Michael Schnuerle v. Insight Communications Company, L.P. , 376 S.W.3d 561 ( 2012 )

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MICHAEL SCHNUERLE, AMY GILBERT, APPELLANTS/CROSS-APPELLEES
LANCE GILBERT AND ROBIN WOLFF
ON REVIEW FROM COURT OF APPEALS
V. CASE NO. 2006-CA-002121-MR
JEFFERSON CIRCUIT COURT NO. 06-CI-004267
INSIGHT COMMUNICATIONS, COMPANY, APPELLEES/CROSS-APPELLANTS
L.P. AND INSIGHT COMMUNICATIONS
MIDWEST, LLC
OPINION OF THE COURT BY JUSTICE VENTERS
AFFIRMING IN PART, REVERSING IN PART AND REMANDING
Appellants Michael Schnuerle, Amy Gilbert, Lance Gilbert, and Robin
Wolff, individually and on behalf of all others similarly situated, filed a class
action complaint in the Jefferson Circuit Court against their Internet service
providers, Appellees Insight Communications Company, L.P., and Insight
Communications Midwest, LLC (collectively, Insight). Insight's Broadband High
Speed Internet Service Agreement (Service Agreement) contained an arbitration
clause that required customers to submit damage claims against Insight to
arbitration, and it also barred class action litigation against Insight by its
customers. The circuit court determined that the class action ban was
enforceable, and therefore it dismissed Appellants' complaint. The Court of
Appeals affirmed. Because of that disposition, neither the circuit court nor the
Court of Appeals addressed other issues, including Appellants' challenge to the
enforceability of the Service Agreement's general arbitration clause. We
granted discretionary review to consider the challenges to the enforceability of
the arbitration agreement, as well as the class action waiver and confidentiality
clauses contained therein. We granted Appellees' cross-petition for
discretionary review to enable a more complete resolution of the whole
controversy, including the disputed choice of law provisions of the agreement
and the effect of severability of the challenged provisions from the remaining
portion of the arbitration agreement.
For the reasons stated below, we conclude that in cases governed by the
Federal Arbitration Act, the decision of the United States Supreme Court in
AT&T Mobility LLC v. Concepcion, U.S. , 131 S. Ct. 1740 (2011)
precludes enforcement of a state policy invalidating upon grounds of
unconscionability, a contractual waiver of class action participation, where the
unconscionability is based solely upon the fact that the dispute involves a large
number of de minimis claims which are unlikely to be individually litigated.
Consequently, in the dispute before this Court, the contractual provision under
which Appellants waived their right to participate in class action litigation is
now enforceable under federal law. We also determine as follows: 1) that the
Service Agreement's choice of law provision is not enforceable, and that
Kentucky law, rather than New York law, is applicable to our review;
2) that the Service Agreement's general arbitration provision is not
unconscionable, that it comports with Kentucky's public policy preference
favoring arbitration, and is therefore enforceable; and 3) that the provision
imposing a confidentiality requirement upon the litigants to arbitration
proceedings is void and is severable from the remaining portions of the
agreement. As such, we affirm in part, reverse in part and remand to the
Jefferson Circuit Court for entry of a final judgment consistent with this
opinion.
I. FACTUAL AND PROCEDURAL BACKGROUND
Appellants are all Kentucky residents who entered into the Service
Agreement with Insight for broadband Internet service in the area of Jefferson
County, Kentucky. In order to receive service, the customers were required to
either sign the Service Agreement or manifest their assent to the Service
Agreement via the Internet.
The Service Agreement contains an arbitration clause. Within the
arbitration clause are provisions under which customers agree not to enter into
a class action lawsuit against Insight and not to divulge the results of any
settlement reached through arbitration. The clause, however, does permit
individual customers to pursue any claim of less than $1,500.00 through small
claims court instead of proceeding to arbitration.
Insight's 2006 effort to upgrade its high-speed Internet service left many
of its customers, including Appellants, with service outages for varying lengths
of time. Those outages generated a high volume of calls into Insight's customer
service department, which resulted in long wait times for customers to receive
assistance. According to Appellants, once customers did get through, they
received false and misleading information concerning the service interruption.
They further allege that Insight acted improperly by failing to timely inform its
customers about the outage, and by failing to protect customers "from deletion
of information."
Insight responds that it acknowledged the problem in a timely fashion
and issued credits to 2,595 customers who notified the company of their
particular outage problem. The company later issued a public apology for the
disruptions and set up a voucher system allowing any other dissatisfied
customers to request a credit for the interrupted service. Insight admits to
monetary liability for any service it billed to customers while their Internet
connection was down, and maintains that any dispute would simply require
calculating the actual outage time, which it is willing to do under its customer
service procedures.
Notwithstanding Insight's efforts to address the problem, Appellants filed
a complaint in Jefferson Circuit Court on behalf of themselves individually,
and, pursuant to CR 23, on behalf of the putative class of all other Insight
customers in Kentucky similarly situated. Causes of action were asserted
based upon violations of the Kentucky Consumer Protection Act, KRS 367.170,
et seq. , breach of contract, and unjust enrichment.
4
Insight moved to dismiss the action and to compel arbitration pursuant
to the mandatory arbitration clause contained in the Service Agreement. As
noted above, the arbitration clause does not mandate arbitration of every
dispute but, rather, it allows claims less than 1,500.00 to be litigated. There
is no allegation that the claim of any individual customer would exceed
$1,500.00. The typical claim would be in the range of $40.00. Thus, it is
apparent that any member of the putative class would have the options of filing
a suit in small claims court or proceeding to arbitration.
Appellants argued that the arbitration clause was unenforceable on the
grounds that it was an unconscionable provision of an adhesion contract
imposed upon them by a party with significantly greater bargaining power.
Appellants also argued that the arbitration clause was communicated to
customers in a manner that ensured few, if any, would read it; that they were
forced to use Insight's services because it was the only local broadband cable
Internet provider; that they could not effectively pursue their claims on an
individual basis; and that, because of the small amounts involved, individual
customers would be unable to retain counsel willing to take the case.
The trial court granted Insight's motion to compel arbitration and it
dismissed the class action with prejudice, requiring claimants to pursue their
remedy individually through arbitration or in small claims court as provided in
the Service Agreement. The Court of Appeals affirmed the circuit court's
decision. We granted discretionary review.
5
On December 16, 2010, this Court rendered an opinion in this case.
While Appellee's petition for rehearing or modification of our opinion was
pending, the United States Supreme Court rendered its opinion in AT&T
Mobility LLC v. Concepcion, supra, a decision that dealt with a substantially
similar issue: the enforceability of a class action waiver in a contract that also
required arbitration of any disputes arising out of the contract. We ordered
supplemental briefing and heard oral arguments on the applicability of
Concepcion. Having now reconsidered our previous opinion in light of the
United States Supreme Court's decision in Concepcion, we have withdrawn our
earlier rendition and substituted this opinion.
