any choice on the part of Ms. Gay,” and “bears all the earmarks of an unconscionable contract of adhesion.” But Greenberg found that Virginia law controlled because the contract included a valid choice-of-law provision, and that the arbitration clause was not unconscionable under Virginia law. “Although Gay surely did not have the same bargaining power as Intersections when she entered into the agreement, she has not provided a basis for finding that the inequality in bargaining power was ‘so gross as to shock the conscience,’” Greenberg wrote, quoting the Virginia Supreme Court’s 1992 decision in Management Enterprises Inc. v. Thorncroft Co. Greenberg also found that the terms of the agreement � to arbitrate disputes on an individual basis � cannot be deemed “an unconscionable bargain.” In the final section of the opinion, Greenberg found that even if the court ignored the choice-of-law provision and applied Pennsylvania law, the result would be the same “because federal law requires that we do so and Pennsylvania law must conform with federal law.” Francis and Searles argued that the Pennsylvania Superior Court has twice held that arbitration clauses that prohibit consumers from pursuing class actions are unconscionable. In Lytle, the Superior Court found that “class actions are favored in this commonwealth as a means of resolving many meritorious claims which would otherwise, due to the amounts involved, escape prosecution.” The court remanded the case to the trial court to determine whether “the damages claimed by appellants are insufficient to permit the Lytles to seek legal redress for their injuries in the absence of a class action.” In Thibodeau, the Superior Court went further and held that an arbitration clause that requires waiver of a right to pursue a class action is unconscionable. “Class action lawsuits are and remain the essential vehicle by which consumers may vindicate their lawful rights,” the Thibodeau court said. “It is only the class action vehicle which makes small consumer litigation possible. Consumers joining together as a class pool their resources, share the costs and efforts of litigation and make redress possible.” If such arbitration clauses were allowed in the consumer context, the Thibodeau court said, “corporations are effectively immunized from redress of grievances.” But Greenberg said the federal courts would not follow either Lytle or Thibodeau because they conflict with federal law. Under the U.S. Supreme Court’s 1987 decision in Perry v. Thomas, Greenberg found that federal courts must apply state contract law, but not state arbitration law. As a result, Greenberg said, the 3rd Circuit was forced to “reject Lytle and Thibodeau for we do not agree with them as there is no escape from the fact that they deal with agreements to arbitrate, rather than with contracts in general, and thus they are not in harmony with Perry.” If the holdings in Lytle and Thibodeau were applied, Greenberg said, their reasoning “could result in a significant narrowing of the application of the FAA.” Greenberg said he expressed no view on “whether that might be a desirable result” because it is not the court’s role to do so. “If the reach of the FAA is to be confined then Congress and not the courts should be the body to do so,” Greenberg wrote. (Copies of the 41-page opinion in Gay v. CreditInform , PICS No. 07-2070, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.) •

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