SCHNUERLE (MICHAEL), ET AL. VS. INSIGHT COMMUNICATIONS COMPANY, L.P. , ET AL.Annotate this Case
RENDERED: SEPTEMBER 26, 2008; 2:00 P.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
AMY GILBERT; LANCE GILBERT;
AND ROBIN WOLFF
APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE A.C. MCKAY CHAUVIN, JUDGE
ACTION NO. 06-CI-004267
INSIGHT COMMUNICATIONS COMPANY, L.P;
INSIGHT COMMUNICATIONS MIDWEST, LLC
** ** ** ** **
BEFORE: CLAYTON, KELLER, AND MOORE, JUDGES.
CLAYTON, JUDGE: This comes before the Court on an appeal from a decision
of the Jefferson Circuit Court’s finding that a consumer contract which included a
mandatory arbitration clause and a ban on class actions was valid.
I. FACTUAL AND PROCEDURAL BACKGROUND
The appellees, Insight Communications Company, L.P. and Insight
Communications Midwest, LLC (“Insight”) are internet service providers for the
appellants and other consumers. Beginning on or about April 18, 2006, Insight
failed to provide continuous access to broadband internet service to the appellants,
Michael Schunerle, Amy Gilbert, Lance Gilbert and Robin Wolff (collectively,
“the Appellants”), as well as other consumers who are members of a putative class.
The appellants contend that Insight also failed to promptly remedy the lack of
services, failed to provide an alternative high-speed internet service, disseminated
misleading or incorrect information to consumers who inquired about the failures,
failed to protect consumers from deletion of information caused by the failure and
charged consumers for services it did not provide.
Insight is the Louisville, Kentucky provider of cable internet
broadband services. When consumers apply for this service, Insight requires them
to agree to a service agreement either in writing or on-line. These agreements are
drafted and provided by representatives of Insight and contain a mandatory
arbitration clause which requires consumers to attend mandatory arbitration and
disallows class actions either in court or in arbitration.
Insight moved the trial court to compel arbitration under the Federal
Arbitration Act, 9 U.S.C. § 2, et seq. (“FAA”) and the Kentucky Uniform
Arbitration Act, KRS § 417.050 (“KUAA”). It also moved to dismiss the putative
The Jefferson Circuit Court found that the contract and arbitration
clause were neither procedurally nor substantively unconscionable. The trial judge
held that, pursuant to the service agreement, the consumers have several
alternatives in providers and that those who are aggrieved can either go to an
Insight service agent, arbitration or small claims for damages due to claims they
might have. He found that the test should not be whether someone will exercise
these rights, but whether they are available.
II. STANDARD OF REVIEW
When reviewing a trial court’s motion to compel arbitration, an
appellate court must “defer to the trial court’s factual findings, upsetting them only
if clearly erroneous or unsupported by substantial evidence . . . .” Conseco
Finance Servicing Corp., v. Wilder, 47 S.W.3d 335, 340 (Ky.App. 2001). In
determining whether an arbitration clause is unconscionable, the court must
determine whether it is a contract 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.
The appellants first contend that the provision of the arbitration clause
that prohibits class proceedings is both procedurally and substantively
unconscionable and, therefore, unenforceable. While the Conseco Court involved
contract terms which were procedurally unconscionable, the appellants ask this
Court to find that substantive unconscionability is also present here.
As for procedural unconsionability, the appellants argue that (1) the
class action ban in the arbitration clause is contained within a contract of adhesion;
(2) the appellants had significantly less bargaining power than Insight; (3) the
arbitration clause was communicated in a manner designed to deflect attention
from it; and (4) Insight had a monopoly on broadband service, so class members
had no meaningful choice to get this service without accepting the class action ban.
An adhesion contract 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.” Id. at 342, n. 20
(internal citation omitted).
