Iberia Credit Bureau, Inc. v. Cingular Wireless LLC

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED AUGUST 16, 2004
July 21, 2004
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
FOR THE FIFTH CIRCUIT Clerk
_____________________
No. 03-30613
_____________________
IBERIA CREDIT BUREAU INC, Etc; ET AL
Plaintiffs
IBERIA CREDIT BUREAU INC, doing business as Information
Services; WARDELL X GERHARDT; CONSTANCE WHITE LOUVIERE;
CHARLES V LANDRY; SID HEBERT, on behalf of Iberia Parish
Sheriff’s Department
Plaintiffs - Appellees
v.
CINGULAR WIRELESS LLC, Etc; ET AL
Defendants
CINGULAR WIRELESS LLC, formerly known as BellSouth Mobility,
also known as Cingular/Bellsouth; SPRINT SPECTRUM COMPANY
LP; CENTENNIAL BEAUREGARD CELLULAR LLC, formerly known as
Iberia Cellular Telephone Company LLC, doing business as
Centennial Wireless
Defendants - Appellants
_________________________________________________________________
Appeals from the United States District Court
for the Western District of Louisiana
_________________________________________________________________
Before KING, Chief Judge, and REAVLEY and EMILIO M. GARZA,
Circuit Judges.
KING, Chief Judge:
The appellees in this action are customers of three
cellular-telephone service providers, Cingular Wireless LLC,
Sprint Spectrum LP, and Centennial Beauregard Cellular LLC. The
customers alleged that the service providers engaged in deceptive
trade practices and breached the customers’ service agreements.
The companies moved to compel arbitration of the dispute under
the Federal Arbitration Act and written arbitration clauses in
the customers’ service agreements. The district court denied the
motions to compel arbitration, and the companies brought this
interlocutory appeal. We conclude that the district court
correctly denied Centennial’s motion but erred in denying
Cingular’s and Sprint’s motions. We therefore affirm in part,
reverse in part, and remand.
I. FACTUAL AND PROCEDURAL BACKGROUND
In September 2001, a group of cellular-telephone customers
filed suit in Louisiana state court against their respective
service providers--Cingular, Sprint, Centennial, and Telecorp
Communications, Inc.1--and the providers’ local agents. The
suit, which alleged causes of action for breach of contract and
violation of the Louisiana Unfair Trade Practices Act, LA. REV.
STAT. ANN. § 51:1401 et seq. (West 2003), was predicated on
certain allegedly deceptive billing procedures, most notably the
providers’ practice of rounding up calls to the next whole minute
1
The fourth defendant, Telecorp, is not involved in this
appeal.
2
for billing purposes. The defendants removed the case to federal
court on the basis of diversity of citizenship. The district
court denied a motion to remand and dismissed the local agents on
the ground that they had been fraudulently joined to destroy
complete diversity. The case is a putative class action, but no
class has yet been certified.
Some of the various plaintiffs’ contracts with their
respective service providers include arbitration provisions, but
other contracts do not, depending on the plaintiff and the date
of the contract. The plaintiffs’ original complaint and the
first two amended complaints stated that the plaintiffs were not
pursuing claims related to contracts that contain arbitration
clauses. A later version of the complaint dropped that
limitation. When the plaintiffs began to pursue claims that
involved contracts containing arbitration clauses, Cingular,
Sprint, and Centennial filed motions to compel arbitration and to
stay the judicial proceedings as regards the plaintiffs who were
their respective customers. The state attorney general has also
intervened in the case as a plaintiff. The defendants did not
attempt to compel arbitration with regard to any contracts with
the state, however, and the state is not involved in this appeal.
The arbitration clauses in the various contracts differ in
some relevant respects, as set forth more fully below.
A. Centennial plaintiff
3
Plaintiff Sid Hebert, Sheriff of Iberia Parish, is suing as
a representative of the Iberia Parish Sheriff’s Department.
Through one of the Department’s deputies, Walter Dodge, who acts
as its purchasing agent, the Department opened a multi-telephone
account with Centennial in 1999. Extra phones were added to the
account during the next couple of years. These agreements did
not contain arbitration clauses.
On October 24, 2002, thirteen months after the original
complaint in this case had been filed (but several months before
the Sheriff’s Department was added as a plaintiff in the case),
the Department added still another phone to its Centennial
account, with Dodge signing another standard-form service
agreement. This latest form stated, above the signature line: “I
acknowledge I have read and understand the terms and conditions
on the back of this order form and agree to those terms.” The
final paragraph on the back of the form contains an arbitration
clause requiring the customer (but perhaps not the company--a
matter of dispute) to arbitrate all claims.2 The clause provides
that the arbitrator may not order consolidation or class
arbitration. It further states that any arbitration would be
confidential, and it includes a severability clause stating that
if any portion of the arbitration clause is deemed invalid, the
2
The disputed portion of the arbitration clause is set
forth at length in conjunction with our legal analysis, in Part
III.B.1.
4
rest would remain in force. Dodge and the Sheriff state that
they did not negotiate the terms and were not told of the
arbitration clause, which had not been a part of the parties’
previous agreements.
Another section of the Centennial Terms and Conditions
states that Centennial can change the contract terms by sending
written notice to the customer.
B. Cingular plaintiffs
Plaintiffs Iberia Credit Bureau, Inc., Constance Louviere,
and Wardell Gerhardt entered into service agreements with
Cingular. The agreements are standard forms consisting of a
number of blank boxes for filling in various customer and service
details, followed by six paragraphs of text. The third paragraph
of each agreement explicitly incorporates by reference Cingular’s
Terms and Conditions. Each plaintiff signed the form.
Immediately above the signature line was the following statement:
I ACKNOWLEDGE THAT I HAVE READ AND UNDERSTAND THIS
AGREEMENT AND THE TERMS AND CONDITIONS, AND THE PLAN
PROVISIONS AND CONDITIONS. I AGREE TO BE BOUND THEREBY.
The Terms and Conditions were (depending on which plaintiff is
involved) either printed on the back of the form or presented in
a separate pamphlet that accompanied the form. The two versions
of the Terms and Conditions are substantially identical.
The section of the Terms and Conditions concerning
arbitration provides that “instead of suing in court, CINGULAR
5
and you agree to arbitrate any and all disputes and claims
(including but not limited to claims based on or arising from an
alleged tort) arising out of or relating to this Agreement.”