II. OUR REVIEW IN THIS CASE IS GOVERNED BY PRINCIPLES OF
KENTUCKY LAW RATHER THAN NEW YORK LAW
Among the provisions contained in the Dispute Resolution section of the
Service Agreement is a choice of law clause which provides that "New York Law,
(excluding its choice of law rules) will apply to the construction, interpretation,
and enforcement of the Service Agreement. Citing to Breeding v.
Massachusetts Indem. and Life Ins. Co., 633 S.W.2d 717 (Ky. 1982), the circuit
court declined to apply the Service Agreement's choice of law provision, and
instead applied Kentucky law in determining whether the arbitration
agreement was enforceable.' Because the choice of law is a threshold question
1 Despite a choice of law provision calling for application of New York law, the
circuit court held that Kentucky law applied. Without discussion, the Court of
Appeals decision applied Kentucky law and thus, by implication, affirmed the circuit
court upon this issue.
6
in our review and was raised by Insight in its cross-petition, we first address
the enforceability of the Service AgreeMent's choice of law provision.
Breeding, upon which the circuit court relied, addressed the. issue as
follows:
The traditional choice of law rules in the field of contracts dictated
that matters bearing upon the execution, interpretation and
validity of a contract were determinable by the internal law of the
place where the contract was made. Babcock v. Jackson, 12
N.Y.2d 473, 240 N.Y.S.2d 743, 191 N.E.2d 279 (1963).
However, such a mechanical approach is no longer favored. This
court in Lewis v. Family Group, Ky., 555 S.W.2d 579 (1977)
abrogated the traditional rule of lex loci contractus stating:
Traditionally the rule has been that the validity of a contract
is to be determined by the laws of the state in which it was
made . . . . The modern test is which state has the most
significant relationship to the transaction and the parties.
Restatement Second of Conflicts, Sec. 188 (1971).[ 2 ] Lewis,
supra, pp. 581-582.
Increasingly, states have adopted the grouping of contacts
doctrine. Justice, fairness and the best practical result may best
be achieved by giving controlling effect to the law of the jurisdiction
which, because of its relationship or contact with the occurrence or
the parties, has the greatest concern with the specific issue raised
in the litigation. Babcock v. Jackson, 240 N.Y.S.2d 743, at 749,
191 N.E.2d 279, at 283, supra.
The merit of the doctrine followed in Babcock, supra, is that it gives
to the forum having the most interest in the problem paramount
2 Section 188 provides, in relevant part: "(1) The rights and duties of the parties
with respect to an issue in contract are determined by the local law of the state which,
with respect to that issue, has the most significant relationship to the transaction and
the parties . . . . (2) In the absence of an effective choice of law by the parties (see §
187), the contacts to be taken into account . . . to determine the law applicable to an
issue include: (a) the place of contracting, (b) the place of negotiation of the contract,
(c) the place of perfomiance, (d) the location of the subject matter of the contract, and
(e) the domicile, residence, nationality, place of incorporation and place of business of
the parties . . . ."
control over the legal issues arising out of a particular factual
context.
Id. at 719; see also Harris Corp. v. Comair, Inc., 712 F.2d 1069, 1071 (6th
Cir. 1983) and Wallace Hardware Co., Inc. v. Abrams, 223 F.3d 382 (6th
Cir. 2000). The Breeding decision held that Kentucky law should apply
because Kentucky had the greater interest in, and the most significant
relationship to, the, transaction and the parties.
Upon application of Breeding, we agree with the circuit court's
conclusion that Kentucky law governs our evaluation of the Service Agreement.
Appellants, the other members of the putative class, the Internet equipment,
the Internet service provided, and the relevant operating area are all located in
Kentucky. The customers executed the agreements in Kentucky, and Kentucky
has a substantial interest in the protection of its residents in the area of
commercial transactions. Moreover, one of the principal claims arises under
the Kentucky Consumer Protection Act. New York, on the other hand, has no
discernible connection or interest at all in the subject matter of this litigation.
Thus, there can be no doubt that Kentucky has "the greater interest and the
most significant relationship to the transaction and the parties."
We accordingly base our review of the Service Agreement on relevant
Kentucky law. We further note, however, that the parties do not dispute that
the Federal Arbitration Act (FAA) is applicable to the arbitration clause, and we
accordingly apply its provisions as appropriate.
III. THE SERVICE AGREEMENT'S COMPREHENSIVE BAN ON CLASS
ACTION LITIGATION IS ENFORCEABLE UNDER FEDERAL
ARBITRATION LAW
The principal issue in this appeal is whether the Service Agreement's ban
on class action litigation is enforceable against Appellants and the members of
the putative class they would represent. The ban on class actions found in
Insight's Service Agreement in this case is comprehensive and absolute,
prohibiting the joining of disputes of different claimants, in lawsuits and in
arbitration, in all situations and in all forums. 3
Appellants contend that Insight's prohibition on class action litigation
effectively immunizes it from liability for wrongful conduct resulting in many
small claims, because it removes the only viable and economically effective
remedy available for the redress of such clairns. 4 They argue that because it is
3 Provision 5(e) of the Service Agreement provides as follows:
No Class Action or Consolidated Proceedings. NO DISPUTE MAY BE
JOINED WITH ANOTHER LAWSUIT, OR IN AN ARBITRATION WITH A DISPUTE
OF ANY OTHER PERSON. All parties to the arbitration must be individually
named. THERE SHALL BE NO RIGHT OR AUTHORITY FOR ANY CLAIMS TO
BE ARBITRATED ON A CLASS ACTION OR CONSOLIDATED BASIS OR ON
BASES INVOLVING CLAIMS BROUGHT IN A PURPORTED REPRESENTATIVE
CAPACITY ON BEHALF OF THE GENERAL PUBLIC (SUCH AS A PRIVATE
ATTORNEY GENERAL), OTHER SUBSCRIBERS, OR OTHER PERSONS
SIMILARLY SITUATED. Customer understands and acknowledges that by
consenting to submit claims to arbitration pursuant to this Agreement,
Customer may be forfeiting his or her right to share in any class action awards.
This Section will not apply to any individual claims filed by Customer in a
lawsuit prior to the effective date of this Agreement, nor to the claims of a class
certified prior to the effective date of this Agreement. This Section will apply to
all other claims, including class claims where a class has not yet been certified,
even if the facts and circumstances upon which the claims are based occurred
or existed before the effective date of this Agreement.
4 The Attorney General of Kentucky, AARP, and the Kentucky Justice
Association filed amicus curiae briefs supporting Appellants on this issue. The Pacific
Legal Foundation filed a brief in support of upholding the class action ban provision.
