MICHAEL SCHNUERLE, ET AL. V. INSIGHT COMMUNICATIONS COMPANY, L.P. ET AL.
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RENDERED : DECEMBER 16, 2010
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2008-SC-000789-DG
2009-SC-000390-DG
MICHAEL SCHNUERLE, AMY GILBERT,
LANCE GILBERT AND ROBIN WOLFF,
V.
APPELLANTS/
CROSS-APPELLEES
ON REVIEW FROM COURT OF APPEALS
CASE NO . 2006-CA-002121-MR
JEFFERSON CIRCUIT COURT NO . 06--CI-004267
INSIGHT COMMUNICATIONS COMPANY, L.P.
AND INSIGHT COMMUNICATIONS MIDWEST, LLC
APPELLEES /
CROSS-APPELLANTS
OPINION OF THE COURT BY JUSTICE VENTERS
REVERSING AND REMANDING
Appellants, Michael Schnuerle, Amy Gilbert, Lance Gilbert, and Robin
Wolff, individually and on behalf of all others similarly situated, appeal from an
opinion of the Court of Appeals which affirmed an order of the Jefferson Circuit
Court dismissing their class action complaint against Appellees, Insight
Communications Company, L.P., and Insight Communications Midwest, LLC
(collectively, Insight) . The circuit court then determined, and the Court of
Appeals agreed, that a provision contained in Insight's Broadband High Speed
Internet Service Agreement (Service Agreement) barring class action litigation
against Insight by its customers was enforceable . The Appellants' complaint
was accordingly dismissed . Because of that disposition, the circuit court and
the Court of Appeals did not address other issues, including Appellants'
challenge to the enforceability of the Service Agreement's general arbitration
clause and other specific provisions contained therein .
We granted discretionary review to consider Appellants' challenges to the
enforceability of the arbitration agreement and to the class action ban 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 reverse the Court of Appeals, and
conclude that, under the circumstances present herein, the contractual ban on
class action litigation is void and unenforceable. We also determine as follows:
1) 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, that it
is severable from the provisions banning class actions and imposing
confidentiality, and is therefore enforceable ; and 3) that the provision imposing
a confidentiality requirement upon the litigants to arbitration proceedings is
void .
1. FACTUAL AND PROCEDURAL BACKGROUND
Appellants are Kentucky residents who entered into the Service
Agreement with Insight for broadband Internet service. 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.
In April 2006, Insight upgraded its high-speed Internet service . Because
of the upgrade procedures, many Insight customers, including Appellants,
incurred 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 argues that it timely acknowledged the service outage problem,
and issued credits to 2,595 customers who notified the company about 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 time billed to its 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, on May 1 1,
2006, 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, Kentucky Revised Statutes (KRS) 367.170, et seq., breach of
contract, and unjust enrichment . The complaint alleged improper practices by
Insight, including "the failure to provide High Speed Internet Service to its
consumers, failure to properly and promptly notify its consumers of the failure
on the part of Insight to provide such services, failure to promptly remedy the
lack of services, failure to provide an alternative high-speed Internet service,
the dissemination of misleading or incorrect information to consumers
regarding such failures, failure to protect its consumers from deletion of
information contained in services, and the imposition of charges to its
consumers for contractual-services not provided by Insight."
In response, Insight moved to dismiss the action and to compel
arbitration pursuant to the mandatory arbitration clause contained in the
Service Agreement. As noted before, the arbitration clause does not mandate
arbitration in
all instances but, rather,
allows for litigation in small claims
court of claims less than $1,500 .00 . There is no allegation that the claim of
any individual customer would exceed $1,500.00 ; rather, it is suggested that
the average claim would be in the range of $40.00 . Thus, it is not disputed
that aggrieved customers would have the option of filing a lawsuit in small
claims court or proceeding to arbitration .
Appellants responded by arguing that the arbitration clause was
unenforceable on the grounds that it was an unconscionable adhesion contract
provision imposed on 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 .