The Terms and Conditions further provide, among other things,
that the parties “agree that no arbitrator has the authority to
. . . order consolidation or class arbitration” and that neither
party “may disclose the existence, content, or results of any
arbitration.”3 The arbitration provision concludes by stating
that “[n]otwithstanding the foregoing, either party may bring an
action in small claims court.”
Another section of the Terms and Conditions permits Cingular
to change any terms, conditions, rates, or fees at any time. A
customer who has signed a term contract, such as a one-year
commitment, may cancel service in response to such a change
without incurring a termination fee. Finally, the Terms and
Conditions include a severability clause providing that the
unenforceability of one provision of the agreement does not
affect the remaining terms.
C. Sprint plaintiff
Plaintiff Charles Landry, the only plaintiff in this appeal
who is suing Sprint, has two Sprint cellular accounts. The first
one, opened in July 2001, does not contain an arbitration clause,
3
Cingular’s arbitration clause, like the others involved
in this case, also contains provisions regarding matters such as
responsibility for the costs of arbitration proceedings, but
those provisions are not at issue in this appeal.
6
but the second account, opened in August 2002, does. This second
account was opened after the initial complaint in the lawsuit was
filed. Sprint’s request for arbitration concerns only claims
arising from the second account.
Sprint includes its Terms and Conditions in the box with the
handset that the customer purchases. The Terms and Conditions do
not call for a signature, but they provide that the customer
accepts them by activating his account. The version of the Terms
and Conditions included with Landry’s phone contained the
following provision:
ARBITRATION OF DISPUTES. ANY CLAIM, CONTROVERSY OR
DISPUTE, WHETHER SOUNDING IN CONTRACT, STATUTE, OR TORT,
INCLUDING FRAUD, MISREPRESENTATION, OR ANY OTHER LEGAL
THEORY, RELATED DIRECTLY OR INDIRECTLY TO THE [Sprint
services], WHETHER BETWEEN THE COMPANY AND THE CUSTOMER
OR BETWEEN THE COMPANY OR THE CUSTOMER, ON THE ONE HAND,
AND EMPLOYEES, AGENTS OR AFFILIATED BUSINESSES OF THE
OTHER PARTY, ON THE OTHER HAND, SHALL BE RESOLVED BY
ARBITRATION AS PRESCRIBED IN THIS SECTION.4
This section of the Terms and Conditions further provides that no
discovery will be permitted in the arbitration, except that the
parties will exchange, before the hearing, the evidentiary
materials that they plan to submit to the arbitrator.5
4
A new version of the arbitration clause appears in the
Terms and Conditions that became effective August 1, 2002. The
parties agree that this later version, which was the version that
was in effect when Landry actually activated his phone, is
relevantly equivalent.
5
The arbitration provision is several paragraphs long,
but the portion concerning discovery provides as follows:
No discovery will be permitted, except that the parties
7
Other parts of the Sprint Terms and Conditions set forth
additional provisions relevant to this appeal. Like Centennial
and Cingular, Sprint reserves the right to change the parties’
agreement at any time by publishing new Terms and Conditions. If
the customer uses the Sprint services or pays a bill after the
effective date of the change, he is deemed to have accepted the
change. The Sprint Terms and Conditions also include a
severability clause stating that if any provision in the contract
is deemed invalid, the remaining terms remain in force.
D. The district court’s decision
The district court heard argument on the motions to compel
arbitration on May 23, 2003, and denied the motions with oral
reasons. The judge expressed his view that, based on the
circumstances of contract formation, the plaintiffs had not
really assented to the arbitration clauses. Moreover, he
concluded that the agreements “simply put[] all the benefit to
the company and none to the consumer” and were thus
unconscionable under Louisiana law. The court was apparently of
the view that all of the agreements bound only the customer, but
not the company, to pursue arbitration; this was one of the major
factors behind the court’s unconscionability holding, though the
will exchange, thirty days prior to the hearing on their
dispute, all documents to be submitted to the arbitrator,
including any reports or summaries, and a list of the
names and addresses of those persons to be called to
testify. Following exchange of this information, the
parties may agree to waive a hearing.
8
court also found other features of the contracts worryingly
harsh.
The court formalized the ruling with a written order dated
May 27. Centennial, Cingular, and Sprint timely appealed,
asserting appellate jurisdiction under 9 U.S.C. § 16.
II. APPELLATE JURISDICTION
We have appellate jurisdiction over this interlocutory
appeal by virtue of 9 U.S.C. § 16(a)(1), which permits immediate
appeals of district court orders denying requests to compel
arbitration and to stay litigation. See Am. Heritage Life Ins.
Co. v. Lang, 321 F.3d 533, 536 (5th Cir. 2003).
Despite the apparent statutory basis for our jurisdiction,
the plaintiffs have filed a motion to dismiss the appeal. Citing
Cerveceria Cuauhtemoc Moctezuma S.A. v. Montana Beverage Co., 330
F.3d 284 (5th Cir. 2003) (per curiam), they argue that we lack
jurisdiction whenever the district court determines that the
parties did not form a binding agreement to arbitrate. (The
district court’s decision in this case, as described above, was
based on both unconscionability and a failure of mutual assent.)
A recent decision of this court squarely addressed and rejected
the precise argument that the plaintiffs raise here. See May v.
Higbee Co., 372 F.3d 757 (5th Cir. 2004). Section 16(a)(1)
confers jurisdiction over this appeal notwithstanding the
district court’s opinion that the documents at issue in this case
9
failed to constitute a binding agreement to arbitrate.
Accordingly, we will deny the plaintiffs’ motion to dismiss the
appeal and proceed instead to the merits of the district court’s
decision.
III. ANALYSIS
The parties’ dispute has become relatively narrow. The
plaintiffs do not deny that the scope of the arbitration clauses
is broad enough to encompass their causes of action. Nor do they
contend in their appellate brief, though they did at times below,
that they never assented to the arbitration clauses. They do
contend, however, that the arbitration clauses at issue in this
case are unconscionable and unenforceable.6 The district court
agreed with them and refused to compel arbitration. We review
the denial of the motion to compel arbitration de novo. Carter
v. Countrywide Credit Indus., Inc., 362 F.3d 294, 297 (5th Cir.
