In a recent Ohio Eighth District Court of Appeals' decision, the Court ruled that "loser-pays" provisions in agreements related to consumer transactions – where the loser pays the winner’s expenses and legal fees in a lawsuit or arbitration – must comply with the fee-shifting guidelines in the Ohio Consumer Sales Practices Act ("CSPA").
In Hedeen v. Autos Direct Online, Inc., 2014-Ohio-4200, the plaintiff argued that the trial court improperly stayed her lawsuit (which stated claims for breach of contract, violations of the Motor Vehicle Sales rule and the CSPA, and fraud and deceit with respect to the purchase of a used car) pending arbitration. Though the Court found the arbitration agreement otherwise enforceable, it found that the "loser-pays" provision, which provided that the "non-prevailing party shall pay, and the arbitrators shall award the prevailing party's arbitration costs and expenses, including reasonable attorney's fees," was contrary to public policy as it would allow prevailing suppliers under the CSPA to recover attorney's fees even if the consumer did not file an action in bad faith. The Court ruled:
In the instant case, we find that the loser-pays provision in the arbitration agreement violates public policy to the extent that it requires the arbitrator to award ADO reasonable attorney fees even if Hedeen did not file her action in bad faith. The CSPA reflects a strong public policy that consumers who bring good faith claims against suppliers will not have to pay the supplier’s attorney fees under R.C. 1345.09(F), even if the consumer loses his or claim against the supplier. ADO’s loser-pays provision effectively nullifies this statutory protection provided to consumers by the CSPA. Therefore, we agree with Hedeen in that the loser-pay provision chills consumers from pursuing their statutory claims through arbitration.
Id. at Para. 48
Based upon this analysis, the Court found the arbitration clause unenforceable and that the trial court erred in staying her suit pending arbitration, although, as noted in the dissent, the Court could have simply limited the effect of the loser-pays provision.
Though the Hedeen analysis focused on arbitration provisions, it could apply equally to loser-pays provisions in other contracts relating to consumer transactions. Accordingly, businesses that engage in consumer transactions and utilize loser-pays provisions with respect to dispute resolution should review their agreements to ensure compliance with the CSPA.