Intellectual Property Law

Ninth Circuit Wakes Up On Its Own Planet

By Tim Feathers

That is how Raymond T. Nimmer explains a trio of decisions by that court that have been handed down in the last several months.  Collectively, the decisions strike down arbitration clauses, class action waivers, and choice of law/forum selection clauses in various agreements. 

In Nagrampa v. Mailcoups, Inc., the Ninth Circuit, focussing on the concept of procedural unconscionability, found a mandatory arbitration and forum selection clause included in a franchise agreement unconscionable.  The reason cited by the court was that the clause lacked mutuality where the franchisor could use the judicial process in some circumstances, but the franchisee could not.  Of course, according to that reasoning, presumably each and every contract clause would have to have mirror image mutuality.  Nimmer points out that this has never been a requirement of contract law.  The court also cited as a basis for its reasoning, the conclusion that the forum selection clause had "no justification other than as a means of maximizing an advantage over [Franchisees]."  Nimmer's take on that is basically…right-so the problem with that would be?

The next case in the trio is Douglas v. U.S. District Court, where the Ninth Circuit held that an amendment of an online agreement lacked assent.  The court went on to conclude that even if there had been assent, the terms for waiver of class action rights and mandatory arbitration were unconscionable.  In doing so, the Court noted the stance it had taken in Nagrampa that the mere fact that a customer has meaningful choices as to other service providers does not defeat a claim of procedural unconscionability.  In other words, the customer is free to shop around for other service providers who may have different contractual terms.  According to the Ninth Circuit, the customer need not do so, and it can simply ignore the terms with the service provider it chooses.

The last case is Davis v. O'Melveny & Myers.  In the Davis case, the Ninth Circuit held that an arbitration clause in an agreement with an employee was unconscionable.  Nimmer explains that the Davis court found the agreement "procedurally unconscionable because the law firm did not offer the employee the option of rejecting the clause and continuing as an employee with an unmodified contract."

I guess it might be helpful to back up a bit, and talk about when an agreement, or part of an agreement, can be disregarded as unconscionable.  Historically, courts have required both substantive and procedural unconscionability to exist before striking down an agreement. In general, substantive unconscionability exists when an agreement itself is so one-sided that it shocks the senses, while procedural unconscionability focuses on the bargaining process (or lack thereof) used to reach the final agreement. The current view is that these two elements must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. 

In effect, the Ninth Circuit appears to be expanding the concept of procedural unconscionability to essentially eliminate the ability of companies to include mandatory arbitration, class action waivers, or forum selection clauses in any standard, non-negotiated contracts.  Under the views of the Ninth Circuit, companies do not have the option of presenting a take it or leave it contract to their customers (even though the customers could choose other service providers).  The Ninth Circuit, instead, is simply zapping those provisions out of standard contracts, which Nimmer argues is the kind of thing typically reserved to the legislature (and courts on the planet Xenon). 

Photo courtesy of David Darkmatter under Creative Commons

Full post as published by The TechKnowledgy Blog on October 10, 2007 (boomark / email).