TechLaw

Technology Puts Debt Collectors on Uncertain Legal Ground

According to a Government Accountability Office report (GAO-09-748) released today, modern communications technologies have blurred the former clarity of key provisions in the Fair Debt Collection Practices Act.

The first problem is that the FDCPA was written in 1977, before the advent of the commercial Internet, e-mail, voice mail, mobile phones and fax machines. (For my older readers, 1977 was the year Rocky won the Best Picture Oscar and Lindsay Wagoner won an Emmy for her work in The Bionic Woman. Days of bread and circuses for sure.)

Meanwhile, back at the Forum, Congress created the second problem. Congress designed the FDCPA to be frozen in time, by failing to give the Federal Trade Commission rulemaking authority to implement the act. What this means for debt collectors is that their ability to lawfully dun debtors via something other than a landline -- such as a fax machine, voice mail, e-mail, or mobile phone -- is substantially in doubt.

This is a big problem for debt collectors because, as we all know, the landline -- the leading communications technology of 1977 -- is the least likely place to reach anyone nowadays. One commenter to the GAO, the National Association of Retail Collection Attorneys, remarked that "conflicting court decisions have made regulatory compliance a guessing game, rather than a predictable endeavor."

Here are a few technology-related concerns mentioned in the GAO report:

Voice-mail and answering machines. Leaving a collection message on these devices is legally risky, because someone other than the debtor may overhear the message, causing an FDCPA violation.

Mobile phones. A debtor may be in a different timezone than the one suggested by the debtor's mobile phone area code. And the debtor's mobile service provider may charge for connecting the debt collector's call. This means that attempts to collect a debt via a mobile phone call could violate the FDCPA's rules on imposing telephone charges on consumers and on calling outside the lawful hours of 8 a.m. and 9 p.m.

Caller identification devices. The display of the debt collector's phone number on a caller identification device could be a violation of the FDCPA if someone other than the debtor sees the number. On the other hand, blocking caller identification information could be a violation of the FTC Act's prohibition on making a false or misleading statement.

E-mail messages and fax machines. These communications technologies are believed to create too high a risk that someone other than the debtor may read the transmission, in violation of the FDCPA's ban on disclosure to third parties.

Predictive dialers. Effective, perhaps, but these raise the risk of violating the FDCPA's prohibition on causing a phone to ring repeatedly with the intent to annoy or harass the debtor.

Another problem identified by the GAO is the post-1977 emergence of a debt collection industry where consumer debts and personal information are packaged and sold as "debt portfolios" among debt buyers and other intermediaries, creating doubt about the FDCPA's application to these new entities. Also creating business problems for debt collectors, many of whom did not directly deal with the original debtor, is the fact that they frequently lack good information about the collection history, prior consumer complaints, and the outcome of bankruptcy proceedings.

These and other problems led the GAO to call on Congress to update the FDCPA to take into account changes in the debt collection industry, to reflect changes in communications technologies, and to give the FTC rulemaking authority to implement any so-modified law. There is little good in the GAO's proposal for debtors. The clear thrust of the GAO's report is that the debt collection industry is having trouble effectively communicating with debtors, due in large part to fragmentation within the industry and due to the widespread adoption of communications technologies that have placed modern debt collection efforts on uncertain legal ground. And that Congress should do something about it. Eventual legislation might be an opportunity, however, for privacy rights advocates to insert consumer privacy protections into an area that, on the surface, seems to be rife with information processing and transfers and trade in sensitive personal information.

Jurisdiction Setback Apparently Won't Derail Privacy Action Against NebuAd

Plaintiffs in a privacy rights lawsuit against behavioral targeting technology provider NebuAd Inc. and six Internet service providers who shared their users' data with NebuAd have told the trial court they will press on even in the wake of the court's ruling that none of the ISP defendants are subject to suit in California. The court's Oct. 6 ruling left California-based NebuAd as the only defendant in the case, a complication because NebuAd liquidated its assets and went out of business in May 2009.

According to the court's opinion allowing NebuAd's current counsel to withdraw, also issued on Oct. 6, the plaintiffs believe that "NebuAd is not really going anywhere," and that NebuAd "is simply restarting with a new name," based out of the United Kingdom.