On September 6, 2006, the trial court entered an order granting Insight's
motion to compel arbitration, dismissing the class action with prejudice, and
allowing individual customers to pursue their claims in small claims court as
provided under the Service Agreement's arbitration clause. The Court of
Appeals affirmed the circuit court's decision. We granted discretionary review.
II. KENTUCKY LAW APPLIES TO REVIEW OF THE ARBITRATION CLAUSE
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 . I Because a threshold question is the choice of law
to be applied in our review, and this issue is an issue raised by Insight in its
cross-petition, we first address the enforceability of the Service Agreement's
choice of law provision.
Breeding, relied upon by the circuit court, 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 .
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.
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
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
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 performance, (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 . . . ...
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 UNENFORCEABLE
The principal issue in this appeal is whether the Service Agreement's ban
on class action litigation is enforceable against Appellants and the putative
class they would represent. Appellants contend3 that prohibitions on class
action litigation in consumer adhesion contracts should be held to be
unenforceable per se upon the grounds that they are exculpatory, result in
unjust enrichment to the company, and are, accordingly, unconscionable and
void as against public policy . The issue is one of first impression in this
jurisdiction .
3 The Attorney General of Kentucky, AARP, and the Kentucky Justice Association filed
amicus curie briefs supporting Appellants on this issue. The Pacific Legal
Foundation filed a brief in support of upholding the class action ban provision.
As explained below, while we do not go so far as to broadly declare
prohibitions on class action litigation in consumer adhesion contracts
unenforceable in all circumstances, we hold that the ban is unenforceable
under the individualized facts of this case.
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 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.
Thus, the ban on class actions in this provision is comprehensive and
absolute, prohibiting the joining of lawsuits in all situations and in all forums .
Appellants contend that the Service Agreement's prohibition on class action
litigation effectively shields Insight from liability for conduct resulting in many
small claims by removing the only viable and economically effective remedy to
redress such claims. They argue that because it is not economically practical
for an individual customer to independently litigate his or her small claim, the
class action prohibition serves to exculpate Insight from liability for such
claims and, correspondingly, it unjustly enriches the company because there
will never be an adjudication requiring it to repay the many small claims .
The potential that an absolute ban on class action litigation may produce
an improper exculpatory result is demonstrated by way of a simple example .
Suppose XYZ Company inadvertently or intentionally overbilled each of its one
million customers by one dollar during a particular month . As a result, it
gained possession of one million dollars to which it is not entitled, and which
instead belongs to its customer base. Suppose, in addition, that the company
acted unethically (or incorrectly believed it had a valid defense) and refused to
return the overcharges. Economic realities dictate that none4 of the one million
overbilled customers would bring an individual claim seeking the recovery of
his dollar. The time, effort, and expense involved to recover a dollar simply
would not be worthwhile . Thus, while the economic loss to each individual
customer would be negligible, the lack of an economically viable means to bring
the company into court would effectively exculpate the company from liability,
allowing it to reap unjustly a substantial economic windfall. We agree with the
Appellants that the only economically viable means for customers to bring a
4
Or a negligible few who are motivated by something other than economic concerns.
company into court, as plaintiffs, under these circumstances is by class action
litigation . 5
The practical effect of a de minimis claim situation 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) (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
5 We acknowledge that customers 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 .
Accordingly, the theoretical availability of this remedy does not alter our
conclusions.
individual suits, but zero individual suits, as only a lunatic or a fanatic sues for
$30.")
As explained in Vasquez v. Superior Court, 484 P.2d 964, 968 (Cal . 1971),
"[f]requently numerous consumers are exposed to the same dubious practice
by the same seller so that proof of the prevalence of the practice as to one
consumer would provide proof for all . Individual actions by each of the
defrauded consumers are often impracticable because the amount of individual
recovery would be insufficient to justify bringing a separate action ; thus an
unscrupulous seller retains the benefits of its wrongful conduct ." "A class
action by consumers produces several salutary by-products, including a
therapeutic effect upon those sellers who indulge in fraudulent practices, aid to
legitimate business enterprises by curtailing illegitimate competition, and
avoidance to the judicial process of the burden of multiple litigation involving
identical claims . The benefit to the parties and the courts would, in many
circumstances, be substantial ." Id.
