A
BNA, INC.
ELECTRONIC !
COMMERCE & LAW
REPORT
VOL. 14, NO. 1
JANUARY 7, 2009
CLICK-THROUGH AGREEMENTS
Despite a general public policy in favor of arbitration in most contexts, courts in some jurisdictions have, citing unconscionability, declined to enforce arbitration clauses in clickthrough agreements and other contracts of adhesion. Companies should consider mitigating the risk that their online contracts will suffer a similar fate by conspicuously displaying
the arbitration clause, carefully selecting the applicable law, ensuring a mutuality of remedies, and even advancing the costs of arbitration.
The Glue That Holds It Together: Enforceability of Arbitration Clauses
In Click-Through Agreements and Other Adhesion Contracts
BY LOTHAR DETERMANN
AND
AGNIESZKA PURVES
hether in the employment, consumer, or business context, companies are increasingly including agreements to arbitrate in their contracts to
reap such benefits of arbitration as faster proceedings,
preclusion of class action lawsuits, confidentiality, limited rights of appeals and a hope of more business-like
and perhaps even pro-business contract interpretations.
W
Prof. Dr. Lothar Determann is a partner in the
technology practice group of Baker & McKenzie LLP, San Francisco/Palo Alto office
(www.bakernet.com) and teaches Computer
and Internet law at the University of California Berkeley School of Law (Boalt Hall), University of San Francisco School of Law and
Freie Universitãt Berlin (http://
www.lothar.determann.name). Agnieszka
Purves is an associate in the international commercial practice group of Baker &
McKenzie LLP. The authors are grateful for
the assistance of Arezo Yazd, a 2009 J.D. candidate at the University of California, Berkeley School of Law (Boalt Hall).
COPYRIGHT 姝 2009 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
While public policy and courts in the United States
generally favor arbitration in most contexts, some
courts have become increasingly skeptical about arbitration clauses in contracts of adhesion and have rendered some arbitration clauses invalid on unconscionability grounds. What steps, then, can companies take to
bolster the enforceability of their arbitration clauses in
click-through license agreements, Web site terms of
service, or similar types of modern mass-market
contracts?
Procedural and Substantive Unconscionability
An arbitration clause is subject to general state-law
contract principles and thus may be invalidated if it is
found to be both procedurally and substantively unconscionable.1 Contracts that a party with greater bargaining power offers on a ‘‘take or leave’’ basis (also referred to as ‘‘contracts of adhesion’’) can be qualified as
procedurally unconscionable, particularly if the party
with the weaker bargaining power does not have access
1
See Circuit City Stores, Inc. v. Saint Clair Adams, 279
F.3d 889 (9th Cir. 2002); Brower v. Gateway 2000, Inc., 676
N.Y.S.2d 569 (1998).
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2
to a meaningful alternative product or service offerings
or with respect to disadvantageous clauses that are not
presented in a conspicuous manner.
But, the mere fact that an arbitration clause is part of
a contract of adhesion or otherwise procedurally unconscionable does not yet render it invalid as long as the
arbitration clause is not also qualified as substantively
unconscionable.2
Moreover, as recently evidenced by the Bragg and
Douglas decisions, a red flag of procedural unconscionability is a lack of notice to the other party.3 This is
consistent with other Ninth Circuit and California decisions, which generally require that arbitration clauses
be highlighted in some manner such as with the use of
clear headings, line breaks, and notice.4 The standard is
similar, although somewhat more lenient, in other jurisdictions.5
There is also some split in authority about what constitutes procedural unconscionability. In the consumer
context, for instance, while New York law precludes an
unconscionability claim in the presence of a meaningful
alternative, California courts may invalidate a contract
of adhesion even if the consumer can obtain the goods
or services from another source.
