Court Opinion

ID: 3049457
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:27:28.004907+00
Date Added: 2024-06-11T11:49:20.415257
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

JOE DOUGLAS, on behalf of himself       
and on behalf of all others
similarly situated,
                          Petitioner,
                  v.                          No. 06-75424
UNITED STATES DISTRICT
COURT FOR THE CENTRAL
                                               D.C. No.
                                            CV-06-03809-GAF
DISTRICT OF CALIFORNIA,                        OPINION
                        Respondent,
TALK AMERICA INC., a
Pennsylvania corporation,
              Real Party in Interest.
                                        
             On Petition for Writ of Mandamus
             to the United States District Court
            for the Central District of California

                   Argued and Submitted
             June 7, 2007—Pasadena, California

                     Filed July 18, 2007

        Before: Alex Kozinski, Ronald M. Gould and
           Consuelo M. Callahan, Circuit Judges.

                     Per Curiam Opinion

                             9067
9070                  DOUGLAS v. USDC

                         COUNSEL

J. Paul Gignac, Katherine Donoven and Lisa Johnston
Nicholes, Arias, Ozzello & Gignac, LLP, Santa Barbara, Cali-
fornia; David R. Greifinger, The Law Offices of David R.
Greifinger, Santa Monica, California; Howard Andrew Gold-
stein, Law Offices of Howard A. Goldstein, Van Nuys, Cali-
fornia, for the petitioner.

Paul F. Donsbach and Jennifer L. Andrews, Kutak Rock LLP,
Irvine, California; Bartholomew L. McLeay, Jeremy Fitzpat-
rick and Paul R. Gwilt, Kutak Rock LLP, Omaha, Nebraska,
for real party in interest.

                         OPINION

PER CURIAM:

   We consider whether a service provider may change the
terms of its service contract by merely posting a revised con-
tract on its website.

                            Facts

   Joe Douglas contracted for long distance telephone service
with America Online. Talk America subsequently acquired
this business from AOL and continued to provide telephone
service to AOL’s former customers. Talk America then added
four provisions to the service contract: (1) additional service
                       DOUGLAS v. USDC                         9071
charges; (2) a class action waiver; (3) an arbitration clause;
and (4) a choice-of-law provision pointing to New York law.
Talk America posted the revised contract on its website but,
according to Douglas, it never notified him that the contract
had changed. Unaware of the new terms, Douglas continued
using Talk America’s services for four years.

   After becoming aware of the additional charges, Douglas
filed a class action lawsuit in district court, charging Talk
America with violations of the Federal Communications Act,
breach of contract and violations of various California con-
sumer protection statutes. Talk America moved to compel
arbitration based on the modified contract and the district
court granted the motion. Because the Federal Arbitration
Act, 9 U.S.C. § 16, does not authorize interlocutory appeals
of a district court order compelling arbitration, Douglas peti-
tioned for a writ of mandamus.

                           Analysis

  [1] Because a writ of mandamus is an extraordinary rem-
edy, we have developed five factors that cabin our power to
grant the writ:

    1.   “The party seeking the writ has no other ade-
         quate means, such as a direct appeal, to attain
         the relief he or she desires.”

    2.   “The petitioner will be damaged or prejudiced in
         a way not correctable on appeal.”

    3.   “The district court’s order is clearly erroneous as
         a matter of law.”

    4.   “The district court’s order is an oft-repeated
         error, or manifests a persistent disregard of the
         federal rules.”
9072                       DOUGLAS v. USDC
      5.   “The district court’s order raises new and impor-
           tant problems, or issues of law of first impres-
           sion.”

Bauman v. U.S. Dist. Court, 557 F.2d 650, 654-55 (9th Cir.
1977).

   The third factor is a necessary condition for granting a writ
of mandamus. Executive Software N. Am., Inc. v. U.S. Dist.
Court, 24 F.3d 1545, 1551 (9th Cir. 1994). But “all five fac-
tors need not be satisfied at once.” Valenzuela-Gonzalez v.
U.S. Dist. Court, 915 F.2d 1276, 1279 (9th Cir. 1990). If the
district court clearly erred, we determine whether the four
additional factors “in the mandamus calculus point in favor of
granting the writ.” Executive Software, 24 F.3d at 1551.

