Legal Corner: Arbitration Clause Enforcement
Many of you have some sort of Internet connection either at home or at your business. Imagine ordering DSL (a form of faster Internet access), signing a contract, and later being forced to travel to Georgia to arbitrate a dispute with the provider. This was the situation for a group of EarthLink customers.
Ozgur Aral, a California resident, made a claim on behalf of himself and similarly situated class of customers, claiming they were all victims of EarthLink's practice of charging people before they actually receive the necessary equipment to operate the service. Although Aral did not receive the kit for nearly five weeks, he was charged from the date he ordered the service. EarthLink tried to compel arbitration in Georgia based on the arbitration clause in all their contracts. The court denied its request because it requires consumers to arbitrate in Georgia and forbids class actions.
The court decided that the forum selection clause (where the case would be heard) and the class action waiver (meaning that no class action lawsuit could be field against EarthLink) in the arbitration clause are both unenforceable.
The forum selection clause is a clause that allows the drafting party to decide where a dispute will be decided. Essentially, the drafter of the contract will name a city that is most convenient for their company. Forum election clauses are generally enforceable. However, courts have deemed unenforceable those clauses that have been found to be unreasonable. Here, the forum selection clause in EarthLink's contracts was held unenforceable because it required consumers to travel 2,000 miles to seek redress for losses ranging between $40 and $50. This was unreasonable as a matter of law.
A class action is a lawsuit brought by one or more plaintiffs on behalf of a larger group with common interests. EarthLink had included a waiver of such suits in their arbitration clause.
Class action waivers are unenforceable when (1) they are found in consumer contracts of adhesion ("take-it-or-leave-it" type contracts); (2) where disputes are usually for small amounts of money; and (3) when alleged that the party with superior bargaining power has been engaged in a scheme of cheating a large number of consumers out of small amounts of money for each individual.
These three elements were met in the present case. The waiver essentially exempts EarthLink from responsibility for its own fraud, or willful injury. Thus, such waivers are unconscionable as against public policy and therefore unenforceable. A court would be required to decide this case.
The lesson to be learned from this case is that upon installation of software or by accepting materials that have been mailed, consumers enter into "take-it-or-leave-it" contracts on a daily basis.
These contracts are not per se unenforceable. However, if an arbitration agreement within one of these contracts is found to be substantively unconscionable, it will not be enforced.