Prima Paint Corp. v. Flood & Conklin Manufacturing Co

In Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 403-04, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967), the Supreme Court held that under section 4 of the FAA, "if the claim is fraud in the inducement of the arbitration clause itself . . . the federal court may proceed to adjudicate it," but "the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally." Prima Paint Corp., 388 U.S. at 403-04. Several federal courts have examined substantive unconscionability of an arbitration clause when ruling on a motion to compel. See, e.g., Dobbins v. Hawk's Enters., 198 F.3d 715, 717 (8th Cir. 1999); Harris v. Green Tree Fin. Corp., 183 F.3d 173, 181-84 (3rd. Cir. 1999); We Care Hair Dev., Inc. v. Engen, 180 F.3d 838, 843 (7th Cir. 1999); Doctor's Assocs., Inc. v. Hamilton, 150 F.3d 157, 163 (2nd Cir. 1998); Steador Enters., Ltd. v. Armtex, Inc., 947 F.2d 727, 733 (4th Cir. 1991). These cases seem to us clearly correct. See also In re Conseco Fin. Servicing Corp., 19 S.W.3d 562, 568 n.3 (Tex. App. - Waco 2000, orig. proceeding) (questioning the validity of the dicta in Oakwood Homes). The United States Supreme Court, distinguishing between claims of fraud in the inducement of the arbitration agreement itself and fraud in the inducement of the contract as a whole, held that a claim for fraud in the inducement of a contract falls within the scope of a broad arbitration agreement. Id. at 403-04. The Court held that "the statutory language of the FAA, 9 U.S.C. 4 does not permit the federal court to consider claims of fraud in the inducement of the contract generally," and such claims must be referred to arbitration. Id. at 404