## Facts

- Kenneth M. Jones, an unemployed and indigent consumer, borrowed $800 from Wisconsin Auto Title Loans, Inc. to pay bills and living expenses.
- The loan used a preprinted, standard-form agreement presented on a take-it-or-leave-it basis.
- The agreement required repayment in one month at an APR of 300% and was secured by Jones’s automobile title (and he provided a car key).
- The agreement contained an arbitration clause requiring binding arbitration of essentially all borrower claims, while reserving for the lender the ability to pursue judicial or self-help remedies to enforce payment obligations and repossess collateral.
- The clause required Jones to pay the first $125 of any arbitration filing fee.
- After Jones defaulted, Wisconsin Auto filed a replevin action to recover the vehicle; Jones counterclaimed (including unconscionability) and sought class certification.
- Wisconsin Auto moved to stay the counterclaims and compel arbitration; the circuit court denied the motion as unconscionable, and the court of appeals affirmed.

## Issues

1. Whether the loan agreement’s arbitration clause was unconscionable under Wisconsin contract law and therefore unenforceable.
2. Whether the Federal Arbitration Act precluded applying Wisconsin’s generally applicable unconscionability doctrine to invalidate the arbitration clause.

## Decision

- The Wisconsin Supreme Court affirmed the denial of the motion to compel arbitration.
- The court held the arbitration clause was procedurally unconscionable because it was an adhesion term imposed on a financially vulnerable consumer with no meaningful opportunity to negotiate or understand the provision.
- The court held the clause was substantively unconscionable because it was one-sided (preserving court access for the lender while forcing the borrower into arbitration) and because the upfront fee requirement could deter small-value consumer claims.
- The court held the FAA did not preempt application of Wisconsin’s unconscionability doctrine because it is a generally applicable contract defense applied without singling out arbitration.
- The court refused to enforce the arbitration clause and allowed Jones’s counterclaims to proceed in court.

## Legal Principles

- Unconscionability under Wisconsin law requires both procedural and substantive components, each present to a sufficient degree based on the totality of the circumstances.
- Procedural unconscionability focuses on the contract formation process, including adhesion contracting, disparities in bargaining power, and lack of meaningful choice or understanding.
- Substantive unconscionability focuses on whether terms are overly harsh or one-sided, including asymmetrical remedies and cost provisions that materially deter a party’s ability to assert rights.
- The FAA permits courts to invalidate arbitration clauses using generally applicable state-law contract defenses, so long as arbitration agreements are not treated more harshly than other contract terms.
- When an arbitration provision is unenforceable, courts may decline to enforce that provision while allowing litigation to proceed on the parties’ claims.

## Conclusion

The court held that a lender-drafted arbitration clause in a high-interest, short-term consumer loan was unenforceable where it was imposed through an adhesive process on a financially vulnerable borrower and materially favored the lender by reserving court remedies for the lender and imposing cost barriers likely to deter borrower claims, and it further held that the FAA did not bar applying Wisconsin’s unconscionability doctrine to reach that result.


Wisconsin Auto Title Loans, Inc. v. Jones, 714 N.W.2d 155 (Wis. 2006)