The recent decision in Knutson v. Sirius continues the ongoing trend of courts enforcing the express terms of arbitration agreements, this time in a Telephone Consumer Protection Act (TCPA) class action.
Knutson, handed down in the United States District Court for the Southern District of California, represents a big win for businesses, potentially empowering them to eliminate exposure to consumer class action lawsuits in certain situations. But businesses will only be able to avail themselves of this opportunity by ensuring that their arbitration clauses contain appropriate language.
Below, we summarize the Knutson decision and its importance, and we discuss considerations for businesses thinking about adding, or currently relying upon, arbitration provisions in their customer agreements.
The Welcome Kit
In November 2011, the plaintiff purchased a vehicle that included a 90-day trial subscription to defendant Sirius XM’s satellite radio service. After his trial subscription with the defendant was activated, the plaintiff claimed that he received three unsolicited sales calls from the defendant on his cellular phone. The plaintiff alleged that he had never provided his cellular phone number to the defendant, nor did he give consent to receive such calls on his cell phone.
After the phone calls took place, the defendant mailed its “Welcome Kit” to the plaintiff. The customer agreement, which was included in the Welcome Kit, set forth the parties’ relationship during the trial subscription period and stated that if the user did not cancel his subscription within three business days of activating his receiver, the agreement would be legally binding on him. The defendant alleged that the plaintiff never canceled his subscription.
The customer agreement contained an arbitration provision, stating in all capital letters that “ANY DISPUTE MAY BE RESOLVED BY BINDING ARBITRATION” and that by agreeing to arbitration, “YOU ARE HEREBY WAIVING THE RIGHT TO GO TO COURT, INCLUDING THE RIGHT TO A JURY…”
Despite the terms of the agreement, on February 15, 2012, the plaintiff filed a class action under the TCPA against the defendant. In response to his complaint, the defendant filed a motion to compel arbitration of the plaintiff’s claims pursuant to the Federal Arbitration Act. On May 30, 2012, the United States District Court for the Southern District of California granted the defendant’s motion to compel arbitration and dismissed the plaintiff’s claims.
The court’s reasoning
In reaching its opinion, the court determined that the customer agreement contained a valid arbitration clause that was enforceable under the FAA. The court addressed the following issues:
The agreement qualified as a binding contract. The court reasoned that the length of the arbitration provisions in relation to the overall length of the agreement, coupled with the use of bolded and capitalized headings foreclosed the plaintiff’s argument that the arbitration provision was unfairly hidden in the document. The court also noted that the “overwhelming weight of authority support[ing] the view that no signature is required to meet the [Federal Arbitration Act’s] ‘written’ requirement.”
TCPA claims may be arbitrated. The court determined that the plaintiff’s contention regarding his inability to effectively vindicate his rights under the TCPA lacked merit because, as the United States Supreme Court reasoned in AT&T Mobility, “such unrelated policy concerns cannot undermine the FAA.”
A request for injunctive relief does not render the agreement unenforceable. Despite a narrow exception to the general rule of FAA preemption that applies when the plaintiff is acting as a private attorney general seeking to enjoin future unlawful practices, the court determined it must enforce the arbitration provision because the exception does not survive AT&T Mobility as it “prohibits arbitration for claims for public injunctive relief.” AT&T Mobility, 131 S. Ct. at 1753.
The agreement did not constitute an unconscionable adhesion contract. While the court found “procedural unconscionability because the arbitration provision referred to arbitration rules, but a copy of those rules were not provided to Plaintiff,” it did not find substantive unconscionability because the parties could receive the same damages that would otherwise be available in court and the plaintiff was not required to pay arbitrators’ fees for claims less than US$10,000. The court therefore concluded that the agreement was not an unconscionable contract of adhesion.
Absent exceptional circumstances, US courts will continue applying FAA
The court’s ruling in Knutson represents an ongoing trend of enforcing the express terms of arbitration agreements. Consistent with the United States Supreme Court’s pro-arbitration holding in AT&T Mobility, parties can expect United States courts to continue applying the FAA to enforce arbitration provisions in the absence of exceptional circumstances.
However, companies should be wary of less consumer-friendly agreements, which may not be looked upon as favorably by the court; one-sided agreements remain susceptible to unconscionability arguments from opposing counsel. For this reason, companies are advised to engage experienced outside counsel to draft arbitration agreements that will effectively preclude class claims and have the best chance of being upheld. Companies involved in transactional relationships with their consumers should review, and consider revising, existing arbitration agreements to ensure enforcement.
For more information about this decision and its impact on your business, please contact:
*The authors wish to thank Sean R. Cain, a 2012 summer associate based in DLA Piper’s Los Angeles office, for his invaluable contributions to this article.