Arthur Merkin v. Vonage America, Inc.

• Court: Court of Appeals for the Ninth Circuit
• Decided: February 29, 2016
• Docket: 14-55397
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS FEB 29 2016 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

ARTHUR MERKIN; JAMES SMITH, No. 14-55397 individually and on behalf of all others similarly situated, and on behalf of the D.C. No. 2:13-cv-08026-CAS- general public, MRW

Plaintiffs - Appellees, MEMORANDUM* v.

VONAGE AMERICA, INC.,

Defendant - Appellant.

Appeal from the United States District Court for the Central District of California Christina A. Snyder, District Judge, Presiding

Argued and Submitted February 2, 2016 Pasadena, California

Before: WARDLAW and HURWITZ, Circuit Judges and RICE,** Chief District Judge.

In this putative class action, Arthur Merkin and James Smith (“Plaintiffs”)

allege that Vonage America, Inc. (“Vonage”) violated California law by charging

* This disposition is not appropriate for publication and is not precedent except as provided by 9th Cir. R. 36-3. ** The Honorable Thomas O. Rice, Chief United States District Judge for the Eastern District of Washington, sitting by designation. certain fees in connection with its Voice over Internet Protocol service. Vonage

filed a motion to compel arbitration pursuant to its Terms of Service. The district

court denied the motion, and Vonage timely appealed. We have jurisdiction under

9 U.S.C. § 16(a)(1)(B) and reverse with directions to grant the motion.

1. We reject Vonage’s argument that the district court should have referred

to the arbitrator the Plaintiffs’ contention that the arbitration provision in the Terms

of Service was unconscionable. “[W]hen a plaintiff’s legal challenge is that a

contract as a whole is unenforceable, the arbitrator decides the validity of the

contract,” but “when a plaintiff argues that an arbitration clause, standing alone, is

unenforceable . . . that is a question to be decided by the court.” Bridge Fund

Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1000 (9th Cir. 2010).

Plaintiffs’ challenge was clearly directed at the arbitration provision.

2. “Under California law, a contract must be both procedurally and

substantively unconscionable to be rendered invalid.” Chavarria v. Ralphs

Grocery Co., 733 F.3d 916, 922 (9th Cir. 2013); see also Sanchez v. Valencia

Holding Co., 353 P.3d 741, 748 (Cal. 2015) (“[P]rocedural and substantive

unconscionability must both be present.”) (alterations omitted). We agree with the

district court that the arbitration provision in the Vonage Terms of Service is

procedurally unconscionable because it is adhesive, Sanchez, 353 P.3d at 751, and

can be unilaterally modified by Vonage. See Westlye v. Look Sports, Inc., 22 Cal.

2 Rptr. 2d 781, 792 (Ct. App. 1993) (describing procedural unconscionability as

arising in situations where there is “no real negotiation and an absence of meaningful

choice”); Chavarria, 733 F.3d at 923 (explaining that the Ninth Circuit has held,

when applying California law, that the “degree of procedural unconscionability is

enhanced when a contract binds an individual to later-provided terms”).

3. In the district court, Plaintiffs identified several provisions of the

arbitration agreement in the 2013 Terms of Service as substantively

unconscionable.1 The only provision among those challenged below asserted on

appeal to be substantively unconscionable is Section 14.10, which exempts certain

categories of claims from arbitration. We therefore address only that provision.

See Collins v. City of San Diego, 841 F.2d 337, 339 (9th Cir. 1988) (“It is well

established in this Circuit that claims which are not addressed” on appeal “are

deemed abandoned.”).

4. Relying on California cases holding it unconscionable to exempt from

arbitration claims one party is likely to bring while requiring arbitration of the other

party’s likely claims, e.g., Fitz v. NCR Corp., 13 Cal. Rptr. 3d 88, 104 (Ct. App.

2004), Plaintiffs argue that the “carve-out” provisions of Sections 14.10(c) and (d)

1 The unilateral modification clause of the 2013 Terms of Service was not among the provisions that Plaintiffs claimed were substantively unconscionable. The district court only cited that clause, however, in finding procedural unconscionability.

