On June 5, the Tennessee Supreme Court rejected a per se rule of unconscionability for non-mutual arbitration clauses, holding them enforceable if not too-one-sided and commercially reasonable under the circumstances.

Berent sued his mobile-home sellers in chancery court, arguing that foreclosure exceptions for the seller within a generally broad-form arbitration clause rendered it unconscionable and unenforceable.   The trial and intermediate appellate courts agreed, under the Supreme Court’s prior decision Taylor v. Butler, 142 S.W.2d 277 (TN 2004). The Sellers sought discretionary review, arguing that Taylor was out-of-step with recent national norms and preempted under the US Supreme Court’s rationale in AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011)(FAA preempted California law invalidated class-waivers in arbitration clauses).

Threading the needle, the Tennessee Supreme Court held that Taylor had not established a per se rule invalidating any non-mutual arbitration clauses, but only those that were mostly one-sided. Applying Taylor, the Court noted that the following factors helped this arbitration clause avoid “unconscionability” so that it was enforceable:

  • It allowed both parties to seek injunctive relief in support of arbitration;
  • It allowed both parties to seek judicial relief in small claims court (a factor not discussed as much as it should have been); and,
  • Its single non-mutual remedy allowed the Sellers recourse to the “uniquely judicial” remedy of foreclosure (and to protect the collateral), itself having other safeguards;

…notwithstanding the Court’s threshold recognition of the contract as one of adhesion. By eschewing a per se rule, the Court avoided the pre-emption issue altogether.

Berent seems a win for sellers and consumer-arbitration proponents, but perhaps is so in name only. The decision likely will require full pre-arbitration determination – upon an evidentiary hearing, perhaps after discovery – of the contract’s formation and factual context, in order to provide the basis for the “facts and circumstances” individualized review to which the Court resorted to dodge Concepcion. Indeed, the Court remanded for consideration of whether Berent’s fraud-in-the-formation allegations warranted further proceedings. The next litigation steps on the issue (whether on a cert petition in this case or in other cases later) will ask whether that pre-arbitration examination beyond the face of the arbitration clause itself runs afoul of the FAA and Conception.

The decision in Berent v. CMH Homes, Inc., No. E2013-012140SC-R1-CV (TN June 5, 2015) is here.

Tennessee’s Berent decision comes on the heels of a Missouri Supreme Court decision enforcing a virtually-identical mobile-home contract provision, by using its severability clause to disregard the “foreclosure reserve clause” it held was unconscionable. Eaton v. CMH Homes, Inc., No. SC 94374, 2015 WL 3387910 (Mo. May 26, 2015)(opinion here).