   [2] 1. Douglas alleges that Talk America changed his ser-
vice contract without notifying him. He could only have
become aware of the new terms if he had visited Talk Ameri-
ca’s website and examined the contract for possible changes.
The district court seems to have assumed Douglas had visited
the website when it noted that the contract was available on
“the web site on which Plaintiff paid his bills.” However,
Douglas claims that he authorized AOL to charge his credit
card automatically and Talk America continued this practice,
so he had no occasion to visit Talk America’s website to pay
his bills. Even if Douglas had visited the website, he would
have had no reason to look at the contract posted there. Parties
to a contract have no obligation to check the terms on a peri-
odic basis to learn whether they have been changed by the
other side.1 Indeed, a party can’t unilaterally change the terms
  1
    Nor would a party know when to check the website for possible
changes to the contract terms without being notified that the contract has
been changed and how. Douglas would have had to check the contract
every day for possible changes. Without notice, an examination would be
fairly cumbersome, as Douglas would have had to compare every word of
the posted contract with his existing contract in order to detect whether it
had changed.
                      DOUGLAS v. USDC                      9073
of a contract; it must obtain the other party’s consent before
doing so. Union Pac. R.R. v. Chi., Milwaukee, St. Paul &
Pac. R.R., 549 F.2d 114, 118 (9th Cir. 1976). This is because
a revised contract is merely an offer and does not bind the
parties until it is accepted. Matanuska Valley Farmers Coop-
erating Ass’n v. Monaghan, 188 F.2d 906, 909 (9th Cir.
1951). And generally “an offeree cannot actually assent to an
offer unless he knows of its existence.” 1 Samuel Williston &
Richard A. Lord, A Treatise on the Law of Contracts § 4:13,
at 365 (4th ed. 1990); see also Trimble v. N.Y. Life Ins. Co.,
255 N.Y.S. 292, 297 (App. Div. 1932) (“An offer may not be
accepted until it is made and brought to the attention of the
one accepting.”). Even if Douglas’s continued use of Talk
America’s service could be considered assent, such assent can
only be inferred after he received proper notice of the pro-
posed changes. Douglas claims that no such notice was given.

   Crawford v. Talk America, Inc., No. 05-CV-0180-DRH,
2005 WL 2465909, at *4 (S.D. Ill. Oct. 6, 2005), and Bischoff
v. DirecTV, Inc., 180 F. Supp. 2d 1097, 1103-06 (C.D. Cal.
2002), on which the district court relied, are not to the con-
trary. The customers in these cases received notice of the
modified contract by mail. The service provider in Bischoff
mailed the contract to the customer, 180 F. Supp. 2d at 1101,
and the service provider in Crawford gave notice to the cus-
tomer that she could see the contract terms online or call the
service provider to learn of the terms. 2005 WL 2465909, at
*3 n.3. Furthermore, Crawford and Bischoff involved new
customers who necessarily would be on notice that they were
required to assent to contract terms as a predicate for using
the service. By contrast, the California Court of Appeal has
held that a revised contract containing an arbitration clause is
unenforceable against existing customers, even when they are
given notice by mail. Badie v. Bank of Am., 67 Cal. App. 4th
779, 801 (Ct. App. 1998).

