Author: Oh-Yoon Kim
Respondent Joe Douglas originally contracted with America Online for long distance telephone service. When Talk America acquired this business and its customers from America Online, Talk America posted a revised contract on its website, without otherwise notifying customers of the changes. When Douglas became aware of additional service charges resulting from a new provision in the revised contract, he filed a class action lawsuit against Talk America in the Central District of California. The lawsuit alleged violations of the Federal Communications Act and California consumer protection statutes, in addition to breach of contract, stemming from Talk America’s addition of numerous contract terms. The added contract terms included additional charges, a class action waiver, an arbitration clause, and a choice-of-law provision requiring disputes to be resolved under New York law. Talk America moved to compel arbitration based on the revised contract, and the district court granted the motion. Douglas petitioned the Ninth Circuit for a writ of mandamus against the district court’s order compelling arbitration.
In holding that mandamus relief was appropriate, the Ninth Circuit weighed the factors announced in Bauman v. U.S. Dist. Court, 557 F.2d 650, 654-55 (9th Cir. 1977). It found mandamus was appropriate because (1) if Douglas prevailed at his arbitration he would lose his status as class representative yet not meet the standard for having his arbitration award vacated, thereby being prejudiced in a way not correctable on appeal; (2) the district court fundamentally misapplied contract law with regard to contract formation, and erroneously applied the law regarding unconscionability; and (3) the contract formation issues raised new and important problems of first impression that could affect “the relationship of numerous service providers with millions of customers,” and thus deserved immediate resolution. Douglas, 495 F.3d at 1068. In fact, the court noted that this was “the first time any federal court of appeals has considered whether to enforce a modified contract with a customer where the customer claims that the only notice of the changed terms consisted of posting the revised contract on the provider's website.” Id. at 1069.
In considering the issues of contract formation raised by Douglas, the Ninth Circuit held that the district court erred in holding that Talk America’s revised contract was binding when Douglas was not notified of the changes. Even though the revised contract was posted on the web site Talk America assumed customers would visit to pay their bills, the court found that Douglas had no occasion to visit the web site because he had authorized AOL to automatically charge his credit card. Because a revised contract is an offer that does not become binding until it is accepted, and because Douglas did not receive notice that the revised contract existed, the court held that Douglas could not have assented to Talk America’s offer. More broadly, the court held that “[p]arties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side.” Douglas, 495 F.3d at 1066. To hold otherwise would be to impose on consumers the “cumbersome” burden not only to check the web site every day for changes, but also to “compare every word of the posted contract with [the consumer’s] existing contract in order to detect whether it had changed.” Id. at 1066, n1. Because Douglas did not agree to the revised contract, the arbitration clause was not binding and the Ninth Circuit vacated the District Court’s order compelling arbitration.
The Ninth Circuit also discussed the District Court's analysis of whether certain provisions in the revised contract were unconscionable. The District Court had applied New York law pursuant to the terms of the revised contract. Because those terms were not binding, the Ninth Circuit held that California law applied because California has a “materially greater interest” than New York in determining the issue. The court said that the revised terms in Talk America’s contract would “probably would not be enforceable in California because they conflict with California's fundamental policy as to unconscionable contracts.” Douglas, 495 F.3d at 1067. Whereas in New York, a contract is not procedurally unconscionable if there are “meaningful alternative choices” for service, in California a contract term can be procedurally unconscionable where the service provider has “overwhelming bargaining power” and presents the customer with a “take-it-or-leave-it “contract. Id. Although the question of whether a contract term is substantively unconscionable in California “depends on the facts and circumstances developed during the course of litigation,” the Ninth Circuit held that the district court erred in holding that the clauses were consistent with California policy. Id. at 1068.