Even if an arbitration clause is procedurally unconscionable, it will not be invalidated unless it is also substantively unconscionable, meaning the terms are unduly harsh or oppressive.6 Again, New York and California are divided to some extent as to what constitutes
substantive unconscionability. Moreover, even though
New York law generally requires both procedural and
substantive unconscionability to invalidate a contract,
substantive unconscionability may be sufficient under
some circumstances.7 Nevertheless, across jurisdictions, there is a tendency to attack as substantively unconscionable terms of arbitration clauses that unduly
allocate arbitration costs to the consumer or that are
unreasonably one-sided.
2
‘‘Courts apply a sliding scale: ‘the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the
term is unenforceable, and vice versa.’ Still, ‘both [must] be
present in order for a court to exercise its discretion to refuse
to enforce a contract or clause under the doctrine of unconscionability.’ ’’ Davis v. O’Melveny & Myers, No. 04-56039,
2007 U.S. App. LEXIS 11265 (9th Cir. Mar. 7, 2006) (citing Armendariz v. Found. Health Psychcare Servs., Inc.,6 P.3d 669,
690 (Cal. 2000).
3
Douglas v. Talk America, Inc., 2007 U.S. App. LEXIS
17061 (9th Cir. Jul. 18, 2007); see also Lothar Determann, Notice, Assent Rules for Contract Changes after Douglas v. U.S.
District Court (12 BNA Electronic Commerce & Law Report 32
(2007)); Bragg v. Linden Research, Inc., No. 06-04925, 2007
U.S. Dist. LEXIS 39516 (E.D. Pa. May 31, 2007).
4
See Net Global Marketing, Inc. v. Dialtone, Inc., No. 0456685, 2007 U.S. App. LEXIS 674 (9th Cir. Jan. 9, 2007); Gutierrez v. Autowest, Inc., 114 Cal. App. 4th 77 (2003); Compare
Davis, 2007 U.S. App. LEXIS 11265.
5
See Iberia v. Cingular Wireless LLC, 379 F.3d 159 (5th
Cir. 2004); Jones v. Genus Credit Management Corp., 353
F. Supp. 2d 598 (D. Md. 2005).
6
Circuit City Stores, Inc., 279 F.3d at 894.
7
Brower, 676 N.Y.S.2d at 574.
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Challenges to Arbitration Terms
Allocation of Fees and Costs
Arbitration clauses often expressly (or indirectly, via
reference to standard rules of the selected arbitration
organization) allocate the costs of the arbitration proceedings to one of the parties or the losing party or
leave it to the discretion of the arbitrators how to allocate costs and attorneys fees. Companies may provide,
for example, that the consumer (or the plaintiff or the
party who ultimately loses in the proceedings) shall
bear a certain percentage (fee splitting) or all (fee shifting) of the arbitration costs.
A common attack on an arbitration clause is that
terms that split or shift the costs of arbitration between
the company and the other party are substantively unconscionable because they subject the other party to
prohibitive arbitration costs, which forces the party to
forgo bringing a claim. For example, in Brower v. Gateway 2000 Inc.,8 consumers who purchased computers
via phone or mail challenged the validity of the arbitration clause included in the terms enclosed with the shipments. Among other claims of unconscionability, the
plaintiffs argued that the $4,000 arbitration fee, of
which $2,000 was nonrefundable regardless of whether
plaintiffs prevailed, was unreasonable and prohibitive
compared to the estimated $1,000 in damages each
plaintiff claimed relating to the cost of computers.9 The
court upheld the arbitration clause but found that the
fee aspect of the arbitration arrangement was excessive
and effectively precluded consumers from any meaningful recourse to the law and thus remanded the matter to allow the parties to find a substitute arbitration
organization that would not charge the consumers a
prohibitive upfront fee.
The Supreme Court of the United States adopts a
case-by-case analysis and does not per se invalidate feesplitting or fee shifting arrangements.10 The Ninth Circuit seems to believe11 that at least in the employment
context, fee-splitting is per se invalid.12 The Bragg decision, however, reflects the Ninth Circuit’s adoption of
the Supreme Court’s case-by-case approach, where the
court examined the actual costs that the consumer had
to bear to bring his claim to determine whether the feesplitting provision was substantively unconscionable.
8
Brower, 676 N.Y.S.2d 569.