NebuAd's attorneys say they are owed $500,000 in legal fees by NebuAd and its insurers. The court permitted the attorneys to withdraw, but declined their additional request to stay the proceedings against NebuAd until new counsel could be retained.

The plaintiffs are alleging violations of the Electronic Communications Privacy Act, the California Computer Crime Law, the federal Computer Fraud and Abuse Act, and the California Invasion of Privacy Act.

The ISPs who were dismissed from the case are Bresnan Communications, CenturyTel Communications Inc., Embarq Inc., Knology Inc., WideOpen West Finance LLC, and Cable One. None of the ISPs is based in California. The trial court ruled that the ISPs' dealings with NebuAd was not a sufficient and constitutionally reasonable basis for a California court to assert jurisdiction over them.

The case is Valentine v. NebuAd Inc., No. 08-5113 (N.D. Cal.).

Business Models That Require Restrictive Consumer Contracts for Success

The MediaFire vs. SkipScreen spat, which involves a download website's attempt to use a terms of use agreement to prevent a third-party software developer from distributing an ad-skipping plugin, highlights a weakness in business models that can succeed only if consumers are coerced by contract into doing something they really don't want to do. The business is only as good as the contract.

The download site, MediaFire, has an acceptable use policy that forbids users from (1) using automated tools to accomplish the download, (2) "interfer[ing] with the normal use" of the MediaFire website, (3) and "reformat[ting] or refram[ing] any portion of any web page," thereby bypassing the advertisements. Consumers don't want to watch display advertisements while waiting for a download to begin. Enter SkipScreen, a Firefox browser plugin that solves this annoyance on behalf of the user. SkipScreen "auto-clicks" toward the true download link, bypassing the wait time in which MediaFire displays advertising to the user.

So, MediaFire has a contract with its users that the users really don't want to follow. And it has no contract at all with SkipScreen's developers. (Though it might be able to assert a "robot contract" claim, Register.com v. Verio, 126 F. Supp. 2d 238 (S.D.N.Y. 2000), or a trespass claim, eBay Inc. v. Bidder's Edge, 100 F. Supp. 2d 1058, 1073 (N.D. Cal. 2000), or a Computer Fraud and Abuse Act claim, EF Cultural v. Explorica, 274 F.3d 577 (1st Cir. 2001). Or even a tortious interference with contract claim. Or a trademark claim. Unfortunately, the possibilities are limitless.) SkipScreen is fighting back with the Electronic Frontier Foundation's help, so now MediaFire will have to go to court to enforce its alleged right to require users to view its advertising, which they apparently don't want to do.

A similar case that produced a recent decision is MetroPCS Inc. v. Virgin Mobile USA LP, No. 08-cv-1658 (N.D. Tex., Sept. 25, 2009). I say that the case is similar because, like the SkipScreen dispute, it involves a business, Virgin Mobile, that is supporting its business model with a terms of use agreement that users do not really want to honor. And it involves a third-party, MetroPCS, that offers Virgin Mobile customers a ready means to avoid the agreement's restrictions.

Virgin Mobile sells cell phone handsets and network service for the handset. Virgin Mobile actually loses $50 on each handset sale, a loss that it can only recoup if the user purchases network service for the length of the service contract. A use agreement on the product packaging and in a terms of service booklet inside the packaging purports to bind the user to the Virgin Mobile network for the life of the service contract, along with other restrictions on how the handset may be used.

MetroPCS disrupts the Virgin Mobile business model by offering a service that re-programs Virgin Mobile handsets so that they can operate on the MetroPCS network. Virgin Mobile sued to stop MetroPCS from luring away its customers in this fashion, raising trademark (the re-programmed handsets still carried Virgin Mobile branding) and breach of contract claims. The court's Sept. 25 opinion, which is inconclusive regarding the trademark claims, features a fascinating discussion about whether MetroPCS is making a trademark "use" of the Virgin Mobile handset by re-programming it and whether consumers are confused about what is going on with their handset. The court cited the telecom industry's controversial practice of locking-in consumers to a particular device as evidence that a cell phone handset and cell phone service are, for trademark law purposes, an integrated product offering. Meaning that a change of networks might constitute an infringing trademark "use" of the handset. MetroPCS argued that a cell phone handset is like a television set, where the hardware and the service network (broadcast, cable, satellite) are distinct offerings that the consumer is free to choose among. Judging from the tenor of the court's discussion, it didn't look like the court was buying the television set analogy. 

