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Smith v. Jem Group, Inc.

United States Court of Appeals, Ninth Circuit

December 12, 2013

Rosita H. SMITH, individually and on behalf of all similarly situated Washington State Residents, Plaintiff-Appellee,
v.
JEM GROUP, INC., a Nevada corporation, Defendant-Appellant.

Argued and Submitted March 7, 2013.

Page 637

Christopher Glenn Emch (argued), Foster Pepper PLLC, Seattle, WA, for Defendant-Appellant.

Toby J. Marshall, Jennifer Rust Murray, Erika L. Nusser (argued), Beth Ellen Terrell, Terrell Marshall Daudt & Willie PLLC, Seattle, WA; Darrell William Scott, The Scott Law Group, P.S., Spokane, WA, for Plaintiff-Appellee.

Appeal from the United States District Court for the Western District of Washington; Robert J. Bryan, Senior District Judge, Presiding. D.C. No. 3:11-cv-05054-RJB.

Page 638

Before: DAVID M. EBEL,[*]WILLIAM A. FLETCHER and JOHNNIE B. RAWLINSON, Circuit Judges.

OPINION

W. FLETCHER, Circuit Judge:

JEM Group, Inc. (" JEM" ) appeals from the district court's denial of its motion to compel arbitration. The district court held that it had authority to decide whether an arbitration clause contained in an attorney retainer agreement is unconscionable. On the merits, the court held that the clause is unconscionable under Washington law.

We affirm.

I. Background

Rosita Smith is the lead plaintiff in a proposed class action against JEM, Marshall Banks, LLC (" Marshall Banks" ), and Legal Helpers Debt Resolution, LLC (" Legal Helpers" ). According to the complaint, JEM is a " back-end" debt-relief company that " implements, manages, and maintains the debt-relief programs marketed and purportedly performed by ‘ front-end’ affiliate debt-settlement companies" including Marshall Banks. Marshall Banks, also known as " Kazlow and Tucker Debt Relief, LLC" (" Kazlow and Tucker" ), is a California " front-end" debt-relief company that markets debt-relief services to consumers. Kazlow and Tucker is a fictitious company that is not registered in any state. Legal Helpers is a Nevada limited liability company and Illinois law firm also known as Macey, Aleman, Hyslip & Searns. The Illinois Department of Financial and Professional Regulation recently issued a cease-and-desist order prohibiting Legal Helpers from engaging in debt adjusting practices in Illinois. It wrote, " Despite the name, ‘ Legal Helpers,’ the company does not provide legal representation to consumers or otherwise act in an attorney capacity." In the Matter of Legal Helpers Debt Resolution LLC, No. 10CC311, at *3 (Ill. Dep't of Fin. & Prof'l Regulation, Div. of Fin. Insts. Aug. 1, 2011).

Under Washington law, a debt-settlement service provider may not charge more than twenty-five dollars in an initial payment, fifteen percent of any single payment, or fifteen percent of the debtor's total debt. Wash. Rev. Cod. § 18.28.080(1). The statute provides an exception for debt-adjustment services performed by attorneys when those services are " solely incidental to the practice of their professions." Id. § 18.28.010(1)(a). According to the complaint, debt-adjustment companies, including JEM and Marshall Banks, have associated with law firms such as Legal Helpers that are willing to lend their names to debt-adjustment companies in an attempt to avoid the limitations such as those contained in the Washington statute. JEM and Marshall Banks charge fees to Washington consumers that exceed the statutory limitations on fees that may be charged by debt-collection agencies.

In March 2010, Smith received a solicitation from defendants offering debt settlement services. At the time, she was struggling financially as a result of her husband's recent death and her own declining health. In early April, Smith signed a twenty-one page contract sent to her by Kazlow and Tucker. The contract included a four-page, fine-print attorney retainer agreement ...


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