California Courts Changing the Playing Field on Some Risk Management Techniques

Texas law professor Raymond Nimmer and Kansas City attorney Tim Feathers draw our attention to three cases from the west coast in which they suggest a federal appeals court has broken away from legal precedent and has embarked on its own course. If followed, that course will significantly limit an organization’s ability to manage its risk exposure through contracts, specifically affecting the ability to benefit from mandatory arbitration, class action waiver, and choice of law and forum provisions.

The discussion concerns three cases from the Ninth Circuit. We previously wrote about one of them and focused on the court’s finding in Douglas v. U.S. District Court that (1) merely posting on a website a change in contract terms was not sufficient to make the change binding on a customer because there was no actual agreement to the change by the customer, and (2) one could only infer that the customer agreed to the change by continued use of the service after the change if the customer had notice that a change had taken place. The changes included mandatory arbitration, choice of law and class action waiver provisions.

The court also reasoned that even if the customer had agreed to the changes, the changes were likely unenforceable on the grounds that they were unconscionable. It is the court’s discussion of unconscionability that has drawn the discussion of these three cases.

The other cases are Nagrampa v. Mailcoups, Inc. and Davis v. O’Melveny & Myers . In Nagrampa, the court declined to enforce a mandatory arbitration and forum selection clause in a franchise agreement. The court was disturbed by what it felt were unbalanced bargaining positions and lack of any actual bargaining. In Davis, the court refused to enforce an arbitration clause proposed to, and agreed to by, an employee of a law firm. The court was disturbed by the fact the change was presented on a take-it-or-leave-it basis; the law firm did not offer the employee the option of rejecting the change and continuing employment on the previous terms.

Historically, finding a contract term to be unconscionable was based on a finding that the term was procedurally and substantively unconscionable. Certain conditions were simply unacceptable, such as lack of notice, deception, taking undue advantage of another party, and something approaching fraud. As Nimmer notes, the doctrine was to prevent oppression and unfair surprise. The doctrine was not intended to prevent one party from gaining an advantage in a contract because it has greater bargaining power.

But these decisions, all based on the Ninth Circuit’s reading of California law, lend a feel that is different from the historical approach. The notion, for example, that an employer cannot change an employment term such as an arbitration provision after an employee is hired, despite the fact the employee is fairly and accurately given notice of it, is rather different for many of us. One thing to bear in mind is that there is plenty of historical precedent for new legal concepts being first implemented on the west coast and then migrating eastward as decisions and rationales are adopted by other state courts. It will indeed be interesting to see whether a greater willingness to find contract terms to be unconscionable begins showing up in other states.