The court was unimpressed with Virgin Mobile's contract claims, however, and it rejected arguments that the terms set out on the product packaging and service booklet should be extended to parties that had no direct dealings with Virgin Mobile.

Just as in the MediaFire/SkipScreen dispute, Virgin Mobile seems to have created a business that requires coercing consumers into doing something they really don't want to do; namely, sticking with Virgin Mobile when there are less expensive network alternatives and the technological means to do something about it. Even if MediaFire and Virgin Mobile are entirely correct in their legal positions (and they may very well be), they are nevertheless swimming against the current of consumer expectations and desires. That seems like a very difficult business to sustain over the long term.

Clearly Disclosed Terms Save Marketer From Deceptive Contracting Claims

For me, the moment of maximum vigilance in an online purchase occurs when the seller asks for my credit card number. I suspect it is the same for everyone. The act of supplying this very important number is the digital equivalent of a handshake. We like the goods, we like the terms, so we supply our credit card number and click "OK" or "Charge this amount" or something similar. We do it all the time.

Another thing we do all the time is abandon offers for services that are "Free" for a limited time if the seller requests a credit card number, presumably to secure payment after the promotional period expires. Free? Great. You want my credit card? Forget it.

But we are promiscuous with our e-mail addresses. Most people I know have several, at least one dedicated to catching promotional or non-essential material, and they have a lot of faith in their spam filters. The provision of an e-mail address is frequently the price paid for receiving an e-book or some other free information good. We give our e-mail address out all the time. We don't attach much significance to it.

These are the thinking-without-thinking processes that Malcolm Gladwell wrote about in Blink: the extent to which decision-making is guided by subconscious, non-rational mechanisms. Supplying a credit card number means "Charge my account and send me the goods." Supplying an e-mail address means "Send me some e-mail," a significantly more casual transaction.

What if supplying an e-mail address could mean "Charge my account"? From a marketing perspective, that would be genius, right? But would it be lawful?

The answer, according to In re VistaPrint Corp. Marketing and Sales Practices Litigation, No. 4:08-md-1994 (S.D. Tex., Aug. 31, 2009), is yes. The court's decision demonstrates how a business can exploit human psychology and play tough with the consumer in an entirely fair and lawful manner.

VistaPrint sold business cards from its website. VistaPrint collected the buyer's credit card information at the point of sale. Following the sale, VistaPrint displayed additional web pages inviting the purchaser to "save" $10 on the just-completed transaction by enrolling in an affiliate marketing program that was free for the first 30 days. After 30 days, the purchaser's credit card would be charged $14.95 each month, unless the purchaser had cancelled the program.

Interested purchasers were asked to accept the invitation not by supplying their credit card information again but by entering their e-mail address and clicking on a "Yes" button indicating that they had read through and agreed to the terms of the offer. VistaPrint's web page indicated that the purchaser's e-mail address would "constitute [an] electronic signature."

The plaintiffs in this case -- a group of purchasers who supplied their e-mail addresses, clicked "Yes" on the acceptance screen, and subsequently neglected to cancel the program after 30 days had expired, thus incurring the monthly $14.95 charge -- first argued that the signup process was unlawfully deceptive. But the court rejected this argument, finding that VistaPrint had clearly and conspicuously explained the terms of the offer to the plaintiffs before inviting them to click "Yes."

According to the court: "This language is clear and easily understandable by anyone capable of making an online purchase of business cards."