Moreover, proceeding by class action "both eliminates the possibility of
repetitious litigation and provides small claimants with a method of obtaining
redress for claims which would otherwise be too small to warrant individual
litigation . Denial of a class action in cases where it is appropriate may have
the effect of allowing an unscrupulous wrongdoer to `retain[ ] the benefits of its
wrongful conduct ."' Keating v. Superior Court, 645 P.2d 1192, 1206-1207 (Cal .
1982) (overruled on other, grounds in Southland Corp. v. Keating, 465 U .S . 1
(1984)) (citations omitted) . "Controversies involving widely used contracts of
adhesion present ideal cases for class adjudication ; the contracts are uniform,
the same principles of interpretation apply to each contract, and all members
of the class will share a common interest in the interpretation of an agreement
to which each is a party ." Id. at 1207 (citations and footnote omitted) .
Because a class action under CR 23 is often the only economically viable
legal procedure to redress a large number of de minimis claims, a clause
prohibiting customers from proceeding under the rule is, as claimed by the
Appellants, an exculpatory provision which may effectively shield a company
from liability for unlawful activity .
"The general rule is that persons may not contract against the effect of
their own negligence and that agreements which attempt to do so are invalid ."
Meiman v. Rehabilitation Center, Inc., 444 S .W.2d 78, 80 (Ky. 1969) (citation
omitted) . 6 While there are exceptions to this general rule,7 "in no event can
such an exculpatory agreement be upheld where either `(1) the interest of the
public requires the performance of such duties, or (2) because the parties do
not stand upon a footing of equality, the weaker party is compelled to submit to
the stipulation .' Id. Here, Insight's customers were "weaker" parties required
to submit to the exculpatory clause, and, accordingly, the rule that such
6 While Meiman involved an exculpatory clause in the context of a medical procedure,
it stands to reason that the same principle is applicable where no physical injury is
involved. And, moreover, it follows that the same principle would apply with equal
force to intentional conduct .
7 See, e.g., Cobb v. GulfRefining Co., 284 Ky. 523, 145 S .W.2d 96 (1940) (A landlord
may exempt himself from liability to tenant for negligence) .
provisions may not be enforced is applicable . For that reason, we hold the
absolute ban upon class action litigation is unenforceable in this case, and in
like cases, as exculpatory, substantively unconscionable, and contrary to
public policy. 8
Despite the practical realities described above arising out of class action
prohibitions in de minimis claim cases, Insight contends that the weight of
authority supports the enforcement of arbitration provisions prohibiting
customers from joining together in a class action lawsuit. In support of its
position Insight cites us to Jenkins v. First American Cash Advance of Georgia,
LLC, 400 F.3d 868 (11th Cir. 2005) (upholding class action ban in payday loan
contract) ; Randolph v. Green Tree Fin. Corp. Alabama, 244 F.3d 814, 819 (11th
Cir. 2001) (holding "a contractual provision to arbitrate [Truth in Lending Act]
claims
is
enforceable even if it precludes a plaintiff from utilizing class action
procedures in vindicating statutory rights under TILA") ; Snowden v. CheckPoint
Check Cashing; 290 F.3d 631, 638 (4th Cir. 2002) (rejecting the borrower's
argument "that the Arbitration Agreement is unenforceable as unconscionable
because without the class action vehicle, she will be unable to maintain her
8 Here, we note that in this declaration of public policy, the usual deference to
legislative prerogative is not involved . 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 and fashioning remedies in this type of litigation.
legal representation given the small amount of her individual damages") ;
Johnson v. West. Suburban Bank, 225 F .3d 366, 369 (3d Cir. 2000) (holding
arbitration "clauses are effective even though they may render class actions to
pursue statutory claims under the [Truth in Lending Act] or the [Electronic
Funds Transfer Act] unavailable") ; and Livingston v. Assocs. Fin., Inc., 339 F.3d
553, 559 (7th Cir. 2003) ("The Arbitration Agreement at issue here explicitly
precludes the [borrowers] from bringing class claims or pursuing `class action
arbitration,' so we are therefore `obliged to enforce the type of arbitration to
which these parties agreed, which does not include arbitration on a class
basis .') .