9
not economically practical for an individual customer to independently litigate
his or her de minimis claim, the class action prohibition effectively exculpates
Insight from liability for such claims and, correspondingly, it thereby unjustly
enriches the company because it will never have to provide recompense for the
many small claims. 5
We agree that the purpose of the class action under CR 23 is to provide a
remedy for the very concerns that Appellants raise. The practical effect of de
minimis claims situations has been explained in other cases addressing class
action litigation. "Economic reality dictates that [litigation involving many
small claims] proceed as a class action or not at all." Eisen v. Carlisle &
Jacquelin, 417 U.S. 156, 161 (1974) ("A critical fact in this litigation is that
petitioner's individual stake in the damages award he seeks is only $70. No
competent attorney would undertake this complex antitrust action to recover
so inconsequential an amount."). "The policy at the very core of the class
action mechanism is to overcome the problem that small recoveries do not
provide the incentive for any individual to bring a solo action prosecuting his or
her rights. A class action solves this problem by aggregating the relatively
paltry potential recoveries into something worth someone's (usually an
attorney's) labor." Amchem Products, Inc. v. Windsor, 521 U.S. 591, 617 (1997)
5 Insight notes that customers in cases of this type could pursue a remedy
through the Attorney General, who is vested with authority under the Kentucky
Consumer Protection Act to pursue litigation against companies who would improperly
overcharge its customers. However, as noted by the Attorney General, "with the
limited resources of the Commonwealth the Attorney General is simply unable to
pursue each and every violator and must limit its case selection to those matters
involving the greatest public interest." Brief of the Attorney General of Kentucky, pg. 4.
10
(quoting Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997));
Carnegie v. Household Intern., Inc., 376 F.3d 656, 661 (7th Cir. 2004) (Posner,
J.) ("The realistic alternative to a class action is not 17 million individual suits,
but zero individual suits, as only a lunatic or a fanatic sues for 8301. 6 7
Because of the important purpose served by class actions, we would be
inclined to join the jurisdictions, such as those just mentioned, that have
invalidated provisions of consumer adhesion contracts that bar class action
resolution of disputes. Our initial opinion in this case so held. However, upon
application of Concepcion, we are now constrained to conclude that under
contracts like the one now before us, which contain a class action waiver and
also require disputes to be arbitrated under the FAA, the federal policy favoring
arbitration preempts any state law or policy invalidating the class action waiver
as unconscionable based solely upon the grounds that the dispute involves
many de minimis claims which are, individually, unlikely to be litigated. We
are satisfied that Concepcion is dispositive, and therefore, we turn our
discussion to its application in this case.
6 The holdings in the aforementioned cases would be substantially affected by
the holding in Concepcion.
7 We note also that the class action is a creation of the courts, not the
legislatures, hence its foundation in this country is in the court-established civil
rules, rather than the statutes. As was the case in England, class actions in the
United States are an outgrowth of the compulsory joinder rule that prevailed in courts
of equity. Shaw v. Toshiba America Information Systems, Inc., 91 F. Supp. 2d 942, 946-
951 (E.D. Tex. 2000) (recounting history of class action litigation). See also Hansberry
v. Lee, 311 U.S. 32, 41 (1940) ("The class suit was an invention of equity to enable it to
proceed to a decree in suits where the number of those interested in the subject of the
litigation is so great that their joinder as parties in conformity to the usual rules of
procedure is impracticable.") As such, courts enjoy wider latitude in determining
public policy regarding class actions and fashioning remedies in this type of litigation.
11
As a preliminary matter, Appellants argue that Insight has waived the
federal preemption argument of Concepcion, or is judicially estopped from
asserting that defense, by "t[aking] the position that state law governed the
enforceability of its class action ban." Appellant's Supplemental Authority
Brief, pg. 2. Clearly, the arbitration clause in this proceeding specifically
provided that it was to be controlled, as applicable, by the FAA. To our
knowledge, Insight has not contended otherwise. Moreover, we regard Insight's
earlier references to state law analysis as indicating no more than the
unexceptional and well-established rule that the interpretation of an
arbitration agreement is generally a matter of state contract law. See Arthur
Andersen LLP v. Carlisle, 556 U.S. 624, 630-31 (2009)(State law is applicable to
determine which contracts are binding and enforceable under the FAA "if that
law arose to govern issues concerning the validity, revocability, and
enforceability of contracts generally," quoting Perry v. Thomas, 482 U.S. 483,
493, n. 9 (1987)). Thus, we conclude that Insight's request that we review this
matter under the holding in Concepcion is properly preserved, and we do not
further address Appellants' preservation arguments. 8
8 In its initial brief as Appellee, under the heading "REGARDLESS OF ANY
RULING ON THE CLASS ACTION WAIVER, THE PARTIES' AGREEMENT TO
ARBITRATE IS ENFORCEABLE," Insight left the clear impression that its fallback
position was that if the class action waiver provision was stricken, upon application of
the agreement's severability clause, the remaining portions of the arbitration
agreement should be upheld, implying that if there were to be class action
proceedings, its preference would be for those proceedings to be in an arbitration
forum rather than in circuit court. Now that Concepcion has exposed the folly of that
position, Insight has quickly adopted the theme of that decision.
12
We similarly reject Appellants' argument to the effect we should not
accept Justice Thomas's separate opinion in Concepcion as a complete
concurrence, and that therefore the decision is a mere plurality not
commanding five votes. While Justice Thomas did indeed express a separate
interpretation of FAA § 2, he nonetheless made clear his full concurrence with
the majority by saying: "When possible, it is important in interpreting statutes
to give lower courts guidance from a majority of the Court." Concepcion, 131
S. Ct. at 1754 (Thomas, J., concurring) ("Therefore, although I adhere to my
views on purposes-and-objectives pre-emption [citation omitted] I reluctantly
join the Court's opinion.")
In Concepcion, the Supreme Court considered a California case in which
the plaintiffs had entered into cellular telephone service agreements with AT&T.
The agreements provided for arbitration of all disputes between the parties,
and further required that claims be brought in the parties' "individual capacity,
and not as a plaintiff or class member in any purported class or representative
proceeding." Id. at 1744.
When a dispute arose, AT&T moved to compel arbitration under the
terms of its contract. The plaintiffs opposed the motion, contending that the
arbitration agreement was unconscionable and unlawfully exculpatory under
California law because it disallowed class action procedures. Relying on the
rule adopted by the California Supreme Court in Discover Bank v. Superior
Court, 113 P.3d 1100 (2005)(abrogated by Concepcion), the district court denied
AT&T's motion to compel, finding that the arbitration provision was
13
unconscionable because AT&T had not shown that bilateral arbitration
adequately substituted for the deterrent effects of class actions; the Ninth
Circuit affirmed, also finding the provision unconscionable under the Discover
Bank rule. Laster v. AT&T Mobility LLC, 584 F.3d 849, 855 (2009)(reversed by
Concepcion); Concepcion, 131 S. Ct. at 1745. In Discover Bank, the California
Supreme Court considered class action waivers in arbitration agreements in
the context of de minimis claims and held them to be unconscionable and
unenforceable under California law. Discover Bank at 1110.