The plaintiffs also contended that the monthly charges were "unauthorized" under the Electronic Funds Transfer Act, 15 U.S.C. 1693 et seq.  Not so, the court said. The EFTA excludes "any electronic fund transfer ... initiated by a person other than the consumer who was furnished with the card, code, or other means of access to such consumer's account by such consumer, unless the consumer has notified the financial institution involved that transfers by such person are no longer authorized." Here, the plaintiffs furnished VistaPrint with their credit card numbers when they purchased the business cards. And they later authorized VistaPrint to charge their account according to the terms of an offer that was clearly spelled out on the web page. "Plaintiffs typed their e-mail addresses into the spaces provided on Defendants' webpages, thereby authorizing Defendants to 'charge/debit [their] account according to the Offer Details,'" the court wrote.

It is hard to fault the court's legal reasoning on either the contracting or the EFTA points. Unlike other cases in which the purchaser was required to click a hyperlink to read important contract terms, a practice very recently found to be non-deceptive, VistaPrint conspicuously displayed the terms of its offer on the same page where it asked for the purchaser's e-mail address and assenting click. And nothing in the EFTA requires the purchaser's act of furnishing account information to be contemporaneous with his or her authorization to charge/debit the account.

Still, I wonder why VistaPrint asked for the purchaser's e-mail address as a means of assenting to its offer. After all, they already had this information and it does not appear that the e-mail address was used to authenticate the purchaser. Strictly as a matter of contract law, all VistaPrint needed was a mouseclick to seal the deal. Is it possible that asking for an e-mail address somehow minimizes in the purchaser's mind the significance of the click? Or distracts the purchaser from the rest of the language on the page? I honestly don't know the answer to these questions. This is sort of a flight of fancy, I admit, but there must be some reason for asking for the e-mail address. I wish I knew what it was.

p.s Yes, I know about Amazon.com 1-Click. Same general sort of deal though 1-Click is a convenience. VistaPrint is offering to pay $10 on the chance that the consumer will forget about that first $14.95 payment 30 days later.

Ten Interesting Things I Read This Week

This post is a collection of links to materials I've been reading this week, really just trying to catch up on old news and re-engage myself in subjects that I spent most of my summer trying to forget while on vacation. I made supplications to the Muse all morning in the hope she would favor me with a catchy title, something that might yield one of those tragically sardonic acronyms like CAN-SPAM or SPY Act, but no, nothing, and now it's time to get back to work and all I have is Ten Interesting Things I Read This Week (TITIRTW):

1. Cleveland Plain Dealer: Idea for protecting newspapers draws national spotlight, bloggers' ire

2. Media & Communications Policy: More on Newspapers and Aggregators

At this point management at most of the leading newspapers have let go of the notion that "parasitic aggregators" are a significant source of their business problems. Yet here is a respected attorney (and counsel to the Cleveland Plain Dealer) making an argument that parasitic aggregators who are free-riding on newspaper content should be stopped. Stopped by reviving the common law doctrine of "hot news" misappropriation. He believes that the Copyright Act should be amended so that it no longer preempts state-law misappropriation claims. The attorney writes: "If the legal principles that we advocate in this analysis were the law, the newspaper publisher would have a legal right to enjoin temporarily or otherwise impede the business of an aggregator that commercially exploits the publisher's news reports in direct competition with the publisher." I don't want to "Go Pundit" here, but this is a solution to a problem that just does not exist.

3. Citizen Media Law Blog: Southeastern Conference Sacks Social Media, Then Recovers

A nice account of the Southeastern Conference's attempt to protect the interests of its television broadcast partners by prohibiting fans from blogging, twittering et cetera during football games that reminded me we are still very much at the beginning of the user-generated media era. The article summarizes the state of the law on the "hot news" doctrine, making a nice counterpoint to the "save the newspapers" discussions above. 

4. U.S. Department of Homeland Security: Secretary Napolitano Announces New Directives on Border Searches of Electronic Media

Modest privacy-enhancing protections announced here, though DHS is not giving back an ounce of their authority to search anyone, anything, any time, at the border. Which still includes laptops: "In the course of a border search, with or without individualized suspicion, an Officer may examine electronic devices and may review and analyze the information encountered at the border."

The American Civil Liberties Union filed a lawsuit this week seeking records relating to searches of electronic devices at the border.