3 are unenforceable. But, the Federal Arbitration Act preempts state-law defenses

“that apply only to arbitration or derive their meaning from the fact that an agreement

to arbitrate is in issue.” AT&T Mobility, LLC v. Concepcion, 563 U.S. 333, 339

(2011). The California rule relied upon by Plaintiffs is such a defense.2

5. Moreover, even assuming arguendo that Section 14.10 is unconscionable,

“[w]here, as here, only one provision of the agreement is found to be unconscionable

and that provision can easily be severed without affecting the remainder of the

agreement, the proper course is to do so.” Dotson v. Amgen, Inc., 104 Cal. Rptr. 3d

341, 350 (Ct. App. 2010) (finding an abuse of discretion for refusing to sever such a

provision); see also Zaborowski v. MHN Gov’t Servs., Inc., 601 F. App’x 461, 464-

65 (9th Cir. 2014) (Gould, J., concurring in part and dissenting in part) (“Concepcion

and its progeny should create a presumption in favor of severance when an

arbitration agreement contains a relatively small number of unconscionable

provisions that can be meaningfully severed[.]”).

6. The order of the district court denying Vonage’s motion to compel

arbitration is REVERSED, and this case is REMANDED with instructions to grant

2 Plaintiffs also challenge Section 14.10(b), which allows a collection agency to which Vonage’s claims against a user have been assigned to go to court. But Section 14.10(a) also offers a consumer the option between pursuing small claims against Vonage in court or through arbitration, claims consumers are more likely to assert, mitigating any one sided unfairness caused by the claims Vonage is allowed to take to court.

4 the motion.

5 Merkin v. Vonage America, Inc., No. 14-55397 FILED Wardlaw, Circuit Judge, dissenting: FEB 29 2016 MOLLY C. DWYER, CLERK I would affirm the district court’s denial of Vonage’s motion to U.S. COURT OF APPEALS compel

arbitration.

1. The district court correctly found Section 14.10’s “carve-out”

provisions substantively unconscionable under California law. Before Concepcion

and since, the settled law in California has been that arbitration agreements may be

substantively unconscionable when they except from mandatory arbitration the

claims one party is more likely to assert. See, e.g., Carmona v. Lincoln Millennium

Car Wash, Inc., 171 Cal. Rptr. 3d 42, 51–52 (Ct. App. 2014); Samaniego v. Empire

Today LLC, 140 Cal. Rptr. 3d 492, 500 (Ct. App. 2012); Abramson v. Juniper

Networks, Inc., 9 Cal. Rptr. 3d 422, 442–43 (Ct. App. 2004). Vonage’s arbitration

agreement does just that. It excepts from mandatory arbitration claims related to

overdue payments, intellectual property rights, and unauthorized use of service.

No one seriously disputes that these are the claims a cell phone services provider,

like Vonage, is most likely to bring against its customers, or that customers are

exceedingly unlikely to assert such claims against Vonage. The result: Vonage

may choose whether to litigate or arbitrate its claims, but customers may not.

Under California law, this provision of Vonage’s arbitration agreement is

1 substantively unconscionable. See Nagrampa v. MailCoups, Inc., 469 F.3d 1257,

1285–87 (9th Cir. 2006) (en banc).

2. The majority does not even reach the question of whether this

agreement is substantively unconscionable under California law. Instead, the

majority concludes that the “California cases” upon which Plaintiffs rely do not

survive Concepcion because these cases establish a “state-law defens[e]” that

“appl[ies] only to arbitration or derive[s] [its] meaning from the fact that an

agreement to arbitrate is in issue.” The majority is wrong. Within the arbitration

context and outside it, under California law a contract is substantively

unconscionable if its terms will have unfairly one-sided effects or results. See

A & M Produce Co. v. FMC Corp., 186 Cal. Rptr. 114, 122, 125–26 (Ct. App.

1982) (providing California’s leading account of substantive unconscionability

analysis in the context of a contract for the sale of agricultural equipment). The

unfairness of “likely” effects or results is no different. Here, by asking whether the

effects of Section 14.10 are likely to be one-sided, the district court followed the

same substantive unconscionability analysis that would apply in any other context.

“Likelihood” aside, the majority’s real point is that the FAA requires the

states to enforce agreements that grant to the stronger party access to either an

arbitral or judicial forum but that deny the weaker party that choice. It does not.