  [3] The district court thus erred in holding that Douglas was
bound by the terms of the revised contract when he was not
9074                       DOUGLAS v. USDC
notified of the changes. The error reflects fundamental misap-
plications of contract law and goes to the heart of petitioner’s
claim. It would alone be sufficient to satisfy the third Bauman
factor, but the district court also committed two additional
errors. Even if Douglas were bound by the new terms of the
contract (which he is not for the reasons already explained),
the new terms probably would not be enforceable in Califor-
nia because they conflict with California’s fundamental policy
as to unconscionable contracts.2 In New York, as in Califor-
   2
     Under the Federal Arbitration Act (FAA), 9 U.S.C. § 2, “[a]rbitration
agreements . . . are subject to all defenses to enforcement that apply to
contracts generally.” Ingle v. Circuit City Stores, Inc., 328 F.3d 1165,
1170 (9th Cir. 2003). Thus, “[t]o evaluate the validity of an arbitration
agreement, federal courts ‘should apply ordinary state-law principles that
govern the formation of contracts.’ ” Id. (quoting First Options of Chi-
cago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). Such state-law principles
come from the law of a particular state—not federal general common law
under the FAA. See First Options, 514 U.S. at 944. Here, Douglas has
raised the state law defenses of lack of contract formation and uncons-
cionability, so we must determine which state’s law applies.
   The FAA “does not create any independent federal-question jurisdic-
tion.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S.
1, 25 n.32 (1983). The district court exercised supplemental jurisdiction in
this case. When a federal court exercises supplemental jurisdiction, “the
federal court applies the choice-of-law rules of the forum state,” which in
this case is California. Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96
F.3d 1151, 1164 (9th Cir. 1996).
   Under California’s choice-of-law rules, the district court may not
enforce the choice-of-law provision pointing to New York law if (1) New
York’s substantive law is contrary to a fundamental policy entrenched in
California’s substantive law and (2) California has a “materially greater
interest” than New York in determining the issue. Wash. Mut. Bank, FA
v. Superior Court, 24 Cal. 4th 906, 916-17 (2001) (quoting Restatement
(Second) of Conflict of Laws § 187(2)). To determine which state has the
materially greater interest, we look to the domicile of the parties and the
place of the wrong. See Reich v. Purcell, 67 Cal. 2d 551, 555 (1967). Cali-
fornia certainly has an interest in protecting the thousands of citizens in
the California subclass of this class action from unconscionable contracts.
And this interest is materially greater than New York’s interest because
Talk America is a Pennsylvania corporation with its principal place of
business in Pennsylvania. Therefore, if New York law conflicts with a
fundamental policy of California, the choice-of-law provision cannot be
enforced and California law would apply.
                       DOUGLAS v. USDC                       9075
nia, a contract is unconscionable only if it is both procedurally
and substantively unconscionable. See Armendariz v. Found.
Health Psychcare Servs., Inc., 24 Cal. 4th 83, 114 (2000);
Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 10
(1988). That’s where the similarities end. The district court
erred in analyzing California law as to both procedural and
substantive unconscionability.

   [4] The district court held that the arbitration clause in the
modified contract is not procedurally unconscionable (and
therefore enforceable) because Douglas had meaningful alter-
native choices for telephone service. Under New York law
this choice forecloses any procedural unconscionability claim.
See Ranieri v. Bell Atl. Mobile, 759 N.Y.S.2d 448, 449 (App.
Div. 2003). However, after the district court made its ruling,
we noted that California “has rejected the notion that the
availability . . . of substitute . . . services alone can defeat a
claim of procedural unconscionability.” Nagrampa v. Mail-
Coups, Inc., 469 F.3d 1257, 1283 (9th Cir. 2006) (en banc).
In California, 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 provid-
ers. Id. at 1284.

   [5] Likewise, the district court held that the class action
waiver provision is not substantively unconscionable. Such
waivers aren’t substantively unconscionable under New York
law. See Hayes v. County Bank, 811 N.Y.S.2d 741, 743 (App.
Div. 2006); Tsadilas v. Providian Nat’l Bank, 786 N.Y.S.2d
478, 480 (App. Div. 2004); Ranieri, 759 N.Y.S.2d at 449. The
district court cited Provencher v. Dell, Inc., 409 F. Supp. 2d
1196, 1201 (C.D. Cal. 2006), for the proposition that Califor-
nia law was in accord, but the California Court of Appeal in
Cohen v. DirecTV, Inc., 142 Cal. App. 4th 1442, 1455 n.13
(Ct. App. 2006), expressly disavowed Provencher. A class
action waiver provision thus may be unconscionable in Cali-
fornia. Whether it is depends on the facts and circumstances
9076                      DOUGLAS v. USDC
developed during the course of litigation. The district court
clearly erred in holding that the clauses (assuming that they
are part of the contract at all) are consistent with California
policy and therefore enforceable as a matter of law.