For the reasons already discussed, however, we are not persuaded by
these authorities, and instead join those jurisdictions holding under similar
circumstances that class action bans are unenforceable. See, e.g., Homa v.
American Express Co., 558 F.3d 225 (3rd Cir. 2009) (holding class-arbitration
waiver within parties' credit card agreement was unconscionable under New
Jersey law) ; Lowden v. T-Mobile USA, Inc., 512 F.3d 1213 (9th Cir. 2008)
(litigation and arbitration class action prohibition contained in arbitration
provision in cellular phone service contract were substantively unconscionable
and unenforceable under Washington law for denying any meaningful remedy) ;
Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir. 2006) (holding under of
Massachusetts law that Agreement that prohibited arbitration on class action
basis was invalid as preventing cable television subscribers from vindicating
statutory rights in suits against provider; enforcing the prohibition would be
essentially shield provider from private consumer antitrust enforcement
liability, even in cases where it has violated the law) ; Caban v. J.P. Morgan
Chase & Co., 606 F .Supp.2d 1361 (S .D.Fla . 2009) (class action waiver in the
arbitration provision of the credit card agreement was invalid as
unconscionable under Florida law) ; Fiser v. Dell Computer Corp., 188 P.3d 1215
(N .M . 2008) (class action ban was substantively unconscionable) ; Muhammad
v. County Bank ofRehoboth Beach, Delaware, 912 A.2d 88 (N .J. 2006) (class-
arbitration waiver contained in arbitration agreement was unconscionable due
to public interest at stake) ; Scott v. Cingular Wireless, 161 P.3d 1000 (Wash .
2007) (class action waiver in arbitration clause of standard subscriber contract
for cellular telephone service, which waiver prohibited class action litigation
and class action arbitration, violated Washington State public policy and
therefore was substantively unconscionable) ; Kinkel v. Cingular Wireless, LLC,
857 N .E .2d 250 (111 . 2006) (class action waiver was substantively
unconscionable) ; Discover Bank v. Superior Court, 113 P. 3d 1100 (Cal. 2005)
(waiver of class arbitration in a consumer contract of adhesion is
unconscionable under California law and should not be enforced, when it
occurs in a setting in which disputes between the contracting parties
predictably involve small amounts of damages, and when it is alleged that the
party with the superior bargaining power has carried out a scheme to
deliberately cheat large numbers of consumers out of individually small sums
of money) ; State ex rel. Dunlap v. Berger, 567 S .E .2d 265 (W.Va. 2002)
(language in retailer's purchase and financing agreement document that
prohibited punitive damages and class action relief was unconscionable and
unenforceable) ; Leonard v. Terminix Intern. Co., L.P., 854 So.2d 529 (Ala. 2002)
(arbitration clause which precluded class-action treatment of a dispute was
unconscionable and unenforceable) .
Nor are we persuaded by Insight's argument in its cross-petition that the
incorporation of the American Arbitration Association's rules and procedures or
its provision allowing for litigation in small claims court frees the class action
ban of its unconscionable character . Even with a remedy in small claims court
and fair, reasonable arbitration rules, a rational customer acting in his own
economic interests will not often be able to bring either a small claims court
action or proceed to arbitration to collect such a de minimis claim.
Consequently, the clause remains exculpatory, and thus substantively
unconscionable when attached to consumer adhesion contracts coupled with
de minimis claims. We note also that the class action promotes judicial
economy and preserves judicial resources . If a substantial number of
aggrieved claimants against Insight opted to proceed in small claims court, the
ability of the court to efficiently process their claims and others could become
seriously strained.
IV. THE GENERAL ARBITRATION CLAUSE IS SEVERABLE
FROM THE CLASS ACTION PROVISION AND IS ENFORCEABLE
AGAINST THE CLASS UPON REMAND
Having determined that the Service Agreement's class action ban is
unenforceable, the question then becomes whether the general arbitration
clause survives and thus compels arbitration in the class action litigation .