Contracts of adhesion are offered to the consumer on “essentially a
‘take it or leave it’ basis without affording the consumer a realistic opportunity to
bargain.” Jones v. Bituminous Casualty Corp., 821 S.W.2d 798, 801 (Ky. 1991).
In Kodak Mining Co. v. Carrs Fork Corp., 669 S.W.2d 917 (Ky.
1984), the Kentucky Supreme Court found that Kentucky law favors the settlement
of disputes through arbitration. This includes consumer complaints such as the
action before this Court. Several jurisdictions have ruled on the use of class action
bans in consumer arbitration clauses and have held that they are not
unconscionable. See Johnson v. Suburban Bank, 225 F.3d 366 (3rd Cir. 2000);
Snowden v. CheckPoint Check Cashing, 290 F.3d 631 (4th Cir. 2002); Iberia Credit
Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004); Livingston v.
Associates Finance, Inc., 339 F.3d 553 (7th Cir. 2003); and Jenkins v. First
American Cash Advance of Georgia, LLC, 400 F.3d 868 (11th Cir. 2005). This
Court agrees with these holdings.
“Adhesion Contracts are not per se improper.” Conseco, 47 S.W.3d
at 342. In fact, “they have been credited with significantly reducing transaction
costs in many situations.” Id. (citing Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th
Cir. 1997)). In the present situation, the consumers can choose from several
internet service providers within the Louisville area. While Insight is the only
“cable” operator to provide broadband internet service, other companies do provide
high-speed internet access.
The arbitration clause within the consumer contract is a favored
means within the law of settling disputes. The consumer also has the right to bring
actions in small claims court, thus, the right to litigate has been preserved. The
specific claims which the litigants would have are not complex issues of law and
fact. The disruption of internet service is something which would be easy to prove
in a small claims setting.
In Suburban Bank, the Third Circuit Court of Appeals explained that:
though pursuing individual claims in
arbitration may well be less attractive than
pursuing a class action in the courts, we do
not agree that compelling arbitration of the
claim of a prospective class action plaintiff
irreconcilably conflicts with TILA’s goal of
encouraging private actions to deter
violations of the Act. Whatever benefits of
class actions, the FAA “requires piecemeal
resolution when necessary to give effect to
an arbitration agreement.”
Id. at 374.
This Court finds that the Service Agreement supplied to consumers by
Insight representatives is neither procedurally nor substantively unconscionable
and that the arbitration clause therein is valid and enforceable. Thus, the Jefferson
Circuit Court’s decision of October 6, 2006, is affirmed.
MOORE, JUDGE, CONCURS.
KELLER, JUDGE, DISSENTS AND FILES SEPARATE OPINION.
KELLER, JUDGE, DISSENTING: Respectfully, I dissent. As noted
by the trial court and the majority, there are two types of unconscionability –
procedural and substantive. Based on my review of case law, procedural
unconscionability can arise from within the agreement and from the circumstances
surrounding the execution of the agreement.1 The primary factors that can arise
from within an agreement to render it unconscionable are: (1) if the agreement is
offered on a take-it or leave-it basis, Howell v. NHC Health Care-Ft. Sanders, Inc.,
109 S.W.3d 731, 735 (Tenn. Ct. App. 2003); Broemmer v. Abortion Services of
Phoenix, Ltd., 840 P.2d 1013, 1016 (Ariz. 1992); (2) if the language of the
agreement is not clear or conspicuous, Wheeler v. St. Joseph Hospital, 63 Cal.
App. 3d 345, 359 (1976); Howell, 109 S.W.3d at 734; In re Southern Indust.
