Class Actions, Arbitration and the Importance of Contract Formation

I wanted to follow up on Jeremy Telman’s posts about two cases, Andermann v. Sprint Spectrum and Berkson v. Gogo.  Both cases involved consumers and standard form contracts.  Both Sprint and Gogo sought to enforce an arbitration clause in their contracts and both companies presumably wanted to do so to avoid a class action.  In Andermann v. Sprint Spectrum, there was no question regarding contract formation.  The contract issue in that case involved the validity of the assignment of the contract  from US Cellular to Sprint.  The court found that the assignment was valid and consequently, so was the arbitration clause.

In Berkson v. Gogo, on the other hand, the issue was whether there was a contract formed between the plaintiffs and Gogo.  As Jeremy notes in his post, this is an important case because it so thoroughly analyzes the existing wrap contract law.  It also has important implications for consumers and the future of class actions.

Many arbitration clauses preclude class actions (of any kind).  Judge Posner notes in his opinion in Andermann v. Sprint Spectrun:

“It may seem odd that (Sprint) wants arbitration….But doubtless it wants arbitration because  the arbitration clause disallows class arbitration.  If the Andermann’s claims have to be  arbitrated all by themselves, they probably won’t be brought at all, because the Andermanns if they prevail will be entitled only to modest statutory damages.”

Judge Posner may have been troubled by this if the facts were different.  The Andermanns are claiming that Sprint’s calls to them are unsolicited advertisements that violate the  Telephone Consumer Protection Act, but Sprint needed to inform them that their service would be terminated because U.S. Cellular’s phones were incompatible with Sprint’s network.  How else would they be able to contact their customers whose service would soon be terminated, Posner rhetorically asks, “Post on highway billboards or subway advertisements?….Post the messages in the ad sections of newspapers? In television commercials?”   Sprint’s conduct here “likely falls” within an exception to the law and hence, Posner notes “the claims are unlikely to prevail.”

It’s a different situation in Berkson v. Gogo.  In that case, Gogo is allegedly charging consumers’ credit cards on a monthly recurring basis without their knowledge.  The plaintiffs were consumers who signed up to use Gogo’s Wi-Fi service on an airplane, thinking it was only for one month.   When Welsh, one of the plaintiffs, noticed the recurring charges, he was given a “partial refund.”  Welsh then hired a lawyer.  Welsh’s lawyer sent Gogo a letter notifying the company of the intent to file a class action lawsuit if it did not correct its practices and notify everyone who might have been charged in this manner.  Gogo then allegedly sent a refund check directly to Welsh, not his lawyer (which would violate the rule not to directly contact someone represented by counsel).  When Berkson, another plaintiff, noticed the charges and complained, the charges stopped; however, when he requested a refund for the period he was charged for the service but did not use it, the company allegedly refused. 

I think that most people would agree that, if the facts alleged are true, Gogo likely violated consumer protection statutes.  It also acted poorly by making it so hard to get a refund.  Companies should not be permitted to act like this and consumers shouldn’t have to threaten class action lawsuits to get their money back.  (Gogo doesn’t seem to dispute that they were charged during months they did not use the service).

This is where contract formation becomes so important.  The class action in Berkson v. Gogo was allowed to proceed because the court found that there was no valid contract formation. 

If there was a contract formed between Gogo and the plaintiffs, the arbitration clause would likely have been effective.  (I say “would likely have been” because it wasn’t even included until after Berkson signed up for the service.  But let’s put that aside for now and continue….).  The arbitration clause – you guessed it – contained the following clause:

“To the fullest extent permitted by applicable law, NO ARBITRATION OR OTHER CLAIM UNDER THIS AGREEMENT SHALL BE JOINED TO ANY OTHER ARBITRATION OR CLAIM, INCLUDING ANY ARBITRATION OR CLAIM INVOLVING ANY OTHER CURRENT OR FORMER USER OF THE SITE OR THE SERVICES, AND NO CLASS ARBITRATION PROCEEDINGS SHALL BE PERMITTED. In the event that this CLASS ACTION WAIVER is deemed unenforceable, then any putative class action may only proceed in a court of competent jurisdiction and not in arbitration.