   Because we find that the district court committed clear
errors of law, we turn to the remaining four Bauman factors.

   [6] 2. The first and second Bauman factors weigh in
favor of granting mandamus relief.3 If Douglas is forced to
arbitrate, he “has no other adequate means” of ensuring that
he can continue as the class representative. Bauman, 557 F.2d
at 654. This would “prejudice[ ]” Douglas “in a way not cor-
rectable on appeal.” Id.

   If Douglas wins the arbitration and is awarded all the dam-
ages he asks for, then his individual claim would be rendered
moot.4 Douglas couldn’t avoid mootness by moving to vacate
the arbitration award solely because he wanted to continue as
the class representative. There are only four permissible
grounds for vacating an arbitration award: (1) “the award was
procured by corruption, fraud, or undue means”; (2) “there
was evident partiality or corruption in the arbitrators”; (3) the
arbitrators “refus[ed] to postpone the hearing” even when
there was sufficient cause to postpone, “refus[ed] to hear evi-
dence pertinent and material to the controversy” or engaged
in “other misbehavior”; and (4) “where the arbitrators
exceeded their powers.” 9 U.S.C. § 10(a). In sum, a party
needs to show “affirmative misconduct” or “irrational[ity]” in
   3
     We generally examine the first and second factors together. See Bau-
man, 557 F.2d at 654 (the second factor “is closely related to the first”).
   4
     If Douglas were to lose the arbitration or were awarded less than he
seeks, his claim would not be moot, as he would be able to challenge the
district court’s order compelling arbitration as part of his appeal of the
arbitration award. See Sanford v. MemberWorks, Inc., 483 F.3d 956, 960
(9th Cir. 2007) (reversing a district court’s order compelling arbitration
when the plaintiff received an arbitration award on a restitution claim but
“[t]he arbitrator found for [defendant] on [plaintiff’s] other claims”).
                        DOUGLAS v. USDC                       9077
the arbitration to vacate an arbitration award. Kyocera Corp.
v. Prudential-Bache Trade Servs., Inc., 341 F.3d 987, 998
(9th Cir. 2003) (en banc). Losing the opportunity to continue
as a class representative doesn’t come close to meeting this
standard.

    [7] If Douglas’s individual claim is rendered moot because
it is fully satisfied as a result of the arbitration, he would lose
his status as class representative because he would no longer
have a concrete stake in the controversy. It is also doubtful
that he could appeal the district court’s order confirming an
award that fully satisfied his individual claim, and he would
thus have no opportunity to challenge the district court’s order
compelling the arbitration in the first place. It is thus entirely
possible that the district court’s clear error in compelling arbi-
tration would be insulated from appellate review. Bauman,
557 F.2d at 654.

   [8] 3. The fifth Bauman factor also favors mandamus
relief. The district court’s order enforcing new contractual
terms when a customer is only given notice of the terms by
having the contract posted on the internet “raises new and
important problems” and addresses “issues of law of first
impression.” Bauman, 557 F.2d at 655. This is the first time
any federal court of appeals has considered whether to
enforce a modified contract with a customer where the cus-
tomer claims that the only notice of the changed terms con-
sisted of posting the revised contract on the provider’s
website. This issue is also of some significance, as it poten-
tially affects the relationship of numerous service providers
with millions of customers, and thus deserves immediate reso-
lution.

                            *   *   *

    [9] Because four of the five Bauman factors favor manda-
mus relief, and only one factor (the fourth) militates against
it, we conclude that the balance of factors favors issuing the
9078                DOUGLAS v. USDC
writ. The district court’s order compelling arbitration is
vacated.

  PETITION GRANTED.