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March 31, 2016 Practice Points

Ninth Circuit: Severance of Unconscionable Provision of Arbitration Clause Preferred When Feasible

The application of unconscionability to arbitration agreements remains a gray area

by Manfred Muecke

In a recent 2–1 decision directing arbitration, the U.S. Court of Appeals for the Ninth Circuit panel provided further guidance regarding state-law unconscionability challenges to arbitration agreements. Merkin, et al. v. Vonage America, Inc., --- F. App'x ---, 2016 WL 775620 (9th Cir. Mar. 24, 2016).   

A judge in the Central District of California had denied defendant Vonage America, Inc.’s motion to compel arbitration in a putative class action challenging certain fees Vonage levied in connection with its voice over Internet protocol (VoIP) telephone service.

In reversing the district court and citing AT&T Mobility, LLC v. Concepcion, 563 U.S. 333, 339, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011), the panel majority held that the Federal Arbitration Act (FAA) precluded the plaintiffs from using a California state law defense to argue that “carve out” provisions of Vonage’s 2013 VoIP terms of service agreement (Vonage Customer Agreement) are unconscionable, even if Vonage exempts itself from arbitration of certain claims while requiring customers to arbitrate claims they may be presumed to bring. Further, the panel noted that even if a certain clause in that agreement were found to be unconscionable, under California and Ninth Circuit authority, the clause can be severed if its removal does not affect the remainder of the agreement.

In a sharply worded dissent, Judge Wardlaw argued that the FAA does not preempt a state-law invalidation of an agreement where the one-sided nature of the arbitration clause renders the agreement unconscionable. Judge Wardlaw also found the district court’s decision to not sever the arbitration clause from the Vonage Customer Agreement was justified if the court would find that such severance would be moot if Vonage retains unilateral authority to modify the agreement as it sees fit.

As the split Merkin decision illustrates, the application of unconscionability to arbitration agreements remains a gray area. Although the panel did not reach whether the lack of mutuality in an arbitration clause can rise to unconscionability, Merkin illustrates how judicial application of FAA pre-emption defenses against unconscionability concerning mutuality, and the enforcement of the Concepcion reasoning are evolving.

Manfred Muecke is an associate with Bonnett Fairbourn Friedman & Balint, PC, in San Diego, California.

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