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Bar-Ayal v. Time Warner Cable Inc.

October 16, 2006


The opinion of the court was delivered by: Wood, U.S.D.J.


I. Overview

Plaintiff Shlomo Bar-Ayal, individually and on behalf of a putative class, brings this action against defendant Time Warner Cable, Inc., to recover damages Plaintiff alleges he (and other class members) suffered as a result of what he claims to be Defendant's "unlawful practice of levying certain customers with additional charges above its itemized rate for cable television and Internet access services, and failing or refusing to refund those charges." Am. Compl. ¶ 1. Specifically, Plaintiff claims that Defendant unlawfully collected from him and other similarly situated consumers "franchise fees" that amounted to five percent of all billed services provided by Defendant, including cable television services and Internet access, when Internet access services should not have been included in the calculation of the franchise fee. Defendant has moved to stay proceedings and compel arbitration, and has also moved, in the alternative, to dismiss to action. For the reasons stated below, Defendant's motion to stay the proceedings and compel arbitration is granted.

II. Background

Plaintiff makes the following allegations in his Amended Class Action Complaint. Plaintiff, a resident of the State of New York and the County of New York, was and continues to be, from July 2001 through the present, a subscriber to Time Warner Cable*fn1 's cable television service as well as its Internet access service marketed under the "Road Runner" brand (hereinafter the "Road Runner Internet service"). For the period from July 2001 through March 2002, in its monthly billing, Defendant billed Plaintiff for cable television services and Internet access services, and added "franchise fees" amounting to five percent of all of those billed services.*fn2 In March 2002, the Federal Communications Commission (the "FCC") issued a declaratory ruling, holding that, for the purpose of the Communications Act of 1934, 47 U.S.C. §§ 151 et seq., as amended by the Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996), a high-speed Internet access service offered through a cable system - i.e., a cable-modem service - is "properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service," and concluding that "revenue from cable modem service would not be included in the calculation of gross revenues from which the franchise fee ceiling is determined." In the Matter of Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities, Declaratory Ruling and Notice of Proposed Rulemaking, 17 F.C.C.R. 4798, ¶ 7, ¶ 105 (2002) ("FCC 2002 Order").

Between March 2002 and June 2002, Defendant continued to collect from Plaintiff franchise fees equivalent to five percent of all billed services, including Internet access services. In June 2002, Defendant decreased the franchise fee charged to Plaintiff to an amount equivalent to five percent of billed cable television services. Defendant did not refund to Plaintiff the franchise fees in excess of five percent of billed cable television services that Defendant collected from Plaintiff until June 2002. Plaintiff alleges that, upon information and belief, Defendant similarly collected and did not refund such excess franchise fees to other subscribers in New York City and throughout the United States.

The class on whose behalf Plaintiff seeks to bring this action is comprised of "all persons who (i) subscribed to the Road Runner Service or any other Internet access service provided by Time Warner Cable and (ii) were assessed 'franchise fees' or other surcharges or taxes on total amounts billed for cable television services and Internet access services combined." Am. Compl. ¶ 8.*fn3

Based on the allegations described above, in his Amended Complaint, Plaintiff brings claims against Defendant for: violation of the Communications Act of 1934, 47 U.S.C. § 542; violation of the Communications Act of 1934, 47 U.S.C. § 206; violation of the Internet Tax Freedom Act, reproduced at 47 U.S.C. § 151 note § 1101, and the Communications Act of 1934, 47 U.S.C. § 206; breach of contract; restitution; and deceptive practices in violation of New York's General Business Law § 349. Plaintiff asks that this action be certified as a class action pursuant to Rule 23(c) of the Federal Rules of Civil Procedure, and seeks, on behalf of himself and the class, damages on each of the counts alleged (as well as a declaration that Defendant has committed violations of the federal and state statutes as alleged), pre-judgment interest, and costs and expenses including attorneys' fees.

Defendant moves to stay proceedings and compel arbitration (and also moves, in the alternative, to dismiss the action).

III. Discussion

A. Issues as to Arbitrability -- Generally

"[T]he Federal Arbitration Act (the 'FAA') creates a 'body of federal substantive law of arbitrability' applicable to arbitration agreements . . . affecting interstate commerce." Alliance Bernstein Inv. Research & Mgmt., Inc. v. Schaffran, 445 F.3d 121, 125 (2d Cir. 2006) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)).*fn4 Under Section 2 of the FAA, "[a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . or an agreement in writing to submit to arbitration an existing controversy arising out of such a 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. "Section 2 is 'a congressional declaration of a liberal federal policy favoring arbitration agreements[.]'" Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 844 (2d Cir. 1987) (quoting Moses H. Cone Mem'l Hosp., 460 U.S. at 24). The FAA "leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985) (emphasis in original).

However, "arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes -- but only those disputes - that the parties have agreed to submit to arbitration." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995). Thus, before compelling arbitration on the merits of a dispute, questions regarding whether a dispute is arbitrable must be addressed.

Problems of arbitrability usually arise in two contexts. First, and most commonly, this question arises when the issue is whether an arbitration clause in an existing . . . agreement covers a particular dispute between the parties. . . . The second type of arbitrability question deals, not with the scope of the arbitration clause, but with whether there is even a valid agreement to arbitrate in effect at a particular time. This question usually arises in one of two factual scenarios: (1) whether the parties ever entered into an arbitration agreement at all, and (2) whether an arbitration agreement has expired or been terminated.

Abram Landau Real Estate v. Bevona, 123 F.3d 69, 72 (2d Cir. 1997) (citations omitted). As to the question of whether the parties entered into an agreement to arbitrate, a party may challenge either the entire contract in which the arbitration provision is included, or the arbitration provision -- or separate arbitration agreement -- itself. Moreover, as further discussed infra, in challenging a contract as a whole or the arbitration provision specifically, a party may argue that the contract or provision does not exist, or is otherwise not valid. "[G]enerally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2 [of the FAA]." Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996). See also Cap Gemini Ernst & Young, U.S., L.L.C. v. Nackel, 346 F.3d 360, 365 (2d Cir. 2003) ("It is clear that questions of contractual validity relating to the unconscionability of the underlying arbitration agreement must be resolved first, as a matter of state law, before compelling arbitration pursuant to the FAA.").

B. Parties' Claims as to Arbitrability

The parties primarily dispute two issues of arbitrability:

1) whether Plaintiff is bound by an arbitration provision included in a contract that Defendant claims Plaintiff accepted; and 2) whether, if Plaintiff is so bound, Plaintiff's claims in this action fall within the scope of that arbitration provision. In addition, Plaintiff alleges that, even if an agreement to arbitrate exists and it covers his claims in this action, the arbitration agreement should not be enforced because it is unconscionable.

1. Claims Regarding Whether Plaintiff is Bound by Arbitration Provision

As to the first issue, Defendant argues that Plaintiff accepted and is bound by the arbitration provision of the subscription agreement for Defendant's cable-modem service (in effect in July 2001) (the "Customer Agreement"); the provision, at Section 13 of the Customer Agreement, states that, with some limited exceptions not relevant here,*fn5 "[a]ny controversy or claim arising out of or related to this agreement . . . shall be resolved by binding arbitration commenced with one year[.]" Declaration of James An (in support of Defendant's Motion to Compel Arbitration), Director of Business Operations, High Speed Online Services, for Time Warner NY Cable Inc., dated March 23, 2004 ("First An Decl."), ¶ 10, and