Class Action Arbitration – Conception Applied by Ky. Supreme Court

Class Action Arbitration – Conception Applied by Ky. Supreme Court

      In Schnuerle v. Insight Communications Co., L.P., No. 2008-SC-0007789-DC (Ky. Dec. 10, 2010), in reliance upon the Ninth Circuit’s Discover Bank decision (Discover Bank v. Superior Court, 113 P.3d 1100 (9^th Cir. 2005), the Kentucky Supreme Court struck down the provision of an arbitration agreement  precluding class action arbitration.  While a motion for rehearing or reconsideration was pending, the U.S. Supreme Court issued its decision in AT&T Mobility, LLC v. Conception, ___ U.S. ___, 131 S.Ct. 1740 (2011), in which it upheld a class action arbitration waiver and overturned Discover Bank.  The case was reargued to the Kentucky Supreme Court, and it has reversed its prior decision, now upholding the waiver of a class action arbitration.  Schnuerle v. Insight Communications Co., L.P., __ S.W.3d __, 2012 WL 39631378 (Ky. Aug. 23, 2012).

      Aside from upholding the waiver of class action arbitration, a result compelled by the Supreme Court’s Conception decision, the Schnuerle decision has a number of interest elements.  Before turning to them, as to waivers of class action arbitration, the Kentucky Supreme Court wrote:

[U]pon application of Concepcion, we are now constrained to conclude that under contracts like the one now before us, which contain a class action waiver and also require disputes to be arbitrated under the FAA, the federal policy favoring arbitration preempts any state law or policy invalidating the class action waiver as unconscionable based solely upon the grounds that the dispute involves many de minimis claims which are, individually, unlikely to be litigated. We are satisfied that Concepcion is dispositive, and therefore, we turn our discussion to its application in this case.  2012 WL 3631378, *5.

The Dissent

      Justice Schroder wrote a partial dissent, joined in by Justice Noble, that would have struck the agreement to arbitrate on the grounds that it is unconscionable.  2012 WL 3631378, *15-16.  That determination followed from Insight’s position as the monopoly supplier of broad-band internet services and its requirement that customers agree to arbitration.

Choice of Law

      While the agreement contained a New York choice-of-law clause, the Supreme Court determined that Kentucky law would apply.  Reviewing Kentucky’s law on the respect granted (or not) choice-of-law elections, including § 188 of the Restatement (2^nd) of Conflicts, the Court wrote:

Upon application of Breeding [v. Mass. Indem. and Life Ins. Co., 633 S.W.2d 717 (Ky. 1982)], we agree with the circuit court's conclusion that Kentucky law governs our evaluation of the Service Agreement. Appellants, the other members of the putative class, the Internet equipment, the Internet service provided, and the relevant operating area are all located in Kentucky. The customers executed the agreements in Kentucky, and Kentucky has a substantial interest in the protection of its residents in the area of commercial transactions. Moreover, one of the principal claims arises under the Kentucky Consumer Protection Act. New York, on the other hand, has no discernible connection or interest at all in the subject matter of this litigation. Thus, there can be no doubt that Kentucky has “the greater interest and the most significant relationship to the transaction and the parties.”  2012 WL 3631378, *4.

The FAA Controls

            The agreement at issue provided:

The arbitration process established by this section is governed by the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1–16. The FAA, not state law, shall govern the arbitrability of all disputes between Insight regarding this Agreement and the Service.  2012 WL 3631378, *9.

While both parties agreed that the arbitration agreement is subject to the FAA, the Court noted that “the contract for Internet service which is the subject matter of the contract clearly involves an interstate (indeed worldwide) service….”  2012 WL3631378. *10, footnote 11.

Outstanding Questions

            A number of points remain unresolved after this ruling including:

·                    In an agreement governed by the Kentucky (versus the Federal) Arbitration Act, is a class action waiver effective?

·                    Absent an agreement involving interstate commerce, will an election to be governed by the FAA always be respected?

·                    What is the analytic path for determining, absent a contractual election, whether a particular agreement to arbitrate will be governed by the KyAA or the FAA?

·                    Applying the majority decision, what more or different in an agreement to arbitrate would lead to a conclusion of either substantive or procedural unconscionability?