The arbitration “nightmare” feared by most companies―classwide arbitration―has become a reality for Insight Communications Company LP, an Internet service provider that was named in a putative class action filed in Kentucky state court.

The lawsuit involved an alleged failure by Insight to adequately recompense customers in Kentucky for a service disruption. Claims were asserted under the Kentucky Consumer Protection Act, and for breach of contract and unjust enrichment. The average claim of each putative class member was only $40. Companies using arbitration provisions in Kentucky should review them to ensure that they will pass muster under this new opinion.

The Supreme Court of Kentucky, in its opinion issued December 16, 2010, reversed the Kentucky Court of Appeals and held that “the absolute ban upon class action litigation is unenforceable in this case, and in like cases, as exculpatory, substantively unconscionable and contrary to public policy.” The Court further stated that the class action waiver is “substantively unconscionable when attached to consumer adhesion contracts coupled with de minimis claims.” The Court refused to enforce a choice-of-law provision calling for the application of New York law and instead invalidated the class action waiver under Kentucky law.

Federal and state courts throughout the country are sharply divided over the validity of class action waivers. Click here for Alan S. Kaplinsky’s “Scorecard on where Federal and State Appellate Courts and Statutes Stand on Enforcing Class Action Waivers in Pre-Dispute Consumer Arbitration Agreements.” Insight’s arbitration provision contained very few consumer-friendly features and generally prohibited the customer from disclosing the existence, content, and results of any arbitration award, a feature that the Court also held unconscionable.

For example, the arbitration provision lacked an opt-out feature allowing the customer an unconditional right to reject the provision and still retain Internet service. It also lacked contractual fee-shifting language giving the customer an absolute right to recover his or her attorneys’ fees from Insight if he or she prevailed in arbitration. It is unclear whether the result would have been any different if Insight’s arbitration provision contained any of these or other consumer-friendly features.

Because the Court did not discuss Federal Arbitration Act (FAA) preemption, it appears that Insight failed to argue that the FAA preempts state law with respect to the Kentucky law holding that the class action waiver is unconscionable. Currently pending before the U.S. Supreme Court, in AT&T Mobility v. Concepcion, is the question of whether the FAA preempts California law holding that the class action waiver in the arbitration provision in AT&T’s cell phone contract is unconscionable. (Click here for Ballard Spahr’s prior legal alerts on Concepcion.)

Although the Kentucky Supreme Court invalidated the class action waiver and confidentiality provisions, it otherwise enforced the arbitration provision. The Court concluded that “upon remand, upon satisfaction of the relevant procedural requirements contained in the arbitration agreement, class action litigation may proceed in an arbitration forum.” Although not discussed in the opinion, this holding is flatly contrary to the U.S. Supreme Court’s opinion earlier this year in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 130 S. Ct. 1758 (2010), that imposing class arbitration on parties who have not agreed to authorize it is inconsistent with the FAA. (Click here to read our legal alert about that opinion.) It also appears that Insight’s arbitration provision failed to contain “blow-up” language stating that the provision would be null and void if the Court invalidated the class action waiver.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs), its guidance in structuring and documenting new consumer financial services products, and its experience with the full range of federal and state consumer credit laws throughout the country. For further information, please contact Alan S. Kaplinsky, Group Chair, at 215.864.8544 or kaplinsky@ballardspahr.com; or Mark J. Levin, 215.864.8235 or levinm@ballardspahr.com.  


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