Mechanical Corp., 266 B.R. 827, 833 (W.D. Tenn. 2001); (3) if the agreement is
Unless otherwise stated, “agreement” refers to the arbitration provisions of the overall written
part of a larger document, Howell, 109 S.W.3d at 734; (4) if the terms are more
favorable to one party, Broemmer, 840 P.2d at 1015; and (5) if the agreement does
not adequately explain the arbitration procedure, Howell, 109 S.W.3d at 734. The
primary factors that can arise from the events surrounding the execution of the
agreement are: (1) whether the parties are on an equal footing, In re Southern
Indust. Mechanical Corp., 266 B.R. at 830; (2) whether the person signing the
agreement has the educational capacity to read and understand it, Howell, 109
S.W.3d at 735; Miner v. Walden, 422 N.Y.S. 2d 335, 340 (1979); Broemmer, 840
P.2d at 1016-17, (3) whether the agreement was adequately explained to the person
signing it, Howell, 109 S.W.3d at 735; Broemmer, 840 P.2d at 1017; Obstetrics
and Gynecologists William, G. Wixted, Patrick M. Flanagan, William Robinson,
Ltd. v. Pepper, 693 P.2d 1259, 1261 (Nev. 1985); (4) whether the person signing
the agreement was under emotional distress at the time of signing, Broemmer, 840
P.2d at 1017; and (5) whether the person signing could have reasonably expected
that such an agreement would be presented at the time of signing, Broemmer, 840
P.2d at 1017; Wheeler, 63 Cal. App. 3d at 357.
After reviewing the agreement in question, I believe there may be
procedural deficiencies with the agreement and its execution. Although the
arbitration portion of the agreement is set out, in part, in capital letters, it is not a
stand alone document. In fact, the arbitration agreement begins on page seven of a
twenty-three page document. Furthermore, the arbitration agreement is in a
portion of the overall agreement that is entitled “EXHIBIT A: Software License
Agreement.” It is unclear whether a person executing a service agreement would
contain a provision mandating arbitration and waiving the right to pursue a class
action suit or that such a provision would be within the software license portion of
the service agreement. Although it appears from the record that the plaintiffs had
the capacity to understand the agreement, the trial court did not address that issue.
Therefore, I would remand this matter to the trial court for it to consider these
Substantively, unconscionability involves three primary factors: (1)
whether the agreement limits remedies that are otherwise provided by statute,
Morrison v. Circuit City Stores, Inc., 317 F.3d 646, 653 (6th Cir. 2003); (2) whether
it limits discovery, Walker v. Ryan’s Family Steak Houses, Inc., 400 F.3d 370, 378
(6th Cir. 2005); and, (3) whether the cost of arbitration effectively negates the
ability of a party to pursue a remedy, Morrison, 317 F.3d at 658.
My substantive concern is that the class action ban portion of the
agreement may negate the ability of a party to pursue a remedy. The trial court and
majority indicate that the provision for a litigant to proceed in small claims court
overcomes any issue regarding the cost of arbitration. While the minimal filing fee
associated with a small claims action may permit litigants with minimal claims to
proceed, it is not clear to me that it would have permitted these litigants to do so.
Furthermore, one must consider more than just the filing fee when considering the
cost associated with litigation. A litigant with a minimal claim, even one in excess
of the small claims court filing fee, may be foreclosed from litigating simply
because of the time involved in appearing in court. It does not appear that the trial
court took this into consideration when rendering its decision. Therefore, I would
remand this matter to the trial court to consider this issue.
Finally, I note that the arbitration agreement provides that “NEW
YORK LAW (EXCLUDING ITS CHOICE OF LAW RULES) WILL APPLY TO
THE CONSTRUCTION, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT.” Neither the trial court nor the majority addressed what impact
this choice of law provision has on the arbitration agreement. Therefore, this
matter should be remanded to the trial court for adjudication of that issue.
BRIEFS FOR APPELLANTS:
BRIEF FOR APPELLEES:
H. Philip Grossman
Jennifer A. Moore
Laurence J. Zielke
Nancy J. Schook
F. Paul Bland
ORAL ARGUMENT FOR
ORAL ARGUMENT FOR
Laurence J. Zielke
BRIEF FOR AMICUS CURIAE,
Michael R. Hance