2004).
6
With one exception that we will note later, see infra
note 16, the parties on both sides of the case, both in the
district court and here, have treated the question of the
possible unconscionability of the arbitration clause as a matter
to be decided by the court rather than by the arbitrator. Cf.
Banc One Acceptance Corp. v. Hill, 367 F.3d 426, 429-31 (5th Cir.
2004) (concluding that a procedural unconscionability attack on
an arbitration clause was a question for the court); Inv.
Partners, L.P. v. Glamour Shots Licensing, Inc., 298 F.3d 314,
316 (5th Cir. 2002) (holding that the court should decide an
attempt to void an arbitration clause as violative of public
policy). But cf. Anders v. Hometown Mortgage Servs., Inc., 346
F.3d 1024, 1031 (11th Cir. 2003) (holding that where an
arbitration clause’s limitations on remedies were severable, a
challenge to them was for the arbitrator to decide). We will
therefore proceed on the same basis.
10
A. Applicability of state unconscionability principles
The argument that an arbitration agreement or clause is
unconscionable or otherwise unenforceable requires consideration
of both federal and state law. The Federal Arbitration Act (FAA)
was in large part motivated by the goal of eliminating the
courts’ historic hostility to arbitration agreements. Allied-
Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270-71 (1995).
Section 2 of the FAA puts arbitration agreements on the same
footing as other contracts:
A written provision in any maritime transaction or a
contract evidencing a transaction involving commerce to
settle by arbitration a controversy thereafter arising
out of such contract or transaction . . . shall be valid,
irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any
contract.
9 U.S.C. § 2 (emphasis added). That is, as a matter of federal
law, arbitration agreements and clauses are to be enforced unless
they are invalid under principles of state law that govern all
contracts. Therefore, “generally applicable contract defenses,
such as fraud, duress, or unconscionability, may be applied to
invalidate arbitration agreements without contravening § 2.”
Doctor’s Assocs. v. Casarotto, 517 U.S. 681, 687 (1996) (emphasis
added).7 But a state court or legislature may not invalidate
7
Alone among the defendants, Sprint makes an argument
(in a single paragraph in its brief) that, notwithstanding the
role for state law that 9 U.S.C. § 2 expressly permits, the
Federal Communications Act preempts any state-law rules that
would lead to the invalidation of its arbitration agreement.
11
arbitration agreements on the basis of a rule of law that applies
only to such agreements, such as by declaring them invalid unless
they contain a special notice on the front page. Id.In the case at bar, the district court invalidated the
defendants’ various arbitration clauses based on general contract
principles of unconscionability. In doing so, the court relied
heavily on a recent Louisiana case, Sutton’s Steel & Supply, Inc.
v. BellSouth Mobility, Inc., 776 So. 2d 589 (La. App. 3 Cir.
2000), that ruled that an arbitration clause very much like one
of the clauses at issue in this case (namely, Centennial’s) was
invalid under Louisiana law. Another recent Louisiana case, also
relied upon heavily by the plaintiffs in this appeal, held that
an arbitration clause somewhat similar to all of the clauses at
issue here was likewise unconscionable and unenforceable under
state law. See Simpson v. Grimes, 849 So. 2d 740 (La. App. 3
Cir.), writ denied, 861 So. 2d 567 (La. 2003).
Compare Boomer v. AT&T, 309 F.3d 404, 417-23 (7th Cir. 2002)
(adopting such a theory), with Ting v. AT&T, 319 F.3d 1126, 1135-
47 (9th Cir.) (rejecting it), cert. denied, 124 S. Ct. 53 (2003).
Sprint’s fleeting reference to this argument in its motion to
compel arbitration failed to present this complex issue in a
sufficient manner to give the district court a reasonable
opportunity to rule on it, FDIC v. Mijalis, 15 F.3d 1314, 1327
(5th Cir. 1994), especially considering that Sprint did not
mention the issue during the lengthy hearing at which the
district court made its decision. See Louque v. Allstate Ins.
Co., 314 F.3d 776, 780 n.1 (5th Cir. 2002) (“As a general rule, a
party may not allude to an issue in the district court, abandon
it at the crucial time when the district court might have been
called to rule upon it, and then resurrect the issue on
appeal.”). In any event, we determine that Sprint’s agreement
survives the application of Louisiana unconscionability rules.
12
The parties sharply disagree about the import of these
Louisiana cases. For the plaintiffs, they are practically
determinative inasmuch as they show that agreements relevantly
equivalent to those at issue in this case are invalid under
general Louisiana rules of unconscionability. But the defendants
respond that these cases are both incorrect as a matter of state
law and inconsistent with federal law in that they single out
arbitration clauses for especially searching review.
That a state decision employs a general principle of
contract law, such as unconscionability, is not always sufficient
to ensure that the state-law rule is valid under the FAA. Even
when using doctrines of general applicability, state courts are
not permitted to employ those general doctrines in ways that
subject arbitration clauses to special scrutiny. As the Supreme
Court has cautioned:
A court may not . . . in assessing the rights of
litigants to enforce an arbitration agreement, construe
that agreement in a manner different from that in which
it otherwise construes nonarbitration agreements under
state law. Nor may a court rely on the uniqueness of an
agreement to arbitrate as a basis for a state-law holding
that enforcement would be unconscionable, for this would
enable the court to effect what we hold today the state
legislature cannot.
Perry v. Thomas, 482 U.S. 483, 493 n.9 (1987); see also Banc One,
367 F.3d at 432 (explaining that “state courts may properly
strike down arbitration clauses, but they may not treat
arbitration clauses differently than other contract terms”).
13
State judges, no less than federal judges, are sworn to
uphold supreme federal law. U.S. CONST. art. VI. Indeed, we
ordinarily presume that state courts are aware of and faithfully
follow federal law, including of course the FAA. Cf. Allen v.
McCurry, 449 U.S. 90, 105 (1980). Our own duty to follow federal
law does, however, mean that we must exercise a degree of care
when applying state decisions that strike down arbitration
clauses as unconscionable. Such scrutiny of state decisions is
unusual in our comity-driven federal system, but it is our duty
under the FAA.