The court decision does not specify the exact price of the
computers at issue, but rather states that the $4,000 arbitration
fee was higher than the cost of most Gateway products.
10
See Green Tree Financial Corp. v. Randolph, 531 U.S. 79
(2000).
11
The court in Circuit City Stores, Inc., 279 F.3d at 884-895
did not outright hold per se invalidity to be black letter law, but
noted that the employment agreement at issue required the
employee to split the arbitrator’s fees with Circuit City and this
‘‘fee allocation scheme alone would render an arbitration
agreement unenforceable,’’ citing to Cole v. Burns Intern Security Svcs., which held that ‘‘it is unlawful to require an employee through a mandatory arbitration agreement to share
the costs of arbitration.’’ The court also noted that out of the
five basic requirements that an arbitral forum must meet set
out by the Cole court, Circuit City’s arbitration agreement
failed to meet two of them, one of which is ensuring that employees do not have to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.
12
See Circuit City Stores, Inc., 279 F.3d at 884-895.
9
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The Ninth Circuit has not yet explicitly addressed the
question whether a company may shift the arbitration
costs to the other party in the event the company prevails. Under this scenario, the company would advance
the other party’s costs of arbitration and thus weaken
the argument that the arbitration costs are prohibitive.
At the same time, though, the company would reserve
the right to be reimbursed for the costs it advanced if it
ultimately prevailed in the arbitration proceeding.
The Ninth Circuit’s hostility to any fee-splitting in
Circuit City Stores may be understood that it would
likewise invalidate a provision obligating a consumer to
reimburse the arbitration costs in case the company
prevails. But, in Circuit City Stores, the court noted
other concerns regarding the arbitration clause that led
the court to ultimately invalidate the entire provision. In
particular, the court was very concerned that the provision did not require Circuit City to arbitrate its claims
against employees and that it failed to provide for all
types of relief that would otherwise be available in
court. Second, this case concerned employee rights,
which might warrant different standards for the enforcement of agreements to arbitrate than commercial
disputes, even if with consumers. Finally, based on its
analysis of Ninth Circuit decisions, the court in Bragg
adopted the Supreme Court’s case-by-case analysis
rather than a per se rule invalidating all fee-splitting arrangements.
The U.S. Supreme Court as well as courts in other
states appear to support a provision that calls for the
company to advance arbitration costs while reserving
the right to reimbursement in case it prevails against
the consumer. Green Tree Financial involved a financing agreement that included an arbitration clause that
was silent as to the payment of arbitration costs.13 Randolph, the borrower, claimed that the agreement was
unenforceable because it potentially subjected her to
the risk of bearing substantial arbitration costs thus
forcing her to forgo her claim against the lender. The
court, however, held that ‘‘the ‘risk’ that Randolph will
be saddled with prohibitive costs is too speculative to
justify the invalidation of an arbitration agreement.’’
Under the court’s reasoning, an arbitration clause that
required the consumer to reimburse the company for
arbitration costs in case the company prevailed should
likewise be enforced because the consumer may not
bear arbitration costs at all so the risk of being ‘‘saddled
with prohibitive costs’’ would be too speculative. Moreover, since the company would advance the arbitration
costs, the consumer would not be forced to forgo his
claim as a result of high arbitration costs.
Subsequent decisions indicate that courts have interpreted Green Tree Financial as validating arrangements in which the company advances the arbitration
costs but reserves the right to get reimbursed in case it
prevails on the grounds that whether the costs would be
prohibitive is too speculative because if the plaintiff prevails he will not be subject to any costs and if he loses
he will have a chance to challenge the fee-shifting provision or ask the arbitrator to waive the costs in case of
hardship.14 One court even invalidated an arbitration
13
Green Tree Financial Corp., 531 U.S. at 84.