The FAA rejects the view that arbitration is inherently inferior to litigation. See

2 AT&T Mobility, LLC v. Concepcion, 563 U.S. 333, 339 (2011). However, a choice

between arbitration and litigation is superior to arbitration with no alternative.

That is because choice yields strategic flexibility—here, the opportunity to assess

the circumstances of any particular dispute and determine which forum would be

most advantageous. This is a valuable choice that Vonage, as the drafter of this

adhesive agreement, reserved for itself but denied its customers. The unfairness of

a provision that greatly favors the party with all the bargaining power is not unique

to arbitration, and the FAA does not require its enforcement. See Chavarria v.

Ralphs Grocery Co., 733 F.3d 916, 927 (9th Cir. 2013) (holding that the FAA does

not preempt California law’s invalidation of an arbitration policy that imposed one-

sided costs on the weaker party).

To be sure, the unfairness of this agreement happens to involve arbitration.

As we recently explained, however, Concepcion did not hold that the FAA

“require[s] strict enforcement of all terms contained in an arbitration agreement.”

Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425, 434 (9th Cir. 2015). “Such

a broad construction of the FAA’s purposes is untenable, of course, because it

would render § 2’s saving clause wholly ineffectual.” Id. (citation and internal

quotation marks omitted); see also Chavarria, 733 F.3d at 927 (“[Concepcion]

cannot be read to immunize all arbitration agreements from invalidation no matter

how unconscionable they may be, so long as they invoke the shield of

3 arbitration.”). Rather, while “Concepcion outlaws discrimination in state policy

that is unfavorable to arbitration,” it leaves intact state-law defenses that are

“agnostic towards arbitration.” Chavarria, 733 F.3d at 927 (citation and internal

quotation marks omitted). The application of California’s unconscionability

doctrine in this case is “not unfavorable towards arbitration, but instead reflects a

generally applicable policy against abuses of bargaining power.” Id. The FAA

does not preempt the invalidation of Section 14.10.

3. The majority ignores the correct standard of review by concluding that

Section 14.10 “can easily be severed.” “We review a district court’s choice not to

sever unconscionable portions of an arbitration agreement governed by California

law for abuse of discretion.” Bridge Fund Capital Corp. v. Fastbucks Franchise

Corp., 622 F.3d 996, 1000 (9th Cir. 2010). “An abuse of discretion is a plain error,

discretion exercised to an end not justified by the evidence, a judgment that is

clearly against the logic and effect of the facts as are found.” Rabkin v. Or. Health

Scis. Univ., 350 F.3d 967, 977 (9th Cir. 2003) (internal quotation marks omitted).

“We reverse only if we are convinced firmly that the reviewed decision lies beyond

the pale of reasonable justification under the circumstances.” McCollough v.

Johnson, Rodenburg & Lauinger, LLC, 637 F.3d 939, 953 (9th Cir. 2011) (internal

quotation marks omitted).

4 Under the appropriate standard of review, I cannot conclude that the district

court abused its discretion in declining to sever Section 14.10 from Vonage’s

arbitration agreement. Under California law, a court may refuse to enforce an

arbitration agreement that is “permeated” by unconscionability. Armendariz v.

Found. Health Psychcare Servs., Inc., 6 P.3d 669, 697 (Cal. 2000). In this case,

the procedural unconscionability of Vonage’s unilateral modification provision

would frustrate any effort “to save the arbitration agreement by severance or

restriction.” Nagrampa, 469 F.3d at 1293. This unilateral modification provision

turns the task of severance into a battle with the Hydra: a court could strike an

offending provision, such as Section 14.10, but who’s to say what will take its

place? Vonage would retain the ability to unilaterally “change the terms and

conditions of this agreement from time to time,” as it has done dozens of times

since Merkin and Smith signed up for its service, including four days after they

brought this action. Vonage remains free to revive unconscionable provisions, and

a court cannot be sure that any reformation would result in an enforceable

arbitration agreement. Under these circumstances, the district court’s decision

against severing Section 14.10 does not lie “beyond the pale of reasonable

justification.” McCollough, 637 F.3d at 953.