Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—C.D. Cal.: Arbitration agreements in Vonage telephone service contracts unconscionable, (Feb 5, 2014)

By Jody Coultas, J.D.

Vonage America Inc.’s motion to compel arbitration of customers’ California consumer protection law claims was denied by the federal district court in Los Angeles because the arbitration clause was procedurally and substantively unconscionable (Merkin v. Vonage America Inc., February 3, 2014, Snyder, C.).

The Vonage customers alleged that Vonage’s monthly “Government Mandated” charge of $4.75 for a “County 911 Fee” violated the California Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA) because no government agency mandated such a fee.

Vonage regularly exercised its authority to modify customer service agreements without providing notice to its customers other than posting changes on its website. Vonage argued that all versions of the agreements contained an agreement to arbitrate, and a mutual waiver of the right to bring or participate in a class action.

Vonage removed the case to federal court pursuant to the Class Action Fairness Act and moved to compel arbitration on the basis of an arbitration provision contained within the Vonage Terms of Service (TOS) agreement.

The court noted at the outset that the customers’ argument that they did not agree to the TOS was unpersuasive as Vonage supplied evidence that customers could not complete the subscription process or use Vonage’s service without accepting the Terms of Service agreement.

Because the arbitration provision involved high levels of oppression and surprise, the court found a high degree of procedural unconscionability. Procedural unconscionability focuses on the level of oppression and surprise involved in the agreement. The parties do not dispute that the TOS was a contract of adhesion, and such “take-it-or-leave-it” contracts of adhesion are frequently found to be oppressive under California law. Beyond the fact that the TOS was a contract of adhesion, Vonage’s frequent exercise of its power to change the TOS transformed an ordinary contract of adhesion into a contract that gave Vonage largely unfettered power to control the terms of its relationship with its subscribers. The focus was not on whether Vonage’s power to modify the TOS made it illusory, but on Vonage’s actual and repeated modification of the TOS resulting in no real negotiation and an absence of meaningful choice. Opting out would require a subscriber to constantly monitor the Vonage website for modifications, which indicated surprise on the part of customers.

The arbitration provision was substantively unconscionable, according to the court. Because the arbitration provision included a high degree of procedural unconscionability, only a moderate finding of substantive unconscionability was required to render the arbitration provision unconscionable. An arbitration provision is substantively unconscionable if it is overly harsh or generates one-sided results. The TOS carved out exceptions for the categories of claims likely to be brought by Vonage, which indicated a one-sided agreement. Because claims likely to be brought by subscribers go to arbitration, while claims likely to be brought by Vonage go to court, the agreement was substantively unconscionable.

The court declined to sever the offending provision and found the entire arbitration agreement unenforceable. Courts have discretion to sever an unconscionable provision from an agreement, or refuse to enforce the agreement in its entirety. Severance would not be appropriate because the high degree of procedural unconscionability tainted the service agreement and arbitration provision, previous versions of the TOS contained a variety of provisions that were likely unconscionable, and Vonage’s repeated modifications made it difficult, if not impossible, to determine what the TOS would look like in the absence of the offending provision.

The case is No. 2:13-cv-08026-CAS(MRWx).

Attorneys: Bruce R. MacLeod (McKool Smith Hennigan PC) for Arthur Merkin. Michael A. Sherman (Bingham McCutchen LLP) for Vonage America Inc.

Companies: Vonage America Inc.

Cases: StateUnfairTradePractices CaliforniaNews