See Musnick v. King Motor Co. of Fort Lauderdale, 325
F.3d 1255 (11th Cir. 2003); Gillispie v. Village of Franklin Park,
405 F. Supp. 2d 904 (N.D. Ill. 2005); Pitchford v. Amsouth
Bank, 285 F. Supp. 2d 1286 (M.D. Ala. 2003); Rajjak v. Mc14
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clause that prohibited fee-shifting because the prohibition was inconsistent with the arbitration rules referenced in the arbitration clause.15
In summary, a provision that shifts the costs of arbitration to the non-prevailing party seems to be consistent with case law. Courts vary, however, in terms of the
portion of the arbitration fees that a company should
advance. Some courts have upheld arbitration agreements that require the consumer to pay only a small fee
to initiate the arbitration proceedings such as $25, while
other courts have upheld fee-shifting provisions that require the consumer to pay a portion equal to the
amount the consumer would pay if he were to bring an
action in court.16
Mutuality
Another reoccurring attack on the validity of arbitration clauses has been that the terms lack mutuality of
obligations in situations where the company reserves
additional remedies for itself, which it does not extend
to the other party. Again, such terms are least likely to
survive in the Ninth Circuit, which has consistently
made clear that a lack of mutuality in an agreement is
substantively unconscionable.17 This has been reaffirmed in Bragg, where the court, applying California
law, found that the arbitration clause was substantially
one-sided because the company only reserved for itself
self-help remedies in lieu of arbitration for potential
claims against consumers. Moreover, the court took issue with the fact that the arbitration clause required
consumers to arbitrate in California, which the court
considered unreasonable in circumstances where the
potential for claims was only for a relatively small
amount. Although California law places great importance on mutuality of obligations, some states allow for
more one-sidedness, and some states do not require
mutuality at all.18 For example, the U.S. District Court
for the Eastern District of Pennsylvania refused to apply the Bragg decision to invalidate an arbitration
clause based on lack of mutuality, noting that Bragg
was decided under California law, but lack of mutuality
is not a valid ground to invalidate an arbitration clause
Frank & Williams, No. 01-0493, 2001 U.S. Dist. LEXIS 9764
(S.D. N.Y. Jul. 13, 2001).
15
Chalk v. T-Mobile USA, Inc., No. 06-158, 2006 U.S. Dist.
LEXIS 67948 (D. Or. Sept. 7, 2006).
16
Chalk, No. 06-158, 2006 U.S. Dist. LEXIS 67948; Truitt
v.DirecTV, Inc., No. 08-3782, 2008 U.S. Dist. LEXIS 95612
(E.D. La. Nov. 21, 2008).
17
See Davis, 2007 U.S. App. LEXIS 11265; Circuit City
Stores, Inc., 279 F.3d 889; Ticknor v. Choice Hotels International, Inc., 265 F.3d 931 (9th Cir. 2001).
18
See Davis, 2007 U.S. App. LEXIS 11265 at 1078 (holding
that the confidentiality provision of the arbitration clause unconscionably favors the company); Circuit City Stores, Inc.,
279 F.3d at 894 (holding that the arbitration provision failed to
contain the ‘‘modicum of bilaterality’’ required under California law because it only required employees to arbitrate their
claims); Ticknor, 265 F.3d at 940 (noting that Montana law
does not require that arbitration agreements contain mutual
obligations but agreements cannot be so one-sided and unreasonably favoring one party that they become unconscionable);
Tillman v. Commercial Credit Loans, Inc., 177 N.C. App. 568
(2006) (holding that if the requirement of consideration is met,
there is no additional requirement of equivalence in the values
exchanged or mutuality of obligation’’); Roque v. Applied Materials, No. 03-1564, 2004 U.S. Dist. LEXIS 10477 (D. Or. Feb.
20, 2004) (finding that the requirement of consideration was
met despite one party being more obligated than the other).
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in Pennsylvania.19 With regard to the states that do require mutuality, courts have repeatedly refused to enforce arbitration clauses where the drafter of the clause
imposes arbitration on the other party while reserving
other remedies for it.