Having set forth the role of state contract law in
invalidating arbitration clauses, we turn now to the substance of
the relevant Louisiana law. No section of the Louisiana Civil
Code directly addresses, in so many words, the doctrine of
unconscionability or the related concept of adhesionary
contracts. Nonetheless, Louisiana jurisprudence does recognize
that certain contractual terms, especially when contained in
dense standard forms that are not negotiated, can be too harsh to
justly enforce. The theory of such decisions, often, is that an
unconscionable contract or term can be thought of as lacking the
free consent that the Code requires of all contracts. See
generally Ronald L. Hersbergen, Unconscionability: The Approach
of the Louisiana Civil Code, 43 LA. L. REV. 1315 (1983).8 In
8
The civil law concept of lesion--which concerns the
relative value of the performance agreed to be received and the
14
order to be invalidated, a provision must possess features of
both adhesionary formation and unduly harsh substance. See Andry
v. New Orleans Saints, 820 So. 2d 602, 603-04 (La. App. 5 Cir.
2002) (“[A]dhesion contracts are not per se unenforceable, but
rather lend themselves to an inquiry as to whether the weaker
party consented to the fine print, and if so whether the
adhesionary clause is unduly burdensome or extremely harsh.”);
Saúl Litvinoff, Consent Revisited: Offer Acceptance Option Right
of First Refusal and Contracts of Adhesion in the Revision of the
Louisiana Law of Obligations, 47 LA. L. REV. 699, 758 (1987)
(“[W]here a party had no power to negotiate a contract, [the
Louisiana courts] may disregard a particular clause in the
contract when that clause is unduly burdensome or extremely
harsh.”).
B. Application of the principles to the arbitration agreements
The arbitration clauses at issue in this case share several
features in common and to that extent lend themselves to a common
analysis. But each is also distinctive in certain ways. The
agreement drafted by one of the defendants, Centennial, possesses
a significant feature that the others lack. Namely, among its
other challenged features, the agreement appears to require only
performance agreed to be rendered--can serve a similar role in
policing bargains, though only with regard to certain types of
transactions. See generally Saúl Litvinoff, Vices of Consent,
Error, Fraud, Duress and an Epilogue on Lesion, 50 LA. L. REV. 1,
107-15 (1989).
15
the customer to arbitrate all disputes, leaving the company with
the choice of pursuing a lawsuit instead of arbitrating.
Louisiana cases suggest that this is a particularly troubling
provision, and so we discuss Centennial’s arbitration clause
separately from the other defendants’ agreements.
1. Centennial
Centennial denies the charge that its arbitration clause is
one-sided, arguing that its arbitration provision equally binds
both parties to arbitrate disputes. The arbitration clause
provides as follows:
Dispute Resolution; Waiver of Trial by Jury; Waiver of
Class Actions - Please read this section carefully. It
affects rights that you may otherwise have. It provides
for resolution of most disputes through arbitration
instead of court trials and class actions. . . . You
agree that instead of suing in court, you will arbitrate
any and all disputes and claims arising out of this
Agreement or the Service. Even if applicable law
provides otherwise, you and we each waive our right to a
trial by jury and to participate in class actions. . . .
By this agreement, both you and we are waiving certain
rights to litigate disputes in court. If for any reason
this arbitration clause is deemed inapplicable or
invalid, you and we both waive, to the fullest extent
allowed by law, any claims to recover punitive or
exemplary damages and any right to pursue any claims on
a class or consolidated basis or in a representative
capacity.
(emphasis added). Read carefully, the language is quite precise.
While most of the statements in this paragraph refer to “you and
we” waiving certain rights, the critical sentence in the middle
that sets forth the duty to arbitrate says only that “you agree”
that “you will arbitrate” rather than sue in court. Centennial’s
16
brief repeatedly asserts that both parties are required to
arbitrate, but it never really explains this key sentence, the
plain meaning of which binds only the customer. The conclusion
that only the customer, but not Centennial, is required to
arbitrate is further bolstered (if such bolstering were needed)
by the sentence stating that “most disputes” between the parties
will be resolved through arbitration. If both parties were
required to arbitrate “any and all disputes,” as Centennial
claims, then one would wonder why the contract says that only
“most disputes,” not all disputes, are subject to resolution
through arbitration.9 Centennial’s answer is that the language
was drafted using the qualifier “most” in order to take into
account the possibility that a customer could, for example, bring
a tort suit after randomly being hit by one of the companies’
vans on the street. Such a suit, according to Centennial, would
not be covered by the duty to arbitrate because it does not
“aris[e] out of this Agreement or the Service”; thus the use of
“most.” We find it quite improbable that the language was
drafted with such a scenario in mind and, in any event, the
9
The arbitration clause contains another sentence that
states that “[t]he arbitration of any dispute or claim shall be
conducted in accordance with” certain American Arbitration
Association rules. We do not read this as stating that both
parties must arbitrate all disputes but rather as a statement
that any arbitration that does occur must be governed by the
specified AAA rules.
17
proffered explanation is insufficient to overcome the clear
import of the critical sentence in the agreement.
The one-sidedness of the duty to arbitrate raises a serious
question as to the clause’s validity. Recent Louisiana appellate
cases have deemed such an arrangement unconscionable and
unenforceable. One of those cases, Sutton’s Steel v. BellSouth
Mobility, is on all fours with the present case. Sutton’s Steel
involved a standard-form cellular-phone contract that generally
required disputes to be arbitrated but expressly carved out an
exception for attempts to collect debts from the customer, which
actions BellSouth could pursue in the courts. 776 So. 2d at 594-
96. Like Centennial’s arbitration clause, the clause in Sutton’s
Steel also barred the arbitrator from ordering consolidation or
class arbitration. Id. The court recognized that arbitration is
favored in the law and cited Louisiana’s cognate to 9 U.S.C. § 2.
