Colorado Federal District Court Determines Whether Arbitration Clause in Online Agreement is Illusory

In a recent case, the United States District Court for the District of Colorado found online arbitration clause enforceable and granted Defendants’ Motion to Compel Arbitration.

In Vernon v. Qwest Communs. Int’l, Inc., 09-cv-01840-RBJ-CBS (D. Col. Mar. 8, 2012) Plaintiffs are Qwest internet service customers who asserted claims on behalf of a multi-state consumer class action, alleging that Qwest’s imposition of a $200 early termination fee was improper. Qwest moved to compel arbitration pursuant to the parties’ Subscriber Agreement and its mandatory arbitration clause.

The relevant part of the Subscriber Agreement informs subscribers that:

BY ENROLLING IN, ACTIVATING, USING OR PAYING FOR THE SERVICE AND/OR EQUIPMENT, FAILING TO RETURN THE EQUIPMENT AND CANCEL SERVICE WITHIN 30 DAYS AFTER ORDERING SERVICE OR EQUIPMENT, OR INSTALLING THE EQUIPMENT YOU AFFIRM THAT YOU UNDERSTAND AND AGREE TO THE TERMS AND CONDITIONS IN THIS AGREEMENT, EVEN IF YOU CHOOSE NOT TO READ IT. FURTHER, YOU AFFIRM THAT YOU UNDERSTAND AND AGREE TO THE PRICES, CHARGES, AND OTHER TERMS AND CONDITIONS QUOTED TO YOU DURING THE ORDERING PROCESS AND ON www.qwest.com/legal/highspeedinternetsubscribers agreement/ and www.qwest.com/legal, ALL OF WHICH ARE INCORPORATED BY REFERENCE.

The Subscriber Agreement expressly provides that all disputes other than those related solely to collection of debt shall be resolved through individual arbitration or proceedings in small claims court:

17. Dispute Resolution and Arbitration; Governing Law. PLEASE READ THIS SECTION CAREFULLY. IT AFFECTS RIGHTS THAT YOU MAY OTHERWISE HAVE. IT PROVIDES FOR RESOLUTION OF DISPUTES THROUGH MANDATORY ARBITRATION WITH A FAIR HEARING BEFORE A NEUTRAL ARBITRATOR INSTEAD OF IN A COURT BY A JUDGE OR JURY OR THROUGH A CLASS ACTION.

(a) Arbitration Terms. You agree that any dispute or claim arising out of or relating to the Services, Equipment, Software, or this Agreement (whether based in contract, tort, statute, fraud, misrepresentation or any other legal theory) will be resolved by binding arbitration. The sole exceptions to arbitration are that either party may pursue claims: (1) in small claims court that are within the scope of its jurisdiction, provided the matter remains in such court and advances only individual (non-class, non-representative, non-consolidated) claims; and (2) in court if they relate solely to the collection of any debts you owe to Qwest.

(i) Arbitration Procedures. . . . The arbitration shall be conducted by the American Arbitration Association (“AAA”). The Federal Arbitration Act, 9 U.S.C. Sections 1-16, not state law, shall govern the arbitration of the dispute. Colorado state law, without regard to choice of law principles, shall otherwise govern and apply to any and all claims or disputes . . . . Arbitration is final and binding. Any arbitration shall be confidential and neither you nor Qwest may disclose the existence, content or results of any arbitration, except as may be required by law or for purposes of enforcement of the arbitration award. The arbitrator may award any relief or damages that a court could award, except an arbitrator may not award relief in excess of or contrary to what this Agreement provides. Judgment on any arbitration award may be entered in any court having jurisdiction.

(ii) Costs of Arbitration. The party requesting arbitration must pay the applicable AAA filing fee, except that if you are an individual using the Services for household or personal use and you initiate arbitration against Qwest: (1) you must pay one-half the arbitrator’s fee up to a maximum of $125 if your claim does not exceed $10,000; (2) you must pay one-half the arbitrator’s fees up to a maximum of $375 if your claim is more than $10,000 but less than $75,000; and (3) you must pay an Administrative Fee in accordance with the AAA’s Commercial Fee Schedule if your claim exceeds $75,000, or if your claim is non-monetary. Except as provided in the preceding sentence, each party shall pay its own expenses of the arbitration, including the expense of its own counsel, witnesses, and presentation of evidence at the arbitration.

* * *

(b) Waiver of Jury and Class Action. By this Agreement, both you and Qwest are waiving rights to litigate claims or disputes in court (except small claims court as set forth in paragraph (a) above). Both you and Qwest also waive the right to a jury trial on your respective claims, and waive any right to pursue any claims on a class or consolidated basis or in a representative capacity.

Plaintiffs argued, inter alia, that the arbitration clause was illusory because Qwest reserved the right to revise the Subscriber Agreement at any time. The court held that the arbitration agreement was not illusory because the changes by Qwest -the drafting party in the Subscriber Agreement- were conditioned upon prior notice to the subscribers, giving subscribers the option to reject those changes by cancelling their service.