Confidentiality
Some courts have also refused to enforce arbitration
clauses that include confidentiality provisions interpreting these provisions as much more favorable to the
companies and thus lacking mutuality.20 However, as
both the Bragg court and the Fifth Circuit pointed out,
confidentiality provisions are not necessarily unconscionable. After all, one of the benefits of arbitration is
that the proceedings are kept private. Rather, the confidentiality provision in Bragg was unconscionable taken
together with the other provisions because it added to
the existing one-sidedness of the agreement. The
court’s reasoning suggests that as long as mutuality is
satisfied with regard to the remedies available to both
parties, confidentiality provisions would survive the
substantive unconscionability test.
Class Action Waivers
One crucial goal of companies is to avoid class actions. Comparing the cost of class to individual litigation that companies and class members respectively incur, it comes as no surprise that the conscionability of
class action waivers is a hotly contested issue in litigation and also appears in the context of disputes over the
validity of arbitration clauses. Companies should note,
however, that courts view class action waivers as a
separate question, and companies that include an arbitration clause in standard contract terms may nevertheless remain exposed to class action lawsuits or class arbitration proceedings if they do not also expressly include class action waiver clauses.
In California, courts decide the issue of enforceability
of class action waivers on a case-by-case basis.21 But as
a practical matter, class action waivers are consistently
struck down in California and in the Ninth Circuit Court
of Appeals because these cases frequently involve the
key factors triggering a finding of unconscionability:
small claims and allegedly unfair practices engaged in
by companies.22 California deems class action waivers
as so against public policy that in Stiener, the court
struck down an arbitration clause that included a class
19
O’Shea v. Direct Financial Solutions, LLC, No. 07-1881,
2007 U.S. Dist. LEXIS 90079 (E.D. Pa. Dec. 7, 2007).
20
Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003); Davis, 2007
U.S. App. LEXIS 11265.
21
Gentry v. Circuit City Stores, Inc., 42 Cal. 4th 443 (2007).
22
Davis v. Chase Bank USA, N.A., 2008 U.S. App. LEXIS
23014 (9th Cir. 2008); Lowden v. T-Mobile USA, Inc., 512 F.3d
1213 (9th Cir. 2008) (T-Mobile improperly charged plaintiffs
for certain services); Murphy v. Check’N’Go of California, Inc.,
156 Cal. App. 4th 138 (relatively small sums involved and employer misclassified its employees resulting in their underpayment); Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005)
(party with the superior bargaining power carried out a
scheme to deliberately cheat large numbers of consumers out
of individually small sums of money); Stiener v. Apple Computer, Inc., 556 F. Supp. 2d 1016 (N.D. Cal. 2008) (claim for
$114.95 and Apple and AT&T hid the fact that consumers will
be subject to annual battery-replacement charges); Brazil v.
Dell, Inc., No. C-07-01700, 2007 U.S. Dist. LEXIS 59095 (N.D.
Cal. Aug. 3, 2007)(small damages and Dell inflated prices to
create false discounts).
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action waiver even though the company allowed consumers to choose small claims court in lieu of arbitration, reimbursed consumers for their filing fee, paid for
all other costs related to the arbitration, offered to pay
certain prevailing plaintiffs a premium on their award
as well as double their attorneys fees and waived its
rights to reimbursement of fees and costs from losing
plaintiffs unless the arbitrator found the action was
frivolous.23
The answer outside of California and the Ninth Circuit is not as clear-cut. For instance, the First and Eleventh Circuit Courts are in line with California whereas
the Third and Eighth Circuit Courts take the view that
class action waivers are not unconscionable.24
A company that includes an arbitration clause in its
standard terms, but does not also include a class action/
class arbitration waiver, may find itself exposed to class
arbitration proceedings. In situations when an arbitration clause is silent regarding class proceedings, courts
generally defer to arbitrators to decide whether the silence can be interpreted to allow class arbitration, on
the grounds that this is a question of contract interpretation and arbitration procedures, which arbitrators are
‘‘well qualified to address.’’25 Therefore, some companies have also expressly excluded class arbitration in
addition to class actions in their standard contract
terms, but courts have not distinguished between the
two for purposes of determining whether such clauses
are valid and have applied the same unconscionability
test to class arbitration waivers as to class action waivers.26
Recommendations for Drafters
Companies may mitigate against the risk that courts
find procedural unconscionability with relative ease by
calling out arbitration clauses explicitly in incorporation by reference statements, separating arbitration
clauses out from the rest of the agreement or requiring
the other party to specifically initial or sign the arbitration clause.27 Mobile commerce brings additional challenges in this respect, given the limited space to display
contract terms on the relatively small device screens,
however, companies often have a number of opportunities in the context of contract formation to provide sufficient notice of the applicable terms, for example, in in23
Stiener, 556 F. Supp. at 1019.