5. The Volokh Conspiracy: How the Ninth Circuit Tried To End Plain View for Computer Searches Without Ending Plain View for Computer Searches

Prof. Orin Kerr ruefully labels the en banc Ninth Circuit's decision in United States v. Comprehensive Drug Testing Inc. as Miranda for computer searches. He writes: "I think the best way to understand today's remarkable Ninth Circuit Fourth Amendment decision in United States v. Comprehensive Drug Testing is that the Ninth Circuit did its best to end the plain view exception for computer searches without formally ending plain view for computer searches. Chief Judge Kozinski's opinion created an elaborate statute-like new regime to make sure the government acts like there is no plain view exception. The decision is a workaround that effectively ends plain view for computer searches by making sure the government will never collect electronic evidence in plain view in the first place."

Sounds a little bitter to me. Judge Kozinski's opinion is a sensational read. And if it really is like Miranda, read it, because it's going to be around for a long time.

6 & 7. Gregg Easterbrook (ESPN): Tuesday Morning Quarterback's AFC preview and TMQ travels back in time to August 2009

A personal favorite, a guilty pleasure, one of the best writers on the Web, reminds me of Tom Wolfe way back when. More than football in here too: smart ruminations on Twitter, the British Humanist Association, and deadly objects from space.

8. Consumer Law & Policy Blog: Official Word from US Courts -- Feel Free to Use RECAP With Our Blessing

The implication here is that the AO's office would naturally have disapproved of RECAP, a Firefox addon that uploads PACER documents to a free repository. But surprise surprise it appears they don't mind at all. Am I the only one who believes the judiciary is the most -- not the least -- open branch of the federal government?

9. Spam Notes: Electronic Communications, Privacy, Data Protection, and More: Gordon v. Virtumundo: 9th Cir Smacks Down Anti-Spammers in Trifecta Defense Win

Ah, August 6, 10 a.m. PST. I was fly-fishing a gentlemanly stretch of the Gallatin River in Yellowstone National Park. Wretched souls like Venkat were slogging through Gordon v. Virtumundo's discussion of CAN-SPAM preemption. He writes: "As far as opinions go, this is as good as it gets." I couldn't agree more. About the fishing, of course.

10. Techdirt: Interview With William Patry: Understanding How The Copyright Debate Got Twisted

Prof. William Patry is coming out with a new book, Moral Panics and the Copyright Wars. Here, a very interesting discussion with Techdirt's Mike Masnick draws out Patry's views on fair use, the file-sharing wars, and copyright politics.

Obama Wants Bigger, Stronger FTC to Handle Privacy and Consumer Protection

President Obama's call yesterday for reform of the regulatory regime governing financial institutions promises to bring additional federal scrutiny to the rest of the Web as well.

The White House plan would create a new Consumer Financial Protection Agency (CFPA), an independent federal body with broad authority to set and enforce consumer-friendly standards for loans, savings products, and other financial offerings. However, there is more to the plan than that. Here's a couple things I saw in the 88-page document explaining the plan.

Privacy Authority to Remain with Stronger Federal Trade Commission

The president's proposal was explicit that the FTC will stay on the privacy beat:

The FTC should also remain the lead federal consumer protection agency on matters of data security, with front-end privacy protection on financial issues moved to the CFPA.

But President Obama believes that the FTC needs more manpower and more authority to carry out its mission. The president called for increasing the FTC's "human, financial, and technical resources," which I take to mean personnel and budget. More importantly, perhaps, the president would like to see the commission's rulemaking authority substantially broadened:

The FTC should be authorized to conduct rulemakings for unfair and deceptive practices under standard notice and comment procedures, and to obtain civil penalties for unfair and deceptive practices.

This is a change from the current situation, in which the FTC's rulemaking authority is confined to specific statutory delegations from Congress and to Magnuson-Moss-style rulemakings. Whether or not the FTC has general authority to enforce FTC Act Section 5 ("unfair or deceptive acts or practices") via notice-and-comment rulemaking is a highly debatable point, from what I can tell. The president is proposing to end that debate in favor of expanding the FTC's rulemaking authority. If the president gets his way, the FTC will have a broad mandate to write rules for all aspects of the business-to-consumer game.

