Federal courts continue to rely on a 2011 US Supreme Court ruling to uphold arbitration clauses and associated class action waivers in online terms of service. We have been counseling clients that this is a good way for online and mobile publishers and service providers to take prophylactic measures against the avalanche of privacy and other consumer class action law suits in recent years. The latest decision involves just one such privacy class action, brought by a firm that has been one of the most active in bringing these cases.

Relying upon the United States Supreme Court decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the three-judge appellate panel in Mortensen et al. v. Bresnan Communications, LLC, Case No. 11-35823 (9th Cir. July 15, 2013), vacated a Montana district court’s order declining to enforce an arbitration clause and choice-of-law clause in a broadband Internet service subscriber agreement. In 2010, two Montana-based plaintiffs filed this putative class action against Bresnan Communications, LLC alleging violations of the Electronic Communications Decency Act, the Computer Fraud and Abuse Act, and Montana state law for trespass to chattels and invasion of privacy as a result of targeted advertising seen while using Bresnan’s Internet service. Bresnan responded by filing a motion to compel arbitration under the subscriber agreement, which the district court denied upon applying Montana public policy requirements. Subsequently, Bresnan filed a motion for reconsideration, which was also denied, and thereafter filed the appeal at issue.

The Ninth Circuit acknowledged that the preemption power of the Federal Arbitration Act (“FAA”) is subject to a notable exception—the savings clause—which preserves generally applicable contract defenses, such as fraud, duress, or unconscionability, and ensures that they are not preempted. California state courts have, in particular, issued rulings refusing to uphold arbitration clauses on unconscionablity grounds. Here, the appellate panel held that the FAA’s savings clause, 9 U.S.C. § 2, was further limited by Concepion and its progeny, such that (1) the FAA preempts Montana’s public policy broadly invalidating adhesive agreements running contrary to the reasonable expectations of a party, and (2) that the district court erred in not applying New York law because a state’s preempted public policy is an impermissible basis on which to reject the parties’ choice-of-law selection. More specifically, the court explained that the scope of Concepcion’s holding extends to mean that “[a]ny general state-law contract defense, based in unconscionability or otherwise, that has a disproportionate effect on arbitration is displaced by the FAA.” As applied to Montana’s reasonable expectations/fundamental rights rule, the court noted that it could not escape preemption by the FAA because it “disproportionately applies to arbitration agreements, invalidating them at a higher rate than other contract provision.”

This decision further supports the enforceability of mandatory arbitration and class action waivers in consumer terms of service and end user license agreements. However, there are a number of ways these can be structured and presented that will make it less likely that the FAA’s savings clause can be successfully employed. Given the proliferation of these suits recently, publishers and service providers should have their privacy policies and terms of service reviewed and potentially updated. Further, as a recent class action against Instagram alleging improper application of changed terms of service illustrates, how changed terms are noticed and implemented is important.