Id. at 596. It nonetheless refused to enforce the clause. The
court observed that the clause was printed in small type on a
standard form and had not been bargained over. Id. The court
further determined that “the substance of the arbitration
provision is unduly burdensome and extremely harsh.” Id. The
court found particular fault with the one-sidedness of the duty
to arbitrate. Id. at 596-97.10 The court concluded that “[s]uch
10
Although subsequent cases state that the “lack of
mutuality” in the Sutton’s Steel arbitration agreement was of
particular concern, see Simpson, 849 So. 2d at 747-48, both
Sutton’s Steel and Simpson make clear that the lack of a
18
disproportionate dispensation . . . of rights and remedies is
arbitrary and is lacking in good faith,” and it refused to
enforce the clause. Id. at 597. Likewise, in another recent
case, a different Louisiana appellate court invalidated a one-
sided arbitration clause in a consumer form contract because it
was written in small print and was “unduly burdensome” to the
consumer. See Posadas v. The Pool Depot, Inc., 858 So. 2d 611,
614 (La. App. 1 Cir.), writ denied, 857 So. 2d 502 (La. 2003).11
reciprocal duty to arbitrate rendered the arbitration clause
unconscionable and unenforceable because it was an adhesionary
provision that was “unduly burdensome” to the consumer. See id.
at 746-47; Sutton’s Steel, 776 So. 2d at 596-97. Thus, the
court’s decision in Sutton’s Steel was based on adhesion and
unconscionability, with the one-sidedness of the duty to
arbitrate acting as the primary indicator of unfairness. The
court’s decision was not based on the distinct doctrine of
mutuality of remedy, according to which (it is said) courts will
not order an equitable remedy such as specific performance unless
it is available to both parties. See generally 3 RICHARD A. LORD,
WILLISTON ON CONTRACTS § 7:14 (4th ed. 1992); J.E. Macy, Annotation,
Comment Note--Mutuality of Remedy as Essential to Granting of
Specific Performance, 22 A.L.R.2d 508 (1952).
11
While the Louisiana Supreme Court has not addressed the
enforceability of such a provision, “a decision by an
intermediate appellate state court ‘is a datum for ascertaining
state law which is not to be disregarded by a federal court
unless it is convinced by other persuasive data that the highest
court of the state would decide otherwise.’” Tex. Dep’t of Hous.
& Cmty. Affairs v. Verex Assurance, Inc., 68 F.3d 922, 928 (5th
Cir. 1995) (quoting West v. Am. Tel. & Tel. Co., 311 U.S. 223,
237 (1940)). Here, of course, we have two such data points. We
are aware that courts in other jurisdictions have reached varying
decisions when faced with unconscionability challenges to one-
sided arbitration clauses. See, e.g., Ingle v. Circuit City
Stores, Inc., 328 F.3d 1165, 1174-75 (9th Cir. 2003) (holding
such an agreement unconscionable per se), cert. denied, 124 S.
Ct. 1169 (2004); Harris v. Green Tree Fin. Corp., 183 F.3d 173,
183-84 (3d Cir. 1999) (enforcing such a clause); Ex parte Parker,
730 So. 2d 168, 171 (Ala. 1999) (stating that lack of a bilateral
19
As explained earlier, federal law would not give effect to
these state court holdings if they single out arbitration clauses
for especially strict scrutiny. We cannot conclude, at this
time, that the controlling state decisions apply different rules
than other Louisiana cases or that they apply the usual rules
differently. They certainly purport to apply general rules of
Louisiana contract law. The Sutton’s Steel opinion bases its
understanding of adhesion contracts and unconscionability on
generally applicable codal provisions and learned commentary, 776
So. 2d at 593-94, not sources applicable specifically to
arbitration. Posadas cites § 2 of the FAA, which states that
arbitration clauses are valid except when they are invalid under
generally applicable rules of contract law, and Sutton’s Steel
cites a nearly identical provision of state law; thus both cases
recognize the favored status of arbitration. The cases do not
necessarily express the impermissible view that arbitration is
inferior to litigation, for a choice of remedies is better than
being limited to one forum. Cf. Sutton’s Steel, 776 So. 2d at
596 (stating that BellSouth attempts to bind customers to
arbitration but “reserves unto itself the option of pursuing
other remedies” (emphasis added)); id. at 597 (referring to
BellSouth’s “disproportionate dispensation . . . of rights and
remedies”). In sum, while we underscore again that federal
duty to arbitrate can be “one factor” in the unconscionability
analysis but is not determinative).
20
courts must exercise care in enforcing state doctrines of
unconscionability to invalidate arbitration clauses, we conclude
in this case that the controlling state cases can properly be
applied under 9 U.S.C. § 2, which permits invalidation of
arbitration agreements under generally applicable rules of state
law. Our decision in this regard accords with this court’s
recent decision in Banc One, 367 F.3d at 431-32, which applied an
on-point Mississippi unconscionability holding where the state
decision did not appear to discriminate against arbitration.12
Despite the evident similarities between Sutton’s Steel and
the present case, Centennial attempts to distinguish Sutton’s
Steel on the grounds that the parties bargained over the contract
at issue here. When a contract is bargained over, Centennial
says, the substantive harshness of any term is irrelevant under
Louisiana law. According to Centennial’s brief, the Sheriff’s
Department’s “sophisticated purchasing agent” negotiated a
special arrangement whereby many phones shared the same block of
airtime.13 The record generated in the district court, however,
12
As Banc One also explained, later developments could
show that the apparently evenhanded state holdings are in fact
applicable only to arbitration agreements. 367 F.3d at 432 n.3.
But as in Banc One, we are unable to so conclude at this point.
13
Centennial also argues that its clause must be enforced
because the customer could choose to take his business to another
cellular service provider who, perhaps, would not have an
arbitration clause. But the same was true in Sutton’s Steel, and
Simpson v. Grimes expressly rejects such an argument. See
Simpson, 849 So. 2d at 746-48; cf. Simpson v. Pep Boys–Manny Moe
& Jack, Inc., 847 So. 2d 617, 622 (La. App. 4 Cir. 2003)
21
does not support Centennial’s efforts to paint this as a
negotiated contract. So far as the record suggests, the
purchasing agent, Deputy Dodge, was simply a member of the
department. Importantly, Sheriff Hebert and Deputy Dodge both
state in affidavits, filed as attachments to their opposition to
the motion to compel arbitration, that they “did not negotiate
nor . . . have the opportunity to negotiate the terms of” the
service agreements; both likewise say that they simply agreed to
purchase “a set number of minutes for a set monthly price.”
Centennial did not controvert these affidavits or argue, during
the hearing on the motion, that the contracts were negotiated.
