The California Court of Appeals for the Second Appellate District found that the forum selection clause in defendant EarthLink, Inc.’s (“EarthLink”) membership contract, which would have required consumers (in this case, putative class plaintiff California residents), to travel 2,000 miles to Georgia in order to recover claims of $40 to $50, is unenforceable because it is unreasonable as a matter of law. Additionally, the Court held that the contract’s class action waiver was procedurally unconscionable because it took the form of an adhesion contract with no opportunity to opt out, and also substantively unconscionable, because, if the allegations were found to be true, EarthLink would have been cheating numerous customers out of small sums of money. The case arises out of a class-action suit brought by plaintiff Ozgur Aral (“Aral”), who alleged that EarthLink began charging him for his DSL line on the date that he ordered the service, even though he did not receive the equipment necessary to utilize the service until five weeks afterwards. As part of his user agreement with EarthLink, Aral agreed that any claim related to the agreement would be adjudicated in arbitration, governed by Georgia law and held in Atlanta, Georgia. The agreement also contained a clause that precluded class action suits.
The issue on appeal was the trial court’s denial of EarthLink’s petition to compel arbitration of the suit. While the Court affirmed the trial court’s decision to deny the petition, it rejected its holding that the case could not be arbitrated because the plaintiff sought injunctive relief as well as restitution. The Court held that the claim for injunctive relief could have been severed from the claim for restitution, which would have allowed arbitration to proceed as to the claim for restitution.
However, despite its disagreement with the reasoning of the trial court, the Court affirmed the denial of the petition because it found the class action waiver to be both procedurally and substantively unconscionable, and because it found the forum selection clause to be unreasonable. In finding the class action waiver clause unconscionable, the Court relied on Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). Discover Bank held that class action waivers should not be enforced when they are both procedurally and substantively unconscionable. A class action waiver is procedurally unconscionable when it is contained in a consumer contract of adhesion. Such a waiver is also substantively unconscionable when it involves small amounts of damages and when there are allegations that the party with superior bargaining power has deliberately cheated numerous consumers out of small sums of money. When these two conditions are met, the class action waiver effectively becomes an exculpatory clause that protects the wrongdoer and prevents consumers from employing the most effective method of redress. Applying these criteria, the Court held that EarthLink’s class action waiver was an example of “quintessential procedural unconscionability” because the terms were “presented on a ‘take it or leave it’ basis” with no opportunity to opt out. The Court also found the waiver substantively unconscionable because of Aral’s allegation that EarthLink charged its customers for DSL service weeks before they had received the equipment necessary to utilize it, an allegation which, if true, meant that “numerous consumers were cheated out of small sums of money through deliberate behavior.” Having found that the class action waiver was both procedurally and substantively unconscionable, the Court held that it was unenforceable.
In considering whether the forum selection clause should be enforced, the Court cited Smith, Valentino & Smith, Inc. v. Superior Court, 17 Cal. 3d 491 (1976) (holding that forum selection clauses are valid in the Court’s discretion, so long as they are not unreasonable) and Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) (holding that forum selection clauses in a contracts of adhesion “are subject to judicial scrutiny for fundamental fairness”). The Court emphasized that while each of these cases places “a heavy burden on the plaintiff who seeks to prove that a forum selection clause is unreasonable . . . the burden was not intended to be insurmountable.” Furthermore, it noted that if trial in the selected forum will be so difficult and burdensome that it will deprive a plaintiff of his or her day in court, it will be found unreasonable. The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Following this logic, the Court found that it was unreasonable to require a potentially significant number of California consumers to travel to Georgia in order to recover small sums of money, because the geographical barrier will “discourag[e] legitimate claims.”
The Court also denied EarthLink’s contention that Aral and other potential plaintiffs could obtain redress by bringing their claims in California small claims court. Because small claims courts do not allow class action suits and do not provide for forms of relief such as punitive damages and attorney fees, the Court held that small claims courts are not an adequate substitute for class action litigation, and do not require that a “patently unreasonable forum selection clause should be enforced.”
Finally, the Court turned to the question of whether the Georgia choice-of-law provision in the EarthLink user agreement should require enforcement of the class action waiver under Georgia law. Citing the Restatement Second of Conflict of Laws, the Court first determined whether EarthLink has a substantial relationship with Georgia and whether there is a reasonable basis for choosing Georgia law. Having found that EarthLink met the first part of the Restatement test, the Court addressed the final question of whether California has a “materially greater interest than the chosen state in the determination of the particular issue.” The Court found that because Aral is a California resident who seeks to represent a class of California consumers with claims under California law, and because California’s policy favors class-action suits, there was “no doubt that California has a ‘materially greater interest than [Georgia] in the determination of [this] particular issue . . . .’”