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In a case where a business entity attempted to add an arbitration agreement to an ongoing relationship by posting the agreement on its website, the Ninth Circuit Court of Appeals held that the district court erred in compelling arbitration because the party opposing arbitration had no notice, actual or constructive, of the arbitration agreement.
In Douglas v. United States District Court, 495 F.3d 1062 (9th Cir. 2007), Douglas contracted with America Online (AOL) for long distance phone service. Talk America later acquired this business from AOL and added four provisions to the service contract: (1) additional service charges; (2) a class action waiver; (3) an arbitration agreement; and (4) a choice of law provision calling for the application of New York law.
Talk America posted the revised contract on its website but never notified Douglas that the contract had been revised. When he learned of the additional service charges, Douglas filed a class action lawsuit against Talk America. In response, Talk America filed a motion to compel arbitration. The district court granted the motion.
Since there is no interlocutory appeal from an order compelling arbitration, Douglas petitioned for a writ of mandamus. Under Ninth Circuit precedent, a writ of mandamus will not be granted unless the lower court's order is "clearly erroneous." Accordingly, in analyzing whether to grant a writ, the Court focused on whether the order compelling arbitration was clearly erroneous.
The Court concluded that the order compelling arbitration was clearly erroneous in three respects. First and foremost, the Court held that Douglas' continued use of Talk America's phone service did not constitute assent to the revised contract because there was no notice of the revisions. In reaching this conclusion, the Court explained that "[p]arties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side."
Second, the Court held that even if the added terms were enforceable, the district court erred in applying New York law (instead of California law) and thereby concluding that the availability of marketplace alternatives precluded a finding of procedural unconscionability.
Third, the Court held that the district court erred in determining the validity of the class action waiver under New York law. In reaching this holding, the Court reasoned that the district court improperly relied on Provencher v. Dell, Inc., 409 F.Supp.2d 1196 (C.D. Cal. 2006) because the California Court of Appeal "expressly disavowed" that decision in Cohen v. DirectTV, Inc., 48 Cal. Rptr. 3d 813 (Cal. Ct. App. 2006).
In light of the alleged errors, the Court vacated the order compelling arbitration.
If Talk America had given Douglas some notice of the amendments to the service contract, the arbitration agreement would have been valid because continued use of a service or retention of a product is an effective form of assent. See, e.g., Tickanen v. Harris & Harris, Ltd., 461 F.Supp.2d 863 (E.D. Wis. 2006).
Setting aside the notice issue, the Court's analysis of the choice-of-law issue is puzzling. Under California law, courts will honor a legitimate choice of law provision unless application of the chosen law would violate a fundamental public policy of California.
Accordingly, in holding that the district court erred in applying New York law to the question of procedural unconscionability, the Court essentially concluded that California has a fundamental public policy against allowing the availability of marketplace alternatives to preclude a finding of procedural unconscionability.
However, the only legal authority cited for that supposed policy is not even a California court decision but rather a decision by the Ninth Circuit itself – namely, Nagrampa v. Mail Coups, Inc., 469 F.3d 1257, 1283 (9th Cir. 2006). Even if one accepts the premise that the judiciary can announce a fundamental public policy, it's inconceivable that a federal court has authority to dictate California's fundamental public policy, especially when that policy contravenes a decision by a California court. See Dean Witter Reynolds, Inc. v. Superior Court, 259 Cal. Rptr. 789, 796 (Cal. Ct. App. 1989) ("[T]here is ample authority for the proposition that the existence of reasonably available market alternatives defeats a claim of adhesiveness.").
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