The sole evidentiary basis for Centennial’s argument on
appeal is the contracts themselves. The documents reflect that
tens of phones were part of the same account and that more phones
were added periodically, but beyond that they are rather
unilluminating standing alone. All of these transactions,
including the October 2002 transaction that first added the
arbitration clause, were accomplished on Centennial’s standard
service-agreement forms. There is certainly no indication that
Dodge had any opportunity to quarrel with the boilerplate terms
and conditions printed on the back of the forms; his affidavit in
fact states that he could not and did not negotiate anything.
(recognizing the availability of other options as one factor in
the analysis but also observing that the challenged contract was
not in fine print and was not unduly burdensome).
22
Assuming that Centennial did not forfeit this issue by failing to
press it below, we reject Centennial’s attempt to bring its case
outside of Sutton’s Steel.
Before closing our discussion of the Centennial agreement,
we observe that the contract contains a severability clause,
which provides that “[i]f any portion of this arbitration
agreement is determined by a court to be inapplicable or invalid,
the remainder shall still be given full force and effect.” While
the clause might come into play if (for example) we deemed
Centennial’s confidentiality rule invalid, it cannot cure the
one-sidedness of the duty to arbitrate. This case does not
present a situation in which a certain offensive term can be
stricken from an otherwise valid agreement to arbitrate, which is
what a severability clause permits the court to do. See SWAT 24
Shreveport Bossier, Inc. v. Bond, 808 So. 2d 294, 308-09 (La.
2001). On the contrary, the offensive provision here is the
sentence in which the customer, but not Centennial, is required
to arbitrate. Saving the clause would require not that we excise
an invalid excrescence and then send the pared-down contract to
arbitration but that we redraft the contract to add important new
material--a duty on Centennial’s part to arbitrate. The
severability clause therefore cannot accomplish the needed
repair. Cf. Armendariz v. Found. Health Psychcare Servs., Inc.,
6 P.3d 669, 697-99 (Cal. 2000) (concluding that a severance could
not save such an arbitration agreement).
23
In conclusion, we hold that the district court did not err
in denying Centennial’s motion to compel arbitration.
2. Cingular and Sprint
We next turn to Cingular and Sprint. We discuss the
Cingular and Sprint agreements in tandem, since some of the same
considerations are applicable to both. Although we examine each
challenged feature of the arbitration clauses one at a time, we
are mindful (as the plaintiffs urge us to be) that we must
consider the combined effect of the various aspects of the
clauses.
a. Fine print (Cingular and Sprint)
The plaintiffs complain that the arbitration clauses are in
difficult-to-read fine print. The district court so remarked at
the hearing on the motions to compel arbitration. Type size
would seem to bear most directly on the question whether the
contracts were formed in an adhesionary manner, which then
triggers a review for substantive harshness. See Andry, 820 So.
2d at 603-04. But the plaintiffs’ type-size argument does not by
itself show that the arbitration clause is invalid. The
companies’ arbitration clauses are not printed in type that is
smaller than that generally used in the rest of the contract.14
14
Indeed, parts of the arbitration clause in the Sprint
contract are printed in type that is somewhat larger than the
type that is generally employed. Similarly, the first paragraph
of the Cingular contract specifically adverts to the arbitration
clause, the only provision given such prominent billing.
24
See Reimonenq v. Foti, 72 F.3d 472, 477 (5th Cir. 1996). The FAA
prohibits states from passing statutes that require arbitration
clauses to be displayed with special prominence, Casarotto, 517
U.S. at 686-88, and courts cannot use unconscionability doctrines
to achieve the same result, Perry v. Thomas, 482 U.S. at 492 n.9.
We therefore reject the type-size argument as a basis for
invalidating the arbitration clauses.
b. Change-in-terms clause (Cingular and Sprint)
All of the contracts at issue in this case include a clause
permitting the cellular service provider to change the terms of
the agreement. The plaintiffs argue that these clauses render
the agreement illusory15 or render the arbitration clause
unconscionable, or both.16
15
The doctrine of illusory promises is familiar within
the common law. See generally RESTATEMENT (SECOND) OF CONTRACTS § 77
cmt. a (1981); WILLISTON ON CONTRACTS, supra, § 7:7. The Louisiana
civil-law tradition recognizes some of the same basic principles
that lie behind the common-law doctrine, albeit by employing
different terminology. See 5 SAúL LITVINOFF, LOUISIANA CIVIL LAW
TREATISE: THE LAW OF OBLIGATIONS § 5.6 (2d ed. 2001).
16
Although the defendants do not dwell on this point
(only Cingular mentions it, and only in a footnote), we note that
the change-in-terms clause potentially implicates the so-called
separability doctrine, which requires certain challenges to
contracts containing arbitration clauses to be heard by the
arbitrator rather than by the court. See Prima Paint Corp. v.
Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (holding that a
fraudulent-inducement defense that applied to the contract as a
whole, as opposed to the arbitration clause in particular, was
for the arbitrators to consider in the first instance). No other
defendant takes such a position, however, and so we will consider
the plaintiffs’ challenge to the clause on its merits. Moreover,
here the plaintiffs link the change-in-terms clause specifically
to the arbitration clause in that they claim that the former
25
There is some support in Louisiana law for the plaintiffs’
position. A Louisiana appellate court recently concluded that a
change-in-terms provision in a standard-form contract between a
securities brokerage firm and its customers rendered the
contract’s arbitration clause one-sided and therefore
unconscionable. See Simpson, 849 So. 2d at 746-49. Unlike the
contract in Sutton’s Steel, which we discussed earlier, the terms
of the arbitration clause in Simpson facially bound both parties
to arbitrate their disputes. But the contract in Simpson also
contained another paragraph stating that the brokerage “may amend
this Agreement upon written mailing [sic] notice to Customer.”
According to the Simpson court, this change-in-terms clause
allowed the brokerage to achieve “through clever subterfuge” the
forbidden one-sided arbitration clause condemned in Sutton’s
Steel. Id. at 748. The court accordingly deemed the arbitration
clause unconscionable and unenforceable. Id. at 749.
The defendants vigorously oppugn Simpson, both as a
statement of Louisiana law and as a matter of § 2 of the FAA,
under which a court may invalidate an arbitration clause only on
grounds that would invalidate any contract. They aptly point out
that the economy is saturated with contracts that contain change-
in-terms provisions of the sort involved here. The party with
could at any time be used to render the duty to arbitrate one-
sided--making it unconscionable under Sutton’s Steel. As
discussed in the text, one Louisiana court has adopted precisely
that reasoning in striking down an arbitration clause.
