Ninth Circuit abandons modern law and attacks standard forms

U.S. law has long held that non-negotiated, standard-form contracts are fully enforceable unless they smack of both procedural and substantive unconscionability. But the Ninth Circuit has embarked on a new path equating procedural unconscionability to mere use of standard forms without deception, and even though there is no lack of notice, no lack of choice and no other indicia of procedural unconscionability; other courts should reject this path and the Ninth Circuit should retract it.

It is as if the Ninth Circuit awoke one morning on its own planet and concluded that it should change fundamental contract law and vitiate many arbitration clauses, class action waivers, and choice of law and forum selection clauses.

            In Nagrampa v. Mailcoups, Inc., 469 F.3d 1257 (9th Cir. 2006) the Ninth Circuit held unconscionable as to a California franchisee,  a mandatory forum and arbitration clause picking Massachusetts as the venue for disputes in a franchise agreement . The alleged procedural problems were the unbalanced bargaining positions and a lack of actual bargaining. But contracts are seldom bargained as to matters other than price and quantity or scope. 

             The alleged substantive problems? 

(1) The clause lacked mutuality because the franchisor could use judicial process in some cases (e.g., to protect its trademark rights), while the franchisee could not. But contract law has never required that each clause have mutuality, only that the entire contract reflect a mutuality of obligation, which this one did.

(2) “[The] contract would require a one-woman franchisee … to fly across the country to arbitrate a contract signed and performed in California…. She may not be able to maintain her claim … The forum selection provision has "no justification other than as a means of maximizing an advantage over [franchisees]."” But the Supreme Court has held that mere cost is not enough to invalidate such clauses. Also, there was a justification for the clause – without it, the franchisor would be forced to litigate in all of the states in which it granted franchises and, thus, to charge all franchisees a premium to enable it to do so.

            Nagrampa is bad enough, but the Ninth Circuit later continued the exegesis of its view of law in Douglas v. U.S. District Court, 2007 WL 2069542 (9th Cir. 2007), a mandamus action. There, after holding that an amendment of an online agreement lacked assent, the Ninth Circuit gratuitously commented that even had there been assent, the terms for class action waiver and mandatory arbitration were unconscionable. The procedural flaw: the clause was a non-bargained standard form. The court said: “The district court held that the arbitration clause [was] not procedurally unconscionable … because Douglas had meaningful alternative choices for … service. Under New York law [this] forecloses any procedural unconscionability claim. However, [in Nagrampa] we noted that California “has rejected the notion that the availability ... of substitute ... services alone can defeat a claim of procedural unconscionability.” [A] contract can be procedurally unconscionable if a service provider has overwhelming bargaining power and presents a “take-it-or-leave-it” contract to a customer - even if the customer has a meaningful choice as to service providers.”

            But– why is that true? If the other party has a valid option that would allow it to choose another provider and it does not exercise that option, why is the result procedurally unconscionable?  The court did not provide any answer to this.

            Then in Davis v. O'Melveny & Myers, 485 F.3d 1066 (9th Cir. 2007), the Ninth Circuit held that an arbitration clause proposed by a law firm and assented to by an employee was unconscionable. It was procedurally unconscionable not because of any lack of actual notice, use of misleading language or terms, or lack of options for the employee. It was 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. The law firm “merely” offered the employee a three month period of employment in which to decide and accept the term or find a new job.

            This collection of cases is bad law that transfers making and amendment of contracts to courts, rather than parties acting in a marketplace. Procedural unconscionability is properly associated with lack of notice, deception, advantage-taking, and quasi fraud. As the doctrine itself states: “The principle is one of prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power.”

             Under the Ninth Circuit view, however, procedural unconscionability morphs into mere use of non-negotiated standard forms and sets the stage for a court hostile to the use of arbitration and class action waivers (or other terms) in consumer and employee cases to invalidate otherwise valid agreements. 

            The marketplace or the federal legislature should make that choice, not a court.   The strange thing is that this attack on arbitration clauses and class action waivers comes when the market is in fact adjusting to give better rights in such clauses to consumers. For example, the AT&T contract that is associated with the Apple iphone products provides that arbitration is mandatory, but that AT&T will pay attorney and other costs for non-frivolous disputes, even if the complainant loses. Markets do adjust unless courts deploy unilateral preclusive power to cut them off.
Written By:stjoe56 On October 24, 2007 10:23 PM

As a lawyer skilled in IP law and the author of a major treatise dealing with computer law, I semi-agree with the 9th Circuit's approach. I have read too many standard contracts that are (1) completely one-sided and (2) incomprehensible.

I once found a on-line contract for a west coast based ISP whose entire client base was located with 150 miles of its headquarters. Yet it required that all proceedings take place in Florida.

SJ