Arbitration Class Action Defense Cases-Douglas v. U.S. District Court: Ninth Circuit Holds Class Action Plaintiff Cannot Be Compelled To Arbitrate Class Action Dispute Against Long Distance Telephone Service Carrier If Not Told Of Contract Modifications

Aug 21, 2007 | By: Michael J. Hassen

Modification of Telephone Service Contract to Include Class Action Waiver and Arbitration Clause not Binding on Class Action Plaintiff Where Customer did not Receive Notice of Change in Contract Terms Ninth Circuit Holds, Reversing District Court Order Compelling Arbitration in Favor of Telephone Company in Class Action Challenging New, Undisclosed Charges

Plaintiff filed a putative class action in California federal court against Talk America, his long distance telephone service company, alleging violations of the Federal Communications Act, breach of contract, and violations of various California consumer protection laws based on its unilateral revision of the service contract, without notice, to add additional service charges. Douglas v. U.S. District Court, 495 F.3d 1062, Slip Opn., at 2 (9th Cir. 2007). Defense attorneys moved to compel arbitration based on another unilateral revision to the service contract that added, without notice to customers, an arbitration clause as well as a class action waiver. Id. The district court granted the motion, and plaintiff petitioned for a writ of mandate because the Federal Arbitration Act does not authorize interlocutory appeals. Id., at 2-3.

Talk America acquired AOL’s long distance telephone service, and then modified the terms of the service contract with former AOL customers to add four provisions: “(1) additional service charges; (2) a class action waiver; (3) an arbitration clause; and (4) a choice-of-law provision point to New York law.” Douglas, at 2. The class action complaint alleged that Talk America did not provide notice of these revisions to its customers, and that the revised contract was only available on Talk America’s website. Id., at 4. The class action alleged that a customer would only learn of the revisions to the service contract if he visited the website and compared the terms of the contract online with prior versions of the contract, id. The district court “seems to have assumed” plaintiff did this as it noted that the contract was available on “the web site on which Plaintiff paid his bills,” id.; but plaintiff argued that “he authorized AOL to charge his credit card automatically and Talk America continued this practice, so he had no occasion to visit Talk America’s website to pay his bills” and that in any event “he would have had no reason to look at the contract posted there” as he was not notified that the terms of the contract had been changed. Id.

The Ninth Circuit held that the unilateral modification of the terms of the service contract, without notice, was ineffective, Douglas, at 4-6, and that the district court erred in holding otherwise, id., at 6. “The error reflects fundamental misapplications of contract law and goes to the heart of petitioner’s claim.” Id. But the Circuit Court also held that California law probably applied, id., at 6-7 n.2, and that the arbitration clause and the class action waiver provision were procedurally and substantively unconscionable, id., at 6-9. The Ninth Circuit then concluded that three of the four remaining prerequisites to mandamus relief existed, id., at 9-12, and accordingly granted the petition and vacated the district court order compelling arbitration, id., at 12.

NOTE: In the Ninth Circuit, the test for granting a writ of mandate involves a consideration of five factors: “1. ‘The party seeking the writ has no other adequate means, such as a direct appeal, to attain the relief he or she desires.’ [¶] 2. ‘The petitioner will be damaged or prejudiced in a way not correctable on appeal.’ [¶] 3. ‘The district court’s order is clearly erroneous as a matter of law.’ [¶] 4. ‘The district court’s order is an oft-repeated error, or manifests a persistent disregard of the federal rules.’ [¶] 5. ‘The district court’s order raises new and important problems, or issues of law of first impression.’” Douglas, at 3 (quoting Bauman v. U.S. District Court, 557 F.2d 650, 654-55 (9th Cir. 1977)).

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