26
the power to change the terms could, in theory, change any term
in the contract in a way that would make the contract
unconscionable. (The cell phone company could, for example,
surreptitiously raise the monthly fee to thousands of dollars and
give itself a security interest in the customer’s house, all in
easy-to-miss fine print.) But while we are not lightly to
disregard the rulings of state intermediate appellate courts, we
do not agree that the Louisiana Supreme Court would use Simpson’s
reasoning to declare unenforceable every contract with a change-
in-terms clause. In fact, other Louisiana cases have enforced
contracts, including arbitration contracts, that contain such
provisions. See Stadtlander v. Ryan’s Family Steakhouses, Inc.,
794 So. 2d 881 (La. App. 2 Cir. 2001) (arbitration agreement with
change-in-terms provision); cf. Seals v. Calcasieu Parish
Voluntary Council on Aging, Inc., 758 So. 2d 286, 291-93 (La.
App. 3 Cir. 2000) (explaining that an employment contract that
gave the employee a right to cancel upon notice was not invalid,
citing Long v. Foster & Assocs., 136 So. 2d 48 (La. 1961)).17
The plaintiffs have also directed us to several recent
federal cases concerning arbitration agreements that contain
change-in-terms clauses. Some of these decisions have
17
The majority opinion in Stadtlander did not explicitly
analyze the change-in-terms provision, but the majority twice
quoted the potentially problematic language, 794 So. 2d at 887,
889 n.9, and the dissent relied on that aspect of the contract,
id. at 893 & n.2 (Peatross, J., dissenting).
27
invalidated arbitration agreements that give the company the
right to alter the terms of the agreement at any time, at least
when the company is not required to give notice of the change.
See, e.g., Dumais v. Am. Golf Corp., 299 F.3d 1216, 1219 (10th
Cir. 2002) (citing cases). Such cases reason that the company,
having reserved to itself the right to change or to eliminate its
obligation, has not really bound itself at all. Here, however,
the defendant companies are required to give the customer notice
of the proposed change. See Morrison v. Circuit City Stores,
Inc., 317 F.3d 646, 668 (6th Cir. 2003); Pierce v. Kellogg, Brown
& Root, Inc., 245 F. Supp. 2d 1212, 1215 (E.D. Okla. 2003) (both
rejecting challenges to arbitration clauses containing change-in-
terms provisions and distinguishing prior decisions in which the
company was not required to give notice of the change).
The change-in-terms provisions in the contracts before us do
not render the contracts’ obligations illusory. The notice of
the change in terms can be understood as an invitation to enter
into a relationship governed by the new terms. The customer then
accepts the new terms by continuing to use the service.18 Cf.
18
Cingular’s contract specifically provides that a
customer who cancels after a change in terms would not be liable
for any early-termination fees that might otherwise apply.
Sprint’s contract is not as clear in this regard, though counsel
represented to us at oral argument that this is a month-to-month
contract without a termination charge. If a customer was
compelled to accept a burdensome change in the terms on pain of
forfeiting a deposit or paying a termination fee, that might show
that the attempt to change the terms was unconscionable or
otherwise unenforceable. Cf. LA. CIV. CODE ANN. art. 1983
28
Bank of La. v. Berry, 648 So. 2d 991, 993 (La. App. 5 Cir. 1994)
(“[A]s per the credit card agreement, the contract between the
parties was perfected upon use of the card by [the customer].”).
The fact that the company has the right to change the terms upon
notice does not mean that the contract never bound it. Nor does
the fact that the companies could later attempt to change the
arbitration clause to render it oppressive mean that the
arbitration clause, as it stands, is unconscionable.
c. Bar on class actions (Cingular)
Cingular’s arbitration agreement contains provisions barring
the arbitrator from ordering consolidation or class arbitration.
The record does not reveal whether, in the absence of such a
provision, there would otherwise be a realistic possibility that
an arbitrator would order a class-wide proceeding; it may be that
the contractual prohibitions merely make explicit what would
otherwise happen in practice. In any event, the plaintiffs argue
that the bar on collective proceedings has the effect of
immunizing the defendants from low-value claims, no matter how
meritorious those claims might be. The companies can accordingly
wrong their customers with impunity, say the plaintiffs, so long
as they do not harm any particular person to a degree that makes
it worthwhile to pursue an arbitration case. The arbitration
(requiring that contracts be performed in good faith). But it
would not mean that the original agreement never bound the
company to anything.
29
clause is therefore not so much an alternative method of dispute
resolution as it is a system for avoiding liability altogether.
While we do not discount the plaintiffs’ complaints, our
calculus also must take into account that both federal and
Louisiana policy favor arbitration as a method of dispute
resolution. See Moses H. Cone Mem’l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24-25 (1983) (noting the “liberal federal
policy favoring arbitration agreements”); Thomas v. Desire Cmty.
Hous. Corp., 773 So. 2d 755, 759 (La. App. 4 Cir. 2000) (en banc)
(referring to the “strong public policy in Louisiana favoring the
enforcement of arbitration clauses”). As the Supreme Court has
explained, the fact that certain litigation devices may not be
available in an arbitration is part and parcel of arbitration’s
ability to offer “simplicity, informality, and expedition,” see
Gilmer, 500 U.S. at 31 (internal quotation marks omitted),
characteristics that generally make arbitration an attractive
vehicle for the resolution of low-value claims. Moreover, this
court recently rejected an argument that an arbitration clause
prohibiting plaintiffs from proceeding collectively was
unconscionable under Texas law. See Carter, 362 F.3d at 298,
301; accord O’Quin v. Verizon Wireless, 256 F. Supp. 2d 512, 519-
20 (M.D. La. 2003) (applying Louisiana law). But see Ting, 319
F.3d at 1150 (holding that an arbitration agreement’s bar on
class-wide relief is unconscionable under California law).