The United States Supreme Court accepted certiorari in Concepcion to
consider whether the Discover Bank rule and similar holdings violate Section 2
of the Federal Arbitration Act (FAA), which makes agreements to arbitrate
"valid, irrevocable, and enforceable, save upon such grounds as exist at law or
in equity for the revocation of any contract," 9 U.S.C. § 2; whether the FAA
prohibits States from conditioning the enforceability of arbitration agreements
on the availability of class-wide arbitration procedures; and whether § 2
preempts Discover Bank-type rules classifying class action waivers in consumer
contracts as unconscionable.
The rationale supporting the Discover Bank rule, and the principal
argument relied upon by the plaintiffs in Concepcion, is that the striking down
of an exculpatory class action waiver derives from common law
unconscionability doctrine and the well-established policy against exculpation
provisions, and that these are well-established grounds that "exist at law or in
equity for the revocation of any contract" under FAA § 2. The Court, however,
14
concluded that the application of doctrines normally thought to be generally
applicable to any contract, such as duress or, as relevant here,
unconscionability, in the context of an arbitration clause, may in practice,
disfavor arbitration in a way that violates § 2 of the FAA .
The Court noted that while ostensibly these rules would apply equally to
all contracts, litigation, and litigants, in practice, the rules would have a
disproportionate impact on arbitration agreements, concluding that "[r]equiring
the availability of class-wide arbitration interferes with fundamental attributes
of arbitration and thus creates a scheme inconsistent with the FAA."
Concepcion, 131 S. Ct. at 1748. In explaining why this is so, the Court began
by noting that the "principal purpose" of the FAA is to "ensur[e] that private
arbitration agreements are enforced according to their terms." Id. (citing Stolt-
Nielsen S.A. v. Animal Feeds Int'l Corp., 130 S. Ct. 1758, 1763 (2010)). 9
The Court also cited to Preston v. Ferrer, 552 U.S. 346, 358 (2008), which
preempted a state-law rule requiring exhaustion of administrative remedies
before arbitration, where the Court emphasized that "[a] prime objective of an
agreement to arbitrate is to achieve 'streamlined proceedings and expeditious
results,' which objective would be "frustrated" by requiring a dispute to be
9 In its petition for rehearing, Insight also argues that we failed to give sufficient
attention to Stolt Nielson. We note that Stolt Nielson, however, is not directly
- -
concerned with the issues we address; rather that decision concerned arbitration
proceedings between sophisticated contract negotiators of equal bargaining power. In
such cases, the unconscionablility analysis is quite distinct from the consumer
adhesion contract situation we address, whereby the relative bargaining power of the
parties is skewed heavily in favor of the commercial entity. To the extent Stolt Nielson
-
is relevant to this proceeding, those points are merged into Concepcion, and thus we
do not undertake a detailed discussion of this case.
15
heard by an agency first, . . . and that such a rule would "at the least, hinder
speedy resolution of the controversy." Analogizing to this case, the Court
concluded that "California's Discover Bank rule similarly interferes with
arbitration," noting that if there is a class action in progress, then "companies
would have less incentive to continue resolving potentially duplicative claims
on an individual basis." Concepcion, 131 S. Ct. at 1750.
The Court further cited to its holding in Stolt-Nielsen, 130 S. Ct. at 1776,
that agreements which are silent on the question of class procedures could not
be interpreted to allow them because the "changes brought about by the shift
from bilateral arbitration to class action arbitration" are "fundamental."
Concepcion, at 1750-1751.
The Court also noted that striking down class action waivers contained
in arbitration clauses is detrimental to arbitration in violation of § 2 because
the switch from bilateral to class arbitration sacrifices the principal advantage
of arbitration, its informality, and makes the process slower, more costly, and
more likely to generate a procedural morass than a final judgment. Id. at
1751. The Court further emphasized the complications created by the
procedural formality associated with class actions, noting, for example the
rigorous due process and Federal Rule of Civil Procedure — based rules
required for a class action money judgment to bind absent class members in
litigation, and noted that it is "unlikely that in passing the FAA Congress
meant to leave the disposition of these procedural requirements to an
arbitrator." Id.
16
Finally, the Court noted that class arbitration creates a substantial
deterrent to arbitration because a class action greatly increases the risks to
defendants of a devastating arbitration award with a very limited opportunity
for judicial review of the decision. "Arbitration," the Court noted, "is poorly
suited to the higher stakes of class litigation." Id. As such, the Court found it
unlikely that Congress would have intended to allow state courts, by adopting
a Discovery Bank-type rule, to force parties to choose between a high-stakes
arbitration without meaningful appellate review, or litigation in the courts. Id.
at 1752. Because the Discover Bank rule "stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress"
in favoring arbitration, the Court held that the Discover Bank rule is preempted
by the FAA. Id.
As can be readily seen, the Discover Bank rule encompasses facts
substantially identical to the facts in this case. More specifically, like the
Discover Bank rule, the present case also includes (1) a class action waiver; (2)
found in a consumer contract of adhesion; (3) involving small amounts of
damages; and (4) it is alleged that the party with the superior bargaining power
is unfairly withholding a small sum of money in damages from each of a large
number of its consumers.
Appellants seek to distinguish Concepcion, relying upon three principal
grounds: (1) that the Discover Bank rule stricken by the Court was applied
systematically in any de minimis claim situation, and would not prevent the
adoption of a similar rule that was applied only on a case-by-case basis; (2)
17
that the arbitration agreement in issue here is far less consumer-friendly than
the one reviewed in Concepcion; and (3) that the Mitsubishi 10 line of cases
holding that class action waivers may be stricken when consumers are
otherwise unable to vindicate their rights, is unaffected by Concepcion, and
that the clause in this case prevents the injured customers from vindicating
their rights.
We are not persuaded by Appellants' effort to distinguish Concepcion.
First, assuming that the Appellees are correct that the Discover Bank rule is an
inflexible rule leaving no room for discretion, we are nevertheless unconvinced
that simply re-characterizing the same basic idea as an individualized
determination based upon the facts of each case is sufficient to evade the
Concepcion.holding. Nor do we believe this case is distinguishable by virtue of
the relatively more consumer-friendly arbitration clause contained in
Concepcion in comparison with the clause contained in this case. A careful
reading of Concepcion discloses that the unusually consumer-friendly terms of
the AT&T agreement were not particularly relevant to the Supreme Court's
holding. Rather, what the Court was actually focusing on and condemning in
Concepcion was the chilling effect on arbitration that occurs when courts are
able to invalidate class action waivers in cases involving de minimis claims;
which is precisely what the Appellants request that we do in this proceeding.
We therefore believe that the less favorable terms for consumers provided by
the Insight agreements offer no basis for a departure from Concepcion's
10 Mitsubishi Motors Corp. v. Soler. Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).
18
holding. That factor simply was not central to the Supreme Court's holding in
the case.
Finally, we strongly agree with Appellants that Concepcion does not
disturb the basic principle that an arbitration clause is not enforceable if it fails
to provide plaintiffs with an adequate opportunity to vindicate their claims.
