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Media Alerts - Tompkins v. 23andME, Inc.
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October 27, 2016
  Tompkins v. 23andME, Inc.
Headline: Ninth Circuit panel holds pursuant to the Federal Arbitration Act, 9 U.S.C. § 2 ("FAA") and California's unconscionability rules that provisions in a mandatory arbitration clause in an online consumer contract of adhesion are valid and enforceable.

Areas of Law: Arbitration; Unconscionability; Federal Arbitration Act.

Issues Presented: (1)Whether provisions in an online mandatory arbitration clause authorizing an award of attorney fees and costs to the prevailing party, designating the forum for arbitrations, and excluding intellectual property disputes from arbitration are unconscionable. (2) Whether other provisions of the online agreement establishing a one-year statute of limitations and giving 23andMe a unilateral right to modify the contract render the arbitration provision unconscionable.

Brief Summary: Plaintiffs are customers of 23andMe, Inc., who purchased DNA test kits on-line. They filed a class action lawsuit claiming that provisions of their agreement with 23andMe relating to mandatory arbitration are unconscionable in the following respects: authorizing attorney fees and costs to the prevailing party; establishing San Francisco as the forum for arbitration proceedings; and exempting from mandatory arbitration any disputes relating to intellectual property rights, obligations, or any infringement claims. Plaintiffs also claimed that other contract provisions establishing a one-year statute of limitations period and giving 23andMe a unilateral right to modify the agreement rendered the arbitration clause unconscionable. 23andMe responded with a motion to compel arbitration. The district court granted 23andMe's motion and plaintiffs appealed.

The Ninth Circuit panel recognized that the Federal Arbitration Act, 9 U.S.C. § 2, establishes a strong national policy favoring arbitration. A court may invalidate an arbitration agreement under the "savings clause" of § 2 only in cases where generally applicable contract defenses such as fraud, duress, or unconscionability are present. The court then examined California law to determine whether the provisions would be held unconscionable under that state's law.

The Ninth Circuit concluded that the provision awarding attorney fees and costs to the prevailing party is not unconscionable under California law. Although California appellate courts have held unilateral cost shifting clauses in the arbitration context to be unconscionable, the plaintiffs failed to show the unconscionability doctrine's application in bilateral provision cases. The court also rejected plaintiffs' claim that the fees and costs to the losing party would be too great for plaintiffs to bear as they failed to provide evidence on this point. Second, the Court held that plaintiffs did not prove that the cost and inconvenience of having arbitrations in San Francisco was unreasonable. Third, plaintiffs failed to identify or raise any intellectual property claims that 23andMe might bring against them.

The court next addressed the contract provisions creating the one-year statute of limitations and giving 23andMe the unilateral right to modify the contract. The Ninth Circuit noted that, as a general rule, where the arbitration agreement itself is not unconscionable, provisions outside the arbitration agreement will not make it so. The court relied on California case precedents in finding the one-year statute of limitations was not unconscionable. It also held that plaintiffs could challenge the enforceability of the modification clause in the arbitration proceeding.

Significance: Consumer contracts formed online between individuals and corporations often include mandatory arbitration clauses. The Federal Arbitration Act established a strong national policy favoring arbitration. Federal courts will enforce a mandatory arbitration clause unless an aggrieved party can prove the provision is procedurally and substantively unconscionable under relevant state law.

Extended Summary: 23andMe sold DNA testing kits to customers online through its website. It claimed its service could assist customers in managing health risks as well as preventing or mitigating certain diseases. Before a customer could purchase the kit, the individual was required to click on a link to the company's terms of service and check a box that acknowledged the buyer's assent to the terms. The agreement included a mandatory arbitration provision. The provision authorized an award of fees and costs to the prevailing party and required that arbitration proceedings be governed by California law and held in San Francisco, California. The arbitration clause specifically excluded from arbitration "disputes relating to intellectual property rights, obligations, or any infringement claims." Other contract provisions established a one-year statute of limitations and gave 23andMe a unilateral right to modify the agreement.

In November 2013, the Food and Drug Administration ordered 23andMe to discontinue marketing its services for health purposes until it obtained government approval. Plaintiffs are customers who had purchased DNA test kits online. They brought a number of class action suits against 23andMe, alleging unfair business practices, breach of warranty, and misrepresentation. By agreement, all claims were consolidated in the United States District Court for the Northern District of California.

23andMe filed a motion to compel all plaintiffs to arbitrate their claims. Plaintiffs responded that the mandatory arbitration provision and other clauses of the agreement were unconscionable. The district court found for 23andMe and granted its motion to compel arbitration. Plaintiffs filed a timely appeal.

The Ninth Circuit affirmed the district court decision. The court began its opinion by recognizing that § 2 of the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements." Any doubts about the scope of arbitrable issues, including applicable contract defenses, are to be resolved in favor of arbitration. Moses H Cone Memorial Hospital v. Mercury Construction Co., 460 U.S. 1, 24-25 (1983). The court noted that the "savings clause" of § 2 authorizes a court to strike or limit an arbitration provision only in instances involving generally applicable contract defenses, such as fraud, duress, or unconscionability. It held that a federal court must look to relevant state law in deciding whether an arbitration provision is unconscionable. For this reason, the Ninth Circuit examined California authorities to decide whether provisions of the arbitration clause in the instant case were unconscionable.