Appellants' position is that the arbitration clause is unenforceable in totality as
an unconscionable adhesion contract term. For the reasons explained below,
we conclude that the general arbitration provisions are severable from the class
action prohibition provision n 9 and remain enforceable in any litigation or
adjudicative processes that may occur upon remand .
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
9
In Section V of this opinion, we determine the confidentiality provisions of the
arbitration clause to be substantively unconscionable . Thus, our discussion in this
section, addresses the original arbitration clause stripped of both the class action
ban and the confidentiality provisions .
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.
(emphasis added)
As noted, Section 5 subsection (b) of the Service Agreement provides for
severability . As discussed below, we discern nothing improper,
unconscionable, or unenforceable about this severability clause, and,
accordingly, conclude that the general arbitration clause survives our
determination that the class action ban is unenforceable .
B. Kentu cky_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, 1.0 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,
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, 10 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,
to 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 .
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 severable from the class action prohibition
provision (and confidentiality provisions), and remains in full force and effect
upon the continuation of any proceedings following remand .
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
arbitration clause (substantive unconscionability) . Id. at 343 fn 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
l
unconscionability structure ."
1 . Procedural Unconscionability
i l 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.
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 fn 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 (11 th Cir. 2005) .
Appellants argue 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 fn 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
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.
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 fn 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
risks between the parties, and similar public policy concerns ." Jenkins, 400
F.3d at 876 .
Stripped of the class action ban and the confidentiality provision, 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
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. Accordingly, upon remand,
upon satisfaction of the relevant procedural requirements contained in the
arbitration agreement, class action litigation may proceed in an arbitration
forum.
V. THE CONFIDENTIALITY PROVISION IS UNENFORCEABLE
Finally, as has been referred to on several occasions, 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 ." 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.
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 AAA, 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 .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 .") ; Armendariz 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. 8,
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. MP 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
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 unenforceable.
VI. CONCLUSION
For the foregoing reasons the decision of the Court of Appeals is
reversed, and this matter is remanded to the Jefferson Circuit Court for such
further proceedings as are consistent with this opinion .
Minton, C.J., Abramson, Cunningham, Noble, and Scott, JJ ., concur .
Schroder, J., concurs in part and dissents in part by separate opinion .
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 . While I
recognize the federal and state authorities favoring arbitration, I believe that
Insight's arbitration agreement is so procedurally unconscionable that the
arbitration clause itself should be held invalid .
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 (11 th 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 highspeed 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 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, 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. 47 S .W.3d 335, 343, n.24 (Ky. App. 2001) .
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 .
For the above reasons, I would allow the class action suit in the Jefferson
Circuit Court to go forward .
COUNSEL FOR MICHAEL SCHNUERLE, AMY GILBERT, LANCE GILBERT AND
ROBIN WOLFF:
H. Philip Grossman
Jennifer Ann Moore
Grossman 8v 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.
Melanie Hirsch
Public Justice
1825 K Street NW
Suite 200
Washington, D .C . 20006
COUNSEL FOR INSIGHT COMMUNICATIONS COMPANY, L.P., INSIGHT
COMMUNICATIONS MIDWEST, LLC :
Laurence John Zielke
Nancy Jane Schook
Janice M. Theriot
David N . Hise
Zielke Law Firm, PLLC
1250 Meidinger Tower
462 South Fourth Street
Louisville, Kentucky 40202
COUNSEL FOR AMICUS CURIAE - PACIFIC LEGAL FOUNDATION:
Bryon Edward Leet
Wyatt, Tarrant & Combs
500 West Jefferson Street
Suite 2800
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
601 E. Street, N .W.
Washington, D .C . 20049
COUNSEL FOR AMICUS CURIAE - THE KENTUCKY JUSTICE ASSOCIATION:
Kevin Crosby Burke
125 S 7th Street
Louisville, Kentucky 40202-2703
John E. Spainhour, Jr.
Susan Shimp Torok
Givhan 8v 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
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