See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637
(1985) ("[Slo long as the prospective litigant effectively may vindicate [his]
statutory cause of action in the arbitral forum, the statute will continue to
serve both its remedial and deterrent function."); Green Tree Financial Corp.-
Alabama v. Randolph, 531 U.S. 79, 81 (2000) ("the existence of large arbitration
costs may well preclude a litigant . . . from effectively vindicating such rights");
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991); 14 Penn Plaza
LLC v. Pyett, 556 U.S. 247 (2009). Accordingly, arbitration clauses certainly
may continue to be struck down as unconscionable if their terms strip
claimants of a statutory right, which cannot be vindicated by arbitration,
because, for example, the arbitration costs on the plaintiff are prohibitively
high; or the location of the arbitration is designated as a remote location. But
again, simply the impracticality of pursuing a single, small dollar claim is not
regarded as an impediment to vindicating one's rights.
Finally, it would be inaccurate to conclude that the consumers in this
case cannot adequately vindicate their rights as contemplated in Mitsubishi for
the reason that the arbitration clause in this case specifically reserves for
Insight customers the same avenue of recovery available to any other plaintiff
19
with a $40.00 claim, that is, the right to go to small claims court. The cost of
going to small claims is a 20.00 filing fee, CR 3.03(1)(a), plus the cost of
service of process, all of which would be recoverable as part of the successful
small claims judgment. And while most, if not all, consumers may well choose
to forgo recovery because it is just not worth the trouble, by the Supreme
Court's calculus in Concepcion, it is preferable for the public to suffer the
unjust enrichments that defendants may occasionally gain than to burden the
arbitration process favored by federal law with a Discover Bank-type rule. We,
of course, yield as we must to the United States Supreme Court's interpretation
of federal law.
In summary, we conclude that Concepcion is dispositive of this issue. A
decision to invalidate or otherwise disregard the anti-class action provision of
Insight's Service Agreements on grounds of unconscionability would undermine
the federal policy favoring arbitration, and would offend the preemption
provisions of the Federal Arbitration Act, as interpreted in Concepcion. We
accordingly conclude that the Court of Appeals properly affirmed the trial
court's dismissal of the putative class action claim.
IV. THE GENERAL ARBITRATION CLAUSE IS NOT UNCONSCIONABLE
In addition to their arguments relating to the class action waiver,
Appellants argue that the arbitration clause is unenforceable in its totality as
an unconscionable adhesion contract term. For the reasons explained below,
20
we conclude that the general arbitration provisions are neither procedurally or
substantively unconscionable, and remain enforceable.
A. The Arbitration Clause
Section 5 of the Service Agreement, contains the following general
provisions relevant to our review of the enforceability of the arbitration clause:
(a) Arbitration for Resolution of Disputes. IT IS IMPORTANT
THAT YOU READ THIS ENTIRE SECTION CAREFULLY. THIS
SECTION PROVIDES FOR RESOLUTION OF DISPUTES THROUGH
FINAL AND BINDING ARBITRATION BEFORE A NEUTRAL
ARBITRATOR INSTEAD OF IN A COURT BY A JUDGE OR JURY
OR THROUGH A CLASS ACTION. YOU continue to have CERTAIN
RIGHTS TO OBTAIN RELIEF FROM a federal or state
REGULATORY agency.
(b) BINDING ARBITRATION. The arbitration process established
by this section is governed by the Federal Arbitration Act ("FAA"), 9
U.S.C. §§ 1-16. The FAA, not state law, shall govern the
arbitrability of all disputes between Insight regarding this
Agreement and the Service. You have the right to take any dispute
that qualifies to small claims court rather than arbitration.
However, all other disputes arising out of or related to this
Agreement (whether based in contract, tort, statute, fraud,
misrepresentation or any other legal or equitable theory) must be
resolved by final and binding arbitration, unless provided
otherwise in this Agreement. This includes any dispute based on
any product, service or advertising having a connection with this
Agreement and any dispute not finally resolved by a small claims
court. The arbitration will be conducted by one arbitrator using
the procedures described by this Section. If any portion of this
Dispute Resolution Section is determined to be unenforceable,
then the remainder shall be given full force and effect. The
provisions of this section shall survive termination, amendment or
,
expiration of this Agreement.
As discussed below, we discern nothing unconscionable, or
unenforceable about this arbitration clause.
21
B. Kentucky Law Favors Arbitration
We begin by noting that in Kentucky, unlike most jurisdictions,
arbitration enjoys the imprimatur of our state Constitution. Section 250 of the
Kentucky Constitution provides "It shall be the duty of the General Assembly to
enact such laws as shall be necessary and proper to decide differences by
arbitrators, the arbitrators to be appointed by the parties who may choose that
summary mode of adjustment." Similar provisions were contained in Article
VI, Section 10, of Kentucky's Second Constitution adopted in 1799, and in
Article 8, Section 10, of Kentucky's Third Constitution adopted in 1850. See
Dutschke v. Jim Russell Realtors, Inc., 281 S.W.3d 817, 823 (Ky. App. 2008).
Clearly, it has long been the public policy of Kentucky that arbitration is
a favored method of dispute resolution. "Arbitration has always been favored
by the courts." Poggel v. Louisville Ry. Co., 225 Ky. 784, 10 S.W.2d 305, 310
(1928). "Kentucky law favors the enforcement of arbitration agreements."
Medcom Contracting Services, Inc. v. Shepherdsville Christian Church Disciples
of Christ, 290 S.W.3d 681, 685 (Ky. App. 2009) (citing Kodak Mining Co. v.
Carrs Fork Corp., 669 S.W.2d 917 (Ky. 1984)); see also, Ally Cat, LLC v.
Chauvin, 274 S.W.3d 451, 458 (Ky. 2009).
Further, our legislature has statutorily recognized a public policy
preference favoring arbitration. Subject to exceptions not relevant here, KRS
417.050 provides that "[a] written agreement to submit any existing
controversy to arbitration or a provision in written contract to submit to
arbitration any controversy thereafter arising between the parties is valid,
22
enforceable and irrevocable, save upon such grounds as exist at law for the
revocation of any contract." Similarly, the Federal Arbitration Act, 9 U.S.C.A. §
2 (FAA), which is applicable to arbitration provisions involving interstate
commerce, 11 provides that "[a] written provision in any . . . contract evidencing
a transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction, or the refusal to perform
the whole or any part thereof, or an agreement in writing to submit to
arbitration an existing controversy arising out of such a contract, transaction,
or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds
as exist at law or in equity for the revocation of any contract."
In light of our clear constitutional and statutory authorities favoring
arbitration "[t]he party seeking to enforce an agreement has the burden of
establishing its existence, but once prima facie evidence of the agreement has
been presented, the burden shifts to the party seeking to avoid the agreement.
The party seeking to avoid the arbitration agreement has a heavy burden."