Under California law, the doctrine of unconscionability is applicable if the written contract is both procedurally and substantively unconscionable, though they need not be present to the same degree. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power while substantive unconscionability relates to overly harsh or one-sided results. Sanchez v. Valencia Holding Co., 61 Cal. 4th 899, 910 (2015).

The Ninth Circuit first examined the provision in the arbitration clause stating "arbitration costs and reasonable documented attorneys' costs of both parties will be borne by the party that ultimately loses." Plaintiffs contended that if they lost, the arbitrators' charge of $1,500 per day and 23andMe's "top tier" lawyers' fees would be unreasonable, overly burdensome, and unfair. The Ninth Circuit panel reviewed relevant California authorities and found that a number of courts had enforced prevailing party clauses in the non-arbitration context. In cases involving arbitration, several California appellate courts held cost shifting clauses unconscionable where they were unilateral, thus available to only one side. But plaintiffs were unable to produce any case where a bilateral clause awarding attorney fees and costs to the prevailing party was unconscionable. Indeed, Cal. Civil Code § 1717 appears to approve bilateral prevailing party clauses. For these reasons, the Ninth Circuit concluded that the bilateral prevailing party clause in this case was not unconscionable. The court also held that plaintiffs did not offer evidence to show that the arbitration costs and attorney fees would be unaffordable or thwart their ability to arbitrate the dispute.

Next, the Ninth Circuit addressed plaintiffs claim that the designation of San Francisco as the forum for arbitration was unconscionable. It discussed the California Supreme Court's decision in Valentino & Smith, Inc. v. Superior Court, 17 Cal. 3d 491 (1976), which rejected plaintiff's claim that a venue clause was unenforceable because of inconvenience and expense of the forum. In the absence of a showing that such a clause is unreasonable, a forum selection clause is generally valid and enforceable. Further case analysis indicates that the plaintiff has a heavy burden of proof to show a forum-selection clause is unconscionable. This is so even if the clause appears in an adhesion contract. Mere inconvenience or additional expense is not the test. So long as the party had adequate notice as to the forum's location, the clause is enforceable. Here, the Ninth Circuit panel concluded that San Francisco was not an unreasonable choice. San Francisco has a proper connection to the contract as it is 23andMe's principal place of business, seven of the plaintiffs reside in California, and six of the nine actions were filed in California. In addition, the two affidavits claiming financial hardship did not explain why the expense of travelling to the San Francisco venue would be burdensome.

The final arbitration clause provision discussed by the Ninth Circuit exempted "any disputes relating to intellectual property rights, obligations, or any infringement claims" from mandatory arbitration. The court cited California authority stating that substituting arbitration for litigation resulted in no inherent disadvantage. Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109,1152 (2013). Moreover, a one-sided contract is not necessarily unconscionable. The Ninth Circuit also found that the plaintiffs did not identify any intellectual property right that 23andMe was likely to bring against its customers. The rights that were included in arbitration are ones that the plaintiffs are likely to sue on and there was therefore a bilateral aspect to the clause. 23andMe demonstrated the need for the clause since it provided its business with a "margin of safety," which in itself, was not unconscionable. For these reasons, the court held the arbitration clause was enforceable.

The plaintiffs also challenged contract terms creating the one-year statute of limitations and the unilateral right of 23andMe to modify the agreement. The plaintiffs contended that these two provisions rendered the arbitration clause unconscionable. The Ninth Circuit reviewed these issues and ruled that both were enforceable. The court cited Rent-A-Center, W, Inc. v. Jackson, 561 U.S. 63, 70-71 (2010), where the Supreme Court held that a party's challenge to a contract provision or to the contract as a whole does not prevent a court from enforcing an agreement to arbitrate. It cited California authority showing that it was not unconscionable for parties in contractual relations do modify a statute of limitations. The one-year statute of limitations in this case was bilateral; it applied to both parties and both parties had adequate notice and agreed to the provision. As for the provision granting 23andMe the unilateral right to modify the contract, even if this clause is unconscionable, it would not make the arbitration provision or the contract as a whole unenforceable. The Ninth Circuit decided that the plaintiffs are free to argue during arbitration that the unilateral modification clause itself is unenforceable and did not reach that claim in the appeal.

For these reasons, the Ninth Circuit affirmed the district court's decision to grant the motion to compel arbitration.

To read the full opinion, please visit:
https://cdn.ca9.uscourts.gov/datastore/opinions/2016/08/23/14-16405.pdf

Panel: Stephen S. Trott, Sandra S. Ikuta, and Paul J. Watford, Circuit Judges.

Argument Date: May 12, 2016

Date of Issued Opinion: August 23, 2016

Docket Number: 14-16405

Decided: Affirmed.

Case Alert Author: David Griego

Counsel: Jeremy Robinson (argued), Jason C. Evans, and Gayle M. Blatt; Casey, Gerry, Schenk, Francavilla, Blatt &Penfield, LLP, San Diego, California; Mark Ankcorn, Ankcorn Law Firm, PC, San Diego, California; for Plaintiff-Appellant

Robert P. Varian (argued), James N. Kramer, M. Todd Scott, and Alexander K. Talarides; Orrick Herrington & Sutcliffe, LLP, San Francisco, California, for Defendant-Appellee

Author of Opinion: Judge Ikuta

Concurrence: Judge Watford

Circuit: Ninth

Case Alert Supervisor: Philip L. Merkel

    Posted By: Glenn Koppel @ 10/27/2016 03:28 PM     9th Circuit  

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