Financial Consumer Protection Rules Will Bleed Over to Non-Financial Commerce

Among the mandates for the new CFPA are (1) ensuring that consumers "have the information they need to make responsible financial decisions" and (2) ensuring that consumers "are protected from abuse, unfairness, deception, or discrimination." Carrying out this aspect of the new agency's mission will necessarily entail promulgating new rules for online disclosure of the terms under which financial services are being provided, such as privacy and data security policies, as well as normative rules regarding forbidden contract terms. One such norm is prohibiting mandatory arbitration clauses -- something that the president's proposal says the CFPA should have the authority to do.

The president's plan also has quite a bit to say about disclosures to consumers:

We propose a new proactive approach to disclosure. The CFPA will be authorized to require that all disclosures and other communications with consumers be reasonable: balanced in their presentation of benefits, and clear and conspicuous in their identification of costs, penalties, and risks.

We propose the following initiatives to improve the transparency of consumer product and service disclosures.

Make all mandatory disclosure forms clear, simple, and concise, and test them regularly. Mandatory disclosure forms should be clear, simple, and concise. This means the CFPA should make judgments about which risks and costs should be highlighted and which need not be. Consumers should verify their ability to understand and use disclosure forms with qualitative and statistical tests.

Note the part about how the CFPA should make judgments about which risks should be highlighted. "Self-regulation" and market forces are not welcome here. And the president is proposing that the CFPA's rules be "a floor not a ceiling," thus inviting additional consumer protection attention at the state level.

It is difficult to see how these new rules on transparency and on "abuse, fairness, deception, or discrimination" in the financial services market will not eventually supply the standard for fairly dealing with consumers in all other aspects of online commerce. In fact, my reading of the president's proposal didn't turn up any language limiting his consumer protection proposals to the financial services market.

Nobody can know which if any of the president's proposals will survive the legislative process, of course. And I hate hyperbole, but there it is. How could a new federal consumer protection agency, and a beefed-up FTC, not be pervasive regulators of online commerce?

Arbitration Fairness Group Forms in Washington

Nine times out of 10 when there's a challenge to an online contract the object of the court's attention is the arbitration clause. Arbitration clauses are the first line of defense against class action lawsuits. A Texas court's recent ruling that Blockbuster's terms of service were an unenforceable illusory contract is just one of many examples of where the plaintiff really just wants to get out from under an arbitration clause.

Today a Public Citizen-sponsored group, the Fair Arbitration Coalition, announced the formation of a coalition that will be lobbying in support of the Arbitration Fairness Act of 2009 (H.R. 1020), a bill that would deny enforceability of most arbitration agreements entered into by individuals: bank accounts, credit card statements, employee handbooks, cell phone contracts, health insurance plans etc. H.R. 1020 provides that "No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of-- (1) an employment, consumer, or franchise dispute; or (2) a dispute arising under any statute intended to protect civil rights."

Agreements to arbitrate that are reached after a dispute is filed would still be enforeable. H.R. 1020 targets the pre-dispute arbitration clauses that consumers agree to as a pre-condition to receiving some desired good or service.

H.R. 1020 has 43 sponsors already. Similar legislation languished in prior Congresses.

"New and Improved" AT&T Class Arbitration Waiver Still Unconscionable

It is really tough to get a class arbitration waiver upheld in California. Maybe impossible. When the Ninth Circuit, in Shroyer v. New Cingular Wireless Services Inc., 498 F.3d 976 (9th Cir. 2007), held that the class arbitration waiver in Cingular (now AT&T)'s wireless terms of service was unconscionable, the company decided to "improve" the class arbitration waiver language rather than eliminate it.

AT&T added to the AT&T Mobility terms of service several incentives for plaintiffs to engage in individual arbitration. Chief among them:

If a person prevails on the merits at arbitration, and receives an award: (1) equal to or less than the greater of (a) $5,000 or (b) the maximum jurisdictional dollar amount for small claims actions in the county containing the person’s billing address; and (2) greater than AT&T’s last written offer prior to selecting an arbitrator; then AT&T will pay the greater of (1) or (2) instead of the award, and pay the person’s attorney double their fees and reimburse them for reasonable costs.