Louisville Peterbilt, Inc. v. Cox, 132 S.W.3d 850, 857 (Ky. 2004) (citation
omitted). As such, we begin our review with a strong presumption that the
general arbitration clause is not unconscionable.
11 The parties do not dispute that the FAA is applicable to the arbitration clause
under consideration. The contract for Internet service which is the subject matter of
the contract clearly involves an interstate (indeed worldwide) service, and, moreover,
the arbitration clause itself specifically provides that "[t]he arbitration process
established by this section is governed by the [FAA]." Thus, without objection of the
parties, we apply FAA provisions as appropriate.
23
C. The Arbitration Clause is not Unconscionable
Appellants contend that the general arbitration clause should be held
unenforceable upon the grounds that the provision is unconscionable. "A
fundamental rule of contract law holds that, absent fraud in the inducement, a
written agreement duly executed by the party to be held, who had an
opportunity to read it, will be enforced according to its terms." Conseco
Finance Servicing Corp. v. Wilder, 47 S.W.3d 335, 341 (Ky. App. 2001) (citing
Cline v. Allis-Chalmers Corp., 690 S.W.2d 764 (Ky. App. 1985)).
The doctrine of unconscionability has developed as a narrow exception to
this fundamental rule. The doctrine is used by the courts to police the
excesses of certain parties who abuse their right to contract freely. It is
directed against one-sided, oppressive and unfairly surprising contracts, and
not against the consequences per se of uneven bargaining power or even a
simple old-fashioned bad bargain. Id. (citing Louisville Bear Safety Service, Inc.,
v. South Central Bell Telephone Company, 571 S.W.2d 438, 440 (Ky. App.
1978)). An unconscionable contract is "one which no man in his senses, not
under delusion, would make, on the one hand, and which no fair and honest
man would accept, on the other." Id. at 342 ((quoting Black's Law Dictionary,
1694 (4th ed. 1976)).
In Conseco, the Court of Appeals noted that review of arbitration clauses
for unconscionability involves a two step process -- first, a review focused on
the procedures surrounding the making of the arbitration clause (procedural
unconscionability) and second, a review of the substantive content of the
24
arbitration clause (substantive unconscionability). Id. at 343 n. 22. In their
arguments, the parties have applied this two-step process. In light of Conseco,
and because the parties have placed much emphasis upon this framework, we
likewise review the argument using the procedural/ substantive
unconscionability structure. 12
1. Procedural Unconscionability
Procedural, or "unfair surprise," unconscionability "pertains to the
process by which an agreement is reached and the form of an agreement,
including the use therein of fine print and convoluted or unclear language .. .
[It] involves, for example, 'material, risk-shifting' contractual terms which are
not typically expected by the party who is being asked to 'assent' to them and
often appear [ ] in the boilerplate of a printed form." Conseco, 47 S.W.3d at
343 n. 22 (citing Harris v. Green Tree Financial Corp., 183 F.3d 173, 181 (3rd
Cir. 1999). Factors relevant to the procedural unconscionability inquiry
include the bargaining power of the parties, "the conspicuousness and
comprehensibility of the contract language, the oppressiveness of the terms,
and the presence or absence of a meaningful choice." Jenkins v. First American
Cash Advance of Georgia, LLC., 400 F.3d 868, 875-876 (11th Cir. 2005).
12 The parties raise the issue of whether a finding of unconscionability requires
both procedural and substantive unconscionability. In our view, for the reasons
reflected herein, there need not be both. Substantive unconscionability, alone, is
grounds for a determination that an arbitration clause, or an individual provision
thereof, is unenforceable. Similarly, the converse is true. If the arbitration clause is
written in "legalese" and disguised in the "fine print," the provision may be
unenforceable even though not substantively unconscionable.
25
Appellants argtie that the arbitration clause is procedurally
unconscionable because it is contained in a non-negotiable, take it or leave it,
adhesion contract. They also argue that the arbitration clause is procedurally
unconscionable because it is not readily visible to customers contracting for
service via the Internet who must navigate to a separate page in order to see it.
"A contract of adhesion is a standardized contract, which, imposed and drafted
by the party of superior bargaining strength, relegates to the subscribing party
only the opportunity to adhere to the contract or reject it." Patterson v. ITT
Consumer Financial Corp., 18 Cal. Rptr. 2d 563, 565 (Cal. App. 1993) (citation
and internal quotation marks omitted). Adhesion contracts are not per se
improper. On the contrary, they are credited with significantly reducing
transaction costs in many situations. See Hill v. Gateway 2000, Inc., 105 F.3d
1147 (7th Cir. 1997). However, adhesion contracts are subject to abuse.
Oppressive terms ancillary to the main bargain can be concealed in fine print
and couched in vague or obscure contractual language. "In consumer
transactions in particular, courts have been willing to scrutinize such contracts
and have refused to enforce egregiously abusive ones." Conseco, 47 S.W.3d at
342 n. 20. (citing Jones v. Bituminous Casualty Corp., 821 S.W.2d 798 (Ky.
1991)).
Upon review of the general provisions of the arbitration clause, we cannot
conclude that it is procedurally unconscionable. The clause was not concealed
or disguised within the form; its provisions are clearly stated such that
purchasers of ordinary experience and education are likely to be able to
26
understand it, at least in its general import; and its effect is not such as to
alter the principal bargain in an extreme or surprising way. As noted by the
trial court "[t]he provision is in clear and concise language. The title is in bold
print. The method of referring the reader to a different screen is a common
practice in most web sites, and even in many written contracts (usually by
reference to an addendum)." In summary, we do not find the arbitration clause
to be procedurally unconscionable.
In light of Concepcion, we are constrained to further note that in future
cases closer scrutiny of the positioning and prominence of class action waiver
provisions will likely be necessary. Future application of Concepcion may be
expected to limit the ability of consumers to band together under state law in a
class action to vindicate important rights. It therefore follows that heightened
attention should be afforded to providing a full and clear disclosure when those
limitations are placed in adhesion contracts. It is fundamental that the
prominence of the disclosure should be commensurate with the importance of
the right being taken away.
2. Substantive Unconscionability
Substantive unconscionability "refers to contractual terms that are
unreasonably or grossly favorable to one side and to which the disfavored party
does not assent." Conseco, 47 S.W.3d at 343 n. 22 (citation omitted). As for
substantive unconscionability, courts consider "the commercial reasonableness
of the contract terms, the purpose and effect of the terms, the allocation of the
27
risks between the parties, and similar public policy concerns." Jenkins, 400
F.3d at 876.
The arbitration clause in this case is a basic arbitration clause
permitting either side to compel arbitration. It has no unique characteristics to
distinguish it from any other standard arbitration clause. Indeed, for the de
minimis individual claims of this case, the customer is deprived of no right at
all by the arbitration clause. With or without the arbitration clause, he is free
to take his cause of action to small claims court, which would be the normal
forum in Kentucky's court system for the individual's claim to be filed in any
event. In summary, the general arbitration clause is not substantively
unconscionable.
