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Fifth Circuit Court of Appeal Addresses Mandatory Arbitration Clause
A recent decision by the U.S. Court of Appeals for the Fifth Circuit dealt with the validity of arbitration clauses in customer service agreements. In Iberia Credit Bureau Inc. v. Cingular Wireless LLC (No. 03-30613, July 21, 2004), a group of cellular telephone customers sued various service providers for deceptive trade practices and breaches of service agreements; the service providers moved to compel arbitration pursuant to arbitration clauses in the various customer contracts. The narrow issue on appeal was whether the arbitration clauses were unconscionable and unenforceable.
The court first addressed the arbitration clause in the customer agreement of Centennial Beauregard Cellular LLC. This arbitration clause was unusual in that it required only the customer to arbitrate all disputes and left the company with the option of pursuing a lawsuit instead of arbitration. Citing the one-sidedness of this duty to arbitrate and recent Louisiana case law stating that such arrangements are unconscionable and unenforceable, the Appeals Court upheld the lower court decision that Centennial could not compel the customers to go to arbitration rather than pursuing a lawsuit.
The other arbitration clauses in issue did not contain this particular feature and were challenged on other grounds. Most importantly, the customers cited the fact that the contracts included a clause permitting the cellular service provider to change the terms of the agreement, and stated that such clauses rendered the agreements illusory or made the arbitration clauses unconscionable, or both. The court stated that the change-in-terms provisions did not render the contracts' obligations illusory. A notice of change in terms can be understood as an invitation to enter into a relationship governed by the new terms, which the customer then accepts by continuing to use the service. The fact that the company has the right to change the terms upon notice does not mean that the contract never bound the company, nor does the fact that the company could later attempt to change the arbitration clause to render it oppressive mean that the arbitration clause is unconscionable as it stands.
The court also addressed the argument that the arbitration clauses were invalid because of terms stating that the existence and result of any arbitration must be kept confidential. Although this requirement is more favorable to the cellular service provider than to its customers, in that it deprives plaintiffs of the ability to establish precedent while companies involved in multiple arbitrations will have first-hand knowledge of how prior arbitrations against them have fared, it is not so offensive as to be invalid.
The Court therefore overturned the lower court's decision that these arbitration clauses were unconscionable or otherwise unenforceable, and compelled arbitration under the other two agreements.
This decision illustrates that courts will sometimes, but not always, refuse to apply contractual provisions in contracts which are not negotiated (e.g., cellular customer service contracts which are generally imposed on customers). If a clause is particularly one-sided, courts will be more likely to find it unenforceable.
For a copy of the decision, visit: