Wednesday, November 30, 2005
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Ban on Class-Action Arbitration Struck Down by Court of Appeal
Agreement Requiring That Consumers Arbitrate Small Claims Individually and in Georgia Held Unconscionable
By KENNETH OFGANG, Staff Writer/Appellate Courts
An arbitration clause in an internet service provider’s standard service agreement is unconscionable because it requires consumers to arbitrate relatively small claims in the company’s home state and prohibits class-wide claims, the Court of Appeal for this district ruled yesterday.
Siding with an EarthLink subscriber and Attorney General Bill Lockyer, who attacked the arbitration clause in an amicus brief, Div. Four affirmed Los Angeles Superior Court Judge Judith Chirlin’s denial of the company’s petition to compel arbitration.
The plaintiff, Ozgur Aral, is seeking class certification of an action charging Atlanta-based Earthlink with violating the Unfair Competition Law by charging DSL subscriber fees from the date service is ordered, rather than from the date the customer receives the equipment needed to connect to the service.
Aral, a software engineer, claims that he was charged for five weeks of service in 2003 that the did not receive because his modem had not arrived. He brought suit on behalf of all California customers who were similarly treated, seeking an injunction against the practice and restitution of all amounts unfairly obtained by EarthLink.
EarthLink responded to the complaint with a petition to compel arbitration in Georgia. Chirlin denied the petition, holding that because the gravamen of the complaint was a claim for injunctive relief that could not be awarded by an arbitrator, the issues were not severable and the entire action should be tried in court.
Justice Daniel Curry, writing for the Court of Appeal, disagreed with the judge’s reasoning but said she was correct in denying the petition.
Severance of non-arbitrable claims for injunctive relief from those that seek monetary remedies, including restitution, is appropriate where the arbitration agreement is otherwise enforceable, the justice said. But he went on to conclude that the EarthLink agreement could not be enforced.
No Preemption
In reaching that conclusion, Curry rejected EarthLink’s contention that the Federal Arbitration Act requires that challenges to the location of an arbitration be ruled on by the arbitrator. The justice cited the recent ruling in Discover Bank v. Superior Court (2005) 36 Cal.4th 148, which held that the FAA does not preempt state law with respect to the determination of whether an arbitration agreement violates fundamental public policy.
On the merits, the justice went on to say, the plaintiff had established that both the forum clause and the class waiver were unconscionable.
With respect to the latter, Curry wrote:
“Although Aral did not allege fraud, the gravamen of the complaint is that numerous consumers were cheated out of small sums of money through deliberate behavior. Accepting these allegations as true, as we must at this stage of the proceedings, the class action waiver must be deemed unconscionable under California law.”
The forum selection clause, the justice went on to say, is unenforceable under traditional principles of contract law.
Curry took issue with Net2Phone, Inc. v. Superior Court (2003) 109 Cal.App.4th 583, in which a divided panel of this district’s Div. Five upheld a forum selection clause in Net2Phone’s service agreement, requiring that customers litigate disputes regarding the company’s “telephony” service in New Jersey.
Action Dead
The court in that case acknowledged that the result would likely be to kill the plaintiff’s “private attorney general” action, because New Jersey law only permits consumer protection actions to be brought by injured parties or by the state attorney general.
Curry wrote:
“Although we agree with the dissent in Net2Phone that consumers with small monetary claims are ill served by a consumer protection scheme that prohibits private attorney general actions, we approach the problem from a different perspective. We believe that a forum selection clause that requires a consumer to travel 2,000 miles to recover a small sum is not reasonable....Although both the California Supreme Court and the United States Supreme Court place a heavy burden on the plaintiff who seeks to prove that a forum selection clause is unreasonable, particularly where the alleged unreasonableness is based on the additional expense and inconvenience of litigating far from home, the burden was not intended to be insurmountable.”
The case was argued on appeal by Christopher F. Robertson of Seyfarth Shaw for EarthLink and Lawrence R. Cagney of Westrup Klick for Aral.
The case is Aral v. EarthLink, Inc., B177146.
Copyright 2005, Metropolitan News Company