D. Conclusion
As noted above, our state Constitution and statutes favor the
enforceability of arbitration agreements. Moreover, the purpose of the FAA
"was to reverse the longstanding judicial hostility to arbitration agreements
that had existed at English common law and had been adopted by American
courts, and to place arbitration agreements upon the same footing as other
contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991).
The FAA's provisions "manifest a 'liberal federal policy favoring arbitration
agreements."' Id. at 25 (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24, (1983)). The Supreme Court has "rejected generalized
attacks on arbitration that rest on 'suspicion of arbitration as a method of
weakening the protections afforded in the substantive law to would-be
28
complainants."' Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 89-90 (2000)
(quoting Rodriguez de Quijas v. Shearson/ Am. Express, Inc., 490 U.S. 477, 481,
(1989)); Jenkins, 400 F.3d at 874. In light of such long-standing public policy,
we see no basis to disturb this contractual term.
V. THE CONFIDENTIALITY PROVISION IS . UNENFORCEABLE
Finally, the Appellants contend that the confidentiality provision
contained in the arbitration agreement should be deemed unenforceable
because it gives the company "an unyielding advantage over individual
customers." They argue that as a repeat participant in the arbitration
proceedings, the company is able to gather a body of information relating to
precedent and rulings arising from within the dispute resolution process, to
which customers involved in separate proceedings would have no access. 13
Insight responds that, by extension, Concepcion prevents state courts
from disturbing confidentiality agreements included within arbitration
agreements. We disagree.
First, the subject matter of Concepcion is far removed from the issue of
confidentiality agreements. 14 Further, the potential obstacles to arbitration
13 As noted above, the arbitration agreement includes a severability provision
which provides that "If any portion of this Dispute Resolution Section is determined to
be unenforceable, then the remainder shall be given full force and effect. The
provisions of this section shall survive termination, amendment or expiration of this
Agreement." Accordingly, in striking down the confidentiality term, the remainder of
the arbitration agreement remains unaffected.
14 Concepcion does mention that with class-wide arbitration "[c]onfidentiality
becomes more difficult." 131 S. Ct. at 1750. However, that certainly does not
represent an indication that confidentiality agreements are likewise protected under
the holding.
29
presented by the forbidding of class action waivers are simply not present in
the case of confidentially provisions. While it is well-established that
confidentially agreements may be enforceable to protect, for example, personal
information or trade secrets; in situations like here, where such concerns are
not present, the provision is wholly one-sided, protecting only the company
that prepared the contract with no reciprocal benefit to the consumers. As
such, we are not persuaded that Concepcion compels that we uphold the
confidentiality agreement in this case. Accordingly, for the reasons explained
below, and upon application of the substantive unconscionability principles as
discussed above, we hold that the confidentiality agreement in this case is
substantively unconscionable, and accordingly unenforceable against
customers who opt for arbitration as a result of the internet outage.
Subsection (g) of the Dispute Resolution provisions, titled Arbitration
Information and Filing Procedures, provides, in relevant part, that "[n]either
you nor Insight may disclose the existence, content or results of any arbitration
or award, except as may be required by law, to confirm and enforce an award,
or to the party's attorneys and/or accountants." Although facially neutral,
confidentiality provisions usually favor companies over individuals. Ting v.
AT&T, 319 F.3d 1126, 1151 (9th Cir. 2003). It is generally recognized that
because companies continually arbitrate the same claims, the arbitration
process tends to favor the company. Cole v. Burns Intern. Sec. Services, 105
F.3d 1465, 1476 (D.C. Cir. 1997). In Cole, the D.C. Circuit held that because
of plaintiffs' lawyers and arbitration appointing agencies like the American
30
Arbitration Association, who can scrutinize arbitration awards and accumulate
a body of knowledge on a particular company, there was little likelihood of any
harm occurring from the "repeat player" effect. Id. at 1486.
In Ting, however, the Ninth Circuit concluded that if a "company
succeeds in imposing a gag order, plaintiffs are unable to mitigate the
advantages inherent in being a repeat player." Ting, 319 F.3d at 1152. Ting
concluded that such confidentiality clauses were unenforceable because it
permitted the company to "place[] itself in a far superior legal posture by
ensuring that none of its potential opponents have access to precedent while,
at the same time, [the company] accumulates a wealth of knowledge on how to
negotiate the terms of its own unilaterally crafted contract[,]" and because "the
unavailability of arbitral decisions may prevent potential plaintiffs from
obtaining the information needed to build a case of intentional misconduct or
unlawful discrimination[.]" Id.
Further, "the secrecy provisions of the arbitration agreements both affect
the outcomes of individual arbitrations and clearly favor Defendants. They do
so by reinforcing the advantages Defendants already possess as repeat
participants in the arbitration process." Acorn v. Household Intern., Inc., 211
F. Supp. 2d 1160, 1173 (N.D. Cal. 2002). "[S]everal studies have found and
several courts have held that a party's repeated appearance 'before the same
group of arbitrators conveys distinct advantages over the [one-time
participant].' Mercuro v. Superior Court, 116 Cal. Rptr. 2d 671, 678 (Cal. App.
2002)." See also Sprague v. Household Intern., 473 F. Supp. 2d 966, 975 (W.D.
31
Mo. 2005) (company has not explained why confidentiality agreements provide
any real benefit, much less a comparable benefit, to the consumer and, as
repeat players, the company is the obvious beneficiary of any attempt to
obscure the process); Luna v. Household Finance Corp. III, 236 F. Supp. 2d 1166,
1180 (W.D. Wash. 2002) ("The advantages repeat participants possess over
"one time" participants in arbitration proceedings are widely recognized in legal
literature and by federal courts."); Annendariz v. Foundation Health Psychcare
Services, Inc., 6 P.3d 669, 690 (Cal. 2000) (size of employee award in
arbitration is lower when employer is a repeat participant); Bingham,
"Employment Arbitration: The Repeat Player Effect," 1 Emp. Rts.
Employment Poly. J. 189, 213 (1997) (potential reasons for the repeat player
advantage in arbitrations include: "unequal information in arbitrator selection,"
"unequal representation at the hearing," a repeat participant's ability to screen
out and settle meritorious cases, and the arbitrator's incentive to satisfy repeat
customers). Consequently, although facially neutral, the confidentiality
provision of the arbitration agreement, in effect, favors Insight.
Insight directs us to Iberia Credit Bureau, Inc. v. Cingular Wireless, LLC,
379 F.3d 159, 175 (5th Cir. 2004) (while the confidentiality requirement is
probably more favorable to the cellular provider than to its customer, the
plaintiffs have not persuaded us that the requirement is so offensive as to be
invalid.); Parilla v. L4P Worldwide Services, VI, Inc., 368 F.3d 269, 280 (3rd Cir.
2004) (each side has the same rights and restraints under those provisions and
there is nothing inherent in confidentiality itself that favors or burdens one
32
party vis-a-vis the other in the dispute resolution process.); and Monroe v.