30
A highly relevant factor in considering the equities of the
arbitration clauses in this case is that the Louisiana Unfair
Trade Practices Act (LUTPA), which is one basis of the
plaintiffs’ claims, does not permit individuals to bring class
actions. See LA. REV. STAT. ANN. § 51:1409(A) (authorizing an
aggrieved individual to sue “but not in a representative
capacity”); Morris v. Sears, Roebuck & Co., 765 So. 2d 419, 421-
22 (La. App. 4 Cir. 2000).19 Although this prohibition does not
apply to the plaintiffs’ breach-of-contract cause of action, it
does significantly diminish the plaintiffs’ argument that
prohibiting class proceedings in consumer litigation is
unconscionable under Louisiana law. Moreover, LUTPA does permit
the state attorney general to sue on behalf of the state and its
consumers and to pursue restitutionary relief on behalf of a
class of aggrieved consumers. LA. REV. STAT. ANN. §§ 51:1404(B),
1407, 1408, 1414; State ex rel. Guste v. Gen. Motors Corp., 370
So. 2d 477, 487 (La. 1978). This further tends to show that the
arbitration clause does not leave the plaintiffs without remedies
or so oppress them as to rise to the level of unconscionability.
d. Confidentiality (Cingular)
19
LUTPA does, however, seek to make it feasible to
vindicate low-value claims by providing for awards of attorneys’
fees, which an arbitrator would presumably be empowered to award
in enforcing a LUTPA plaintiff’s substantive rights. See LA.
REV. STAT. ANN. § 51:1409(A); cf. Carter, 362 F.3d at 298-99. We
observe as well that Cingular’s arbitration clause expressly
permits customers to bring inexpensive small-claims actions.
31
Cingular’s contract includes terms stating that the
existence and result of any arbitration must be kept
confidential. (This restriction does not apply to actions in
small claims court, which the agreement also permits.) The
district court was troubled by this feature of the agreement
because it deprived plaintiffs of the ability to establish
precedent. The plaintiffs add that the confidentiality
requirement, although neutral on its face, gives an informational
advantage to the repeat-player companies, who have first-hand
knowledge of how prior arbitrations against them have fared. The
plaintiffs again cite in support the Ninth Circuit’s decision in
Ting, which noted such considerations in holding unconscionable,
as a matter of California law, a confidentiality provision in a
consumer arbitration agreement. See 319 F.3d at 1151-52.20
While the confidentiality requirement is probably more
favorable to the cellular provider than to its customer, the
plaintiffs have not persuaded us that the requirement is so
20
Although couched in terms of unconscionability, the
plaintiffs’ arguments relate more to broader considerations of
public policy than to the harshness of a particular bargain.
These particular plaintiffs might be better off if prior
arbitrations had been public, and later plaintiffs might benefit
if the confidentiality provision were invalidated in this case.
The vice (if any) of the confidentiality clause lies mostly in
its systematic effect, not in its oppressiveness as regards the
particular plaintiffs before us. The difference in emphasis is
not of much moment, however, as the Louisiana courts recognize
public policy (like unconscionability) as a basis for
invalidating certain agreements. See, e.g., Boudreaux v.
Boudreaux, 745 So. 2d 61, 63 (La. App. 3 Cir. 1999).
32
offensive as to be invalid. Confidentiality can be desirable to
customers in some circumstances. Cf. Rosenberg v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 170 F.3d 1, 8 n.4 (1st Cir. 1999)
(observing, in an employment case, that both sides might prefer
the confidentiality of arbitration); American Arbitration
Association, Consumer Due Process Protocol, Principle 12(2)
(April 17, 1998), at http://www.adr.org. Indeed, the plaintiffs’
attack on the confidentiality provision is, in part, an attack on
the character of arbitration itself. If every arbitration were
required to produce a publicly available, “precedential” decision
on par with a judicial decision, one would expect that parties
contemplating arbitration would demand discovery similar to that
permitted under Rule 26, adherence to formal rules of evidence,
more extensive appellate review, and so forth--in short, all of
the procedural accoutrements that accompany a judicial
proceeding. But part of the point of arbitration is that one
“trades the procedures and opportunity for review of the
courtroom for the simplicity, informality, and expedition of
arbitration.” Mitsubishi Motors Corp. v. Soler Chrysler-
Plymouth, Inc., 473 U.S. 614, 628 (1985). We note as well that
the creation of precedent--one of the plaintiffs’ main concerns--
can cut both ways, since precedent can be helpful or harmful,
depending on the decision. Finally, a corporate repeat-player
can use confidential settlements to prevent a court from making
adverse findings, and, while confidential settlements are not
33
completely analogous to confidential arbitration, it is
instructive that Louisiana law does not prohibit them.
e. Discovery (Sprint)
Plaintiff Landry, the only plaintiff in this case who is a
Sprint customer, has complained on appeal of a clause that
prohibits discovery requests. Landry did not advert to this
aspect of the arbitration clause in his submissions in the
district court. Not only does the failure to raise the matter in
the district court invoke the rule that issues generally cannot
be raised for the first time on appeal, see Alford v. Dean Witter
Reynolds, Inc., 975 F.2d 1161, 1163 (5th Cir. 1992), but it also
means that Landry has not created the factual record that would
be necessary to shoulder his burden of showing that the
restriction would prevent him from vindicating his substantive
rights. See Carter, 362 F.3d at 298-99.21
f. Summary
Having considered the challenged features of the Cingular
and Sprint arbitration clauses, we have determined that the
clauses are not unconscionable or otherwise unenforceable under
generally applicable principles of Louisiana law. Cingular and
21
We express no view regarding whether the result of the
arbitration could later be challenged on the ground that the
restrictions on discovery frustrated Landry’s ability to
effectuate his substantive rights.
34
Sprint are therefore entitled to an order compelling arbitration
and staying the judicial proceedings. See 9 U.S.C. §§ 3-4.22IV. CONCLUSION
The plaintiffs’ motion to dismiss the appeal for want of
jurisdiction is DENIED. We AFFIRM the district court’s judgment
to the extent that it denied Centennial’s motion to compel
arbitration. We REVERSE the judgment to the extent that it
denied the motions of Cingular and Sprint, and we REMAND the case
to the district court for entry of an appropriate order
compelling arbitration.
22
We note that Sprint requested that the district court
compel arbitration and then dismiss, rather than simply stay, the
judicial proceedings. We leave it to the district court to
determine whether such would be proper in this case. Cf. Alford,
975 F.2d at 1164.
35