Pleasants v. Am. Express Co., 541 F.3d 853 (8th Cir.
2008); Gay v. CreditInform, 511 F.3d 369 (3rd. Cir. 2007); Skirchak v. Dynamics Research Corp., 508 F.3d 49 (1st Cir. 2007);
Dale v. Comcast Corp., 498 F.3d 1216 (11th Cir. 2007).
25
Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003); Employers Ins. Co. of Wausau v. Century Indemnity Co., 443 F.3d
573 (7th Cir. 2006); Shaw’s Supermarkets, Inc. v. United Food
& Commercial Workers Union, 321 F.3d 251 (1st Cir. 2003);
Yuen v. Superior Court, 121 Cal. App. 4th 1133 (2004);
Ramirez v. Cintas Corp., 2005 U.S. Dist. LEXIS 43531 (Nov. 2,
2005).
26
Shroyer v. New Cingular Wireless Servs., 498 F.3d 976
(9th Cir. 2007); Gentry, 42 Cal. 4th 443; Stiener, 556 F. Supp.
1016.
27
For additional recommendations on providing notice and
structuring automated contract formation processes, see Lothar Determann, Notice, Assent Rules for Contract Changes after Douglas v. U.S. District Court (12 BNA Electronic Commerce & Law Report 32 (2007)).
24
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corporation by reference statements.28 and confirmation emails.
To completely eradicate procedural unconscionability, however, would require offering a real opportunity
of negotiation, and companies find this requirement
much more difficult to meet, because they have become
accustomed to the convenience of using standard form
contracts on a take-it-or-leave-it basis. In light of this
difficulty and the law’s tolerance of some level of procedural unconscionability, many companies focus instead
on eradicating substantive unconscionability when
drafting their arbitration clauses:
One way companies may avoid drafting substantively
unconscionable terms while at the same time protect
their interests is by replacing their fee-splitting provisions with fee-shifting provisions.
Companies could provide in their arbitration clauses
that the company will advance the arbitration costs of
the other party but reserves the right to reimbursement
in case the company ultimately prevails in arbitration.
Some companies prefer to impose no fee or a minimal fixed fee on the other party at the outset. Others require the other party to pay a portion equal to the
amount the party would pay to file an action in court.
Such terms will allow a company to initially pay a lower
amount in arbitration fees as well as quash any potential later attack that the arbitration costs are prohibitive
since the amount would be no higher than regular court
fees.
The simplest way of calculating court fees would be
to consider the fee for filing a lawsuit in the plaintiff’s
court of choice, which would include fees charged for
filing a lawsuit in small claims court if the plaintiff’s
claim could be brought in that venue. This amount fails
to take into account potential court costs in addition to
filing fees and consequently may result in an amount
lower than the actual cost a plaintiff may have to incur
to bring a claim in court.
However, with the exception of small claims court,
filing fees are generally several hundred dollars, which
is still higher than the minimum amount typically
charged by companies that adopt a minimum fee as opposed to a pure fee-splitting arrangement. Therefore,
the purposes of the terms requiring plaintiffs to initially
pay a fee equal to filing a lawsuit in court would be
served since plaintiffs would pay a higher amount to
initiate the proceedings while companies would have a
valid defense to a possible challenge to its arbitration
clause on the grounds that the arbitration fees are prohibitive.
Such initial fee-splitting arrangements could be combined with fee-shifting clauses on the principle that the
‘‘loser pays all fees.’’