WE BOTH AGREE THAT, WHETHER ANY CLAIM IS IN ARBITRATION OR IN COURT, YOU AND GOGO BOTH WAIVE ANY RIGHT TO A JURY TRIAL INVOLVING ANY CLAIMS OR DISPUTES BETWEEN US.”

Now, under the recent line of federal cases (AT&T Mobility v. Concepcion, American Express v. Italian Colors, etc) interpreting the FAA, if a contract contains a mandatory arbitration clause, an arbitrator pretty much decides everything unless (1) the arbitration agreement is unconscionable; or (2) the agreement to arbitrate was never formed

Regarding (1), this doesn’t mean that a court may determine whether any other contract provision was unconscionable – only the arbitration clause.  So, if there’s another clause that you want to argue is unconscionable — let’s say a recurring billing provision that is not conspicuous just as a random example — you have to take that to the arbitrator.  Furthermore, it’s much harder now (after the line of US Supreme cases noted above)  to argue that an arbitration clause is unconscionable.  While many state courts had previously found mandatory arbitration clauses and class action waivers unconscionable, they may no longer find them unconscionable just because they impose arbitration.  In other words, in order to be found unconscionable, the arbitration clauses have to be one-sided (i.e. only the consumer has to arbitrate) or impose hefty filing fees, etc.  This, as I mentioned in a prior post, is why so many of these clauses contain opt-out provisions.   Gogo’s arbitration clause also contained an opt-out provision.  But, as readers of this blog know, NOBODY reads wrap contract terms and I would be surprised if anyone opted out.  The clause was also in capitalized letters and so would be conspicuous — if only anyone clicked on the link and scrolled down to see it.

This is why Judge Weinstein’s opinion is so important -he recognizes the burden that wrap contracts place on consumers:

“It is not unreasonable to assume that there is a difference between paper and electronic contracting….In the absence of contrary proof, it can be assumed that the burden should be on the offeror to impress upon the offeree — i.e., the average internet user – the importance of the details of the binding contract being entered into…The burden should include the duty to explain the relevance of the critical terms governing the offeree’s substantive rights contained in the contract.”

If a contract contains a mandatory arbitration clause, a consumer who has been wronged and wants to argue that a standard form contract is unconscionable, would probably have to take it to an arbitrator unless there was no agreement to arbitrate in the first place.  If there was no agreement formed at all, that would mean no agreement to arbitrate. 

This is why it is so important not to find contract formation so easily and expect unconscionability to do all the heavy lifting of consumer protection.  An arbitrator very well might do a good job – but we don’t know that because an arbitration is a closed hearing.   Arbitrators also don’t go through the rigorous screening process that judges go through (both elected and appointed judges are thoroughly scrutinized).  Furthermore, arbitral decsions are not generally made public, and so arbitration doesn’t help with providing guidelines for acceptable business behavior.  Judge Posner notes in his opinion, “It’s not clear that arbitration, which can be expensive…and which fails to create precedents to guide the resolution of future disputes, should be preferred to litigation.” Furthermore, if the arbitration clause contains a “no class” provision, it also forces a consumer to face a company’s intimidating attorneys all alone ((because no lawyer is taking this type of case on a contingency basis and no consumer is going to pay a lawyer to attend this type of arbitration).

Berkson v. Gogo is notable for recognizing that website design and contract presentation matter in determining contract formation.  Not every click is perceived the same way by consumers — scrollwraps (where scrolling is required to read through all the terms) provides more notice than a “sign-in-wrap” which is merely a hyperlink next to a SIGN UP button.   The reality is that nobody clicks on the Terms hyperlink with a sign-in wrap.  As Judge Weinstein notes:

“The starting point of analysis must be the method through which an electronic contract of adhesion is formed.  The inquiry does not begin, as defendants argue, with the content of the provisions themselves.”

There are some who think that there’s no harm in finding contract formation so easily because courts and the doctrine of unconscionability will protect consumers from really bad contract terms.  They should think again.  Mandatory arbitration clauses affect consumers’ ability to seek redress which is why we should start taking contract formation seriously.