This isn't good enough, according to the court's decision in Steiner v. Apple Computer Inc., No. 07-4486 (N.D. Cal., March 12, 2008). The plaintiff sought class treatment of his claim that Apple unlawfully failed to disclose substantial expenses iPhone users would incur when replacing batteries on the device. The court ruled that, after Shroyer, AT&T needed to demonstrate that the individual arbitration remedy available under the terms of service "functions as well as a class action would, such that it has not insulated itself from hundreds of thousands, if not millions of iPhone users seeking recovery of the hidden $114.95 in annual battery-changing and related charges."

The court held that the benefits of pursuing individual arbitration were illusory in many instances; in any event, it said, the relevant inquiry is a comparison between the outcomes for all iPhone consumers under the arbitration agreement and under a class action suit. "In this regard, AT&T has not presented any evidence that all iPhone consumers would recover more, on average, if the Court let the Arbitration Agreement stand rather than allowing the Steiners' class action to proceed."

The court was not concerned with whether the plaintiff would receive a fair hearing on his claim. Rather, the inquiry was whether all iPhone users would do better in a class action. On the subject of attorneys' fees, the court wrote that reasonable attorneys' fees in arbitration were not be an adequate incentive to seek redress because what attracts attorneys to class actions is the prospect of lucrative attorneys' fees.

It is hard to imagine any class arbitration waiver that could withstand this sort of inquiry. The main purpose of an arbitration clause is to minimize exposure to litigation. After Shroyer, it appears, the fact a consumer will be able to receive a fair hearing in an individual arbitration proceeding does not save a class arbitration waiver from a finding of unconscionability. In cases like Shroyer and now Steiner, where the plaintiff alleges that the defendant has engaged in a fraudulent scheme by taking a little money from thousands or millions of consumers, any attempt to minimize liability via arbitration will be suspect.

Commercial Contracts Can Be Unconscionable Too

A proposed class action lawsuit against Yahoo!/Overture Services Inc. picked up momentum April 21, when a federal trial court in California turned back a handful of grounds for summary dismissal of claims that Yahoo! misrepresented the quality of the online venues on which it would display the plaintiffs' advertisements. The plaintiffs alleged that Yahoo! promised to display advertisements on Web sites targeted to likely customers; instead, the lawsuit claimed, Yahoo! placed the plaintiffs' advertisements in low-quality locations: inside spyware programs, on typosquatting Web sites, and on domain parking and bulk registration sites.

Among Yahoo!'s arguments for dismissal was its contention that California's unconscionability doctrine does not apply to commercial contracts. There is some support for this argument. Nearly all cases describe the state's unconscionability doctrine using the term "consumer," and many characterize the unconscionability doctrine's rationale as one of rectifying the imbalance of bargaining power between consumers and businesses. For example, a leading case, Discover Bank v. Super. Ct., 36 Cal.4th 148 (2005), summarized the fact pattern there as one in which the defendants "carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money." Language like this limits the unconscionability doctrine to consumer cases, Yahoo! argued.

Here, the court rejected the view that commercial contracts are categorically outside the protection of the unconscionability doctrine:

[A]lthough Discover Bank's holding addresses only consumer contracts, nothing in that decision forecloses the possibility that a class action waiver in a commercial contract may be deemed unconscionable under certain circumstances. Defendants point to no authority to support the contention that class action waivers in commercial contracts should be treated differently than such waivers in consumer contracts, and the Court has identified none. Accordingly, there appears to be no basis for concluding that class action waivers in the commercial context cannot be found to be unconscionable and unenforceable.

The court permitted the case to go forward, allowing the plaintiffs to build a factual foundation for their unconscionability claim. Did Yahoo! have superior bargaining power over the plaintiffs? Could the plaintiffs have feasibly chosen other advertising services? Would it be practical for the plaintiffs to pursue individual remedies instead of a class suit?

Taking up another issue, the court ruled that the plaintiffs would be permitted to conduct discovery for extrinsic evidence indicating that -- notwithstanding the parties' written contract -- the defendants promised in their marketing materials that the plaintiffs would receive "highly targeted" advertising services.

The case is In re Yahoo! Litigation, No. CV 06-2737 (C.D. Cal., April 21, 2008).