Companies should also be wary of reserving for
themselves remedies that are not available to the other
party. This includes the company utilizing self-help
remedies such as suspending or terminating the agreement in case of a dispute with no notice or liability to
the other party. Such one-sided arrangements can render arbitration clauses substantively unconscionable
28
For example, along of the lines of ‘‘All sales are subject
to our Standard Sales Terms, which are attached hereto or
available at www.homepage.com or on request, and contain
disclaimers, limitations of liability, a choice of California law,
an arbitration clause and other important terms and conditions
that affect your rights and remedies.’’
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when viewed in the context of the overall agreement.
Thus, if a company needs to reserve the right to suspend performance or terminate an agreement for cause,
it should consider affording similar rights to its business partners in case the company breaches the agreement.
Also in the interest of mutuality, the arbitration
clause should equally bind both parties to arbitration. If
a company wants to carve out equitable relief (which
cannot normally be provided effectively by arbitrators
or across borders),29 the company should carve out equitable relief for both parties in the arbitration clause.
The same consideration applies to carve-outs for intellectual property-related disputes more broadly, which
some companies do not want to entrust arbitrators
with.30
Furthermore, although one-sided confidentiality provisions may add to concerns regarding the overall onesidedness of an arbitration clause, confidentiality by itself is not necessarily unconscionable. Rather, confidentiality is one of the principal benefits of arbitration.
Therefore, as long as the rest of the arbitration clause is
not unconscionable, courts are not likely to fixate on
confidentiality provisions. But, in many instances, companies will not give up much by agreeing to mutual
confidentiality—so long as certain carve-outs are applied to the contractual definition of ‘‘Confidential Information’’ in line with business needs.
As a separate consideration, companies should carefully select the applicable law for their standard contracts. Depending on where companies do business,
they can often select from a few alternatives subject to
nexus considerations. Class action and class arbitration
waivers do not bode well in many jurisdictions and
companies should choose a state’s law that generally favors such waivers and arbitration clauses more generally. If companies choose the ‘‘wrong’’ law, not only will
their class action/arbitration waiver likely be unenforceable, but companies also risk that the waiver contaminates the remainder of the agreement, and thus causes
the court to strike down, the entire arbitration clause on
grounds that the unconscionable waiver cannot be severed from the rest of the agreement. An alternative approach that companies may want to consider is to only
provide for class arbitration rather than disclaiming
class proceedings altogether.
As a final point, even though in theory the same concepts apply to both Business-to-Consumer (B2C) and
Business-to-Business (B2B) transactions, in practice
courts are more likely to uphold arbitration clauses in a
B2B contract because it is more difficult for a business
to prove procedural unconscionability. One of the elements of procedural unconscionability, unequal bargaining power, is less likely to be present in a transaction between two businesses since they tend to be presumed sophisticated contracting parties. Moreover,
29
See Lothar Determann and Saralyn Ang-Olson, Recognition and Enforcement of Foreign Injunctions in the United
States—Yahoo!, Inc. v. La Ligue contre Le Racisme et
L’Antisemitisme—influential precedent for the freedom of
speech on the Internet or routine confirmation of long established principles regarding equitable relief?, Computer Law
Review International 2002, 12.
30
See, Tod Gamlen, International Arbitration And Intellectual Property Disputes, http://www.bakernet.com/BakerNet/
Resources/Publications/Recent+Publications/
SFArbitrationGuidelinesArticleJun07.htm
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even very high arbitration costs are unlikely to force a
business to forgo bringing a claim.
Still, even though the Bragg court took into account
that the plaintiff was an experienced lawyer and acknowledged that as a result procedural unconscionability was mitigated to some extent, it also noted that this
fact did not eliminate procedural unconscionability
completely because the contract was still offered on a
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take-it-or-leave-it basis and the plaintiff had no opportunity to utilize his experience to negotiate different
terms. Overall, however, arbitration clauses in the B2B
context are less vulnerable to the unconscionability
doctrine and companies can probably apply different
notice practices and substantive terms vis-à-vis their
B2B business partners.
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