Citigroup, Inc., 2003 U.S. Dist. LEXIS 26316 (N.D. Fla. Aug. 5, 2003).
Nevertheless, Insight has failed to identify any practical social utility to the
provision. In light of the substantial potential adverse consequences of the
confidentiality provisions and the absence of countervailing benefits, we join
those jurisdictions that hold that such provisions are unconscionable and
unenforceable.
VI. CONCLUSION
For the foregoing reasons, the decision of the Court of Appeals is affirmed
in part, and reversed in part, and this matter is remanded to the Jefferson
Circuit Court for entry of a final judgment consistent with this opinion.
Minton, C.J., Abramson, Cunningham and Scott, JJ., concur. Schroder,
J., concurs in part and dissents in part by separate opinion, in which Noble, J.,
joins.
SCHRODER, J., CONCURRING IN PART AND DISSENTING IN PART: I
concur with the well-reasoned opinion of the majority on all of the issues
except as to the enforceability of the general arbitration clause and, by
extension, as to the applicability of AT&T Mobility LLC v. Concepcion, U.S.
, 131 S. Ct. 1740 (2011). While I recognize the federal and state authorities
favoring arbitration (including Kentucky Constitution Section 250), I believe
that Insight's arbitration agreement is so procedurally unconscionable that the
arbitration clause itself should be held invalid.
33
The majority accurately sets out the factors relevant to the procedural
unconscionability inquiry - "the conspicuousness of the terms and
comprehensibility of the contract language, the oppressiveness of the terms,
and the presence or absence of a meaningful choice." Jenkins v. First American
Cash Advance of Georgia, LLC, 400 F.3d 868, 875-76 (11th Cir. 2005).
However, the Court's opinion does not address the last factor - whether the
Appellants had a meaningful choice - which I see as critical to the analysis of
unconscionability in this case.
The record established that Insight was the only provider of high-speed
broadband cable internet services in Louisville at the time Appellants entered
into the service agreements. Although there may have been other options to
obtain internet access, the record indicates the service agreements for these
companies had similar binding arbitration clauses or they did not provide high- .
speed broadband cable service. In the digital age in which we now live, internet
access is becoming more and more of a necessity for personal communication,
as well as for business and commerce purposes. The service agreement in this
case was a "take it or leave it" adhesion contract that customers, who had no
bargaining power, were forced to submit to if they wanted high-speed cable
internet access. Unlike the appellees in Conseco Finance Servicing Corp. v.
Wilder, 47 S.W.3d 335, 343 n.24 (Ky. App. 2001), who did not allege that there
was not another reasonably available source for mobile home financing,
Appellants in the present case have shown they had no meaningful choice in
obtaining the high-speed internet service they sought.
34
The fact that the arbitration portion of the service agreement was not in
the portion of the agreement asking for the customer's assent was further proof
of its procedural unconscionability. Customers had to navigate to a separate
page to see that portion of the agreement. While the majority notes that this is
a common practice, it certainly cannot be characterized as conspicuous.
I would therefore hold that the arbitration agreement as a whole was
procedurally unconscionable; given that conclusion, I do not believe this case
falls under Concepcion. The issue in Concepcion was the Discover Bank rule,
which essentially required the availability of classwide arbitration and
invalidated arbitration agreement provisions to the contrary. The Supreme
Court concluded that the Discover Bank rule "interferes with fundamental
attributes of arbitration and thus creates a scheme inconsistent with the FAA."
Concepcion, 131 S. Ct. at 1748. Such interference is not present when, as here,
a particular arbitration agreement is unconscionable under the unique facts of
that particular case.
The "saving clause" of the Federal Arbitration Act
permits arbitration agreements to be declared
unenforceable "upon such grounds as exist at law or
in equity for the revocation of any contract." This
saving clause permits agreements to arbitrate to be
invalidated by "generally applicable contract defenses,
such as fraud, duress, or unconscionability," but not
by defenses that apply only to arbitration or that
derive their meaning from the fact that an agreement
to arbitrate is at issue.
Concepcion, 131 S. Ct. at 1746 (quoting Doctor's Associates, Inc. v. Casarotto,
517 U.S. 681, 687 (1996)) (emphasis added). Insight's arbitration agreement is
35
unconscionable due to the absence of meaningful choice. As such, it is invalid
under "generally applicable contract defenses," id., and this conclusion is not
the type of "state-law rule[] that stand[s] as an obstacle to the accomplishment
of the FAA's objectives" decried in Concepcion. 131 S. Ct. at 1748 (citing Geier
v. American Honda Motor Co., 529 U.S. 861, 872, (2000); Crosby v. National
Foreign Trade Council, 530 U.S. 363, 372-73 (2000)).
For the above reasons, I would allow the class action suit in the Jefferson
Circuit Court to go forward.
Noble, J., joins.
COUNSEL FOR APPELLANTS/CROSS-APPELLEES:
H. Philip Grossman
Jennifer Ann Moore
Grossman & Moore, PLLC
401 West Main Street, Suite 1810
Louisville, Kentucky 40202
Leslie A. Bailey
Public Justice
555 12th Street, Suite 1620
Oakland, California 94607
Frank Paul Bland, Jr.
Public Justice
.1825 K Street NW, Suite 200
Washington, D.C. 20006
COUNSEL FOR APPELLEES/CROSS-APPELLANTS:
Laurence John Zielke
Nancy Jane Schook
Janice M. Theriot
David N. Hise
Zielke Law Firm, PLLC
Suite 1250
462 South Fourth Street
Louisville, Kentucky 40202
36
COUNSEL FOR AMICUS CURIAE - PACIFIC LEGAL FOUNDATION:
Bryon Edward Leet
Wyatt, Tarrant 86 Combs, LLP
500 West Jefferson Street
Louisville, Kentucky 40202-2898
Deborah Lafetra
Pacific Legal Foundation
3900 Lennane Drive, Suite 200
Sacramento, California 95834
COUNSEL FOR AMICUS CURIAE - AARP FOUNDATION LITIGATION:
Kenneth W. Zeller
AARP Foundation Litigation
601 E. Street, N.W.
Washington, D.C. 20049
COUNSEL FOR AMICUS CURIAE - THE KENTUCKY JUSTICE ASSOCIATION:
Kevin Crosby Burke
125 South 7th Street
Louisville, Kentucky 40202
John E. Spainhour, Jr.
•Susan Shimp Torok
Givhan 86 Spainhour, PSC
Professional Building, Suite One
200 South Buckman Street
Shepherdsville, Kentucky 40165
COUNSEL FOR THE COMMONWEALTH OF KENTUCKY:
Jack Conway
Attorney General
Lisa Kathleen Lang
Craig Fletcher Newbern, Jr.
Assistant Attorney General
Office of the Attorney General
700 Capitol Avenue, Suite 118
Frankfort, Kentucky 40601
37