## Facts

- Sharon Taylor bought a used car from City Auto Sales, executing an “As Is” retail buyer’s order with a broad arbitration clause governed by the Federal Arbitration Act (FAA).
- Taylor made a down payment that included proceeds from trading in her prior vehicle and signed a short-term promissory note for the remainder; City Auto delivered the car the same day.
- Taylor also signed a delivery agreement stating that possession was conditional on obtaining financing and reserving City Auto’s right to rescind and retake the vehicle if financing failed.
- About a week later, City Auto informed Taylor that financing was not approved, repossessed the car, kept Taylor’s down payment, and retained personal property left in the vehicle.
- Taylor sued under the Tennessee Consumer Protection Act and related theories, alleging deceptive practices and fraudulent inducement in connection with the transaction and the arbitration provision.
- The arbitration clause compelled Taylor to arbitrate all disputes arising from the sale while preserving City Auto’s ability to pursue certain remedies in court.

## Issues

1. Whether, when an arbitration clause invokes the FAA and broadly covers disputes, a claim for fraudulent inducement of the contract must be arbitrated despite a contrary Tennessee rule.
2. Whether an arbitration clause in a consumer adhesion contract is unconscionable when it compels the consumer to arbitrate all claims but reserves a judicial forum for the merchant’s claims.

## Decision

- The Tennessee Supreme Court held that parties may agree, under the FAA, to arbitrate fraudulent-inducement claims directed at the contract as a whole, notwithstanding Tennessee’s general prohibition.
- The Court nevertheless held the arbitration clause unenforceable because it was unconscionable: it reserved judicial remedies for City Auto while requiring Taylor to arbitrate all of her claims.
- The Court reversed the trial court’s order compelling arbitration and dismissing the complaint, affirmed the appellate court’s judgment for Taylor on the alternative ground of unconscionability, and remanded for further proceedings.

## Legal Principles

- When an arbitration agreement expressly adopts the FAA and broadly covers disputes arising from the transaction, a claim that the overall contract was fraudulently induced is generally for arbitration unless the challenge is directed specifically at the arbitration clause.
- The FAA permits application of generally applicable contract defenses, including unconscionability, to invalidate an arbitration provision.
- An arbitration clause in a consumer adhesion contract may be substantively unconscionable when it mandates arbitration for the consumer while preserving meaningful access to court for the merchant’s claims.
- Unconscionability requires a context-specific analysis; non-mutual remedies are assessed in light of the parties’ relative bargaining power and the degree of one-sidedness.

## Conclusion

The court recognized that the FAA can require arbitration of fraudulent-inducement claims when the parties so agree, but it refused to enforce a one-sided arbitration clause in a consumer car-sale contract because the clause was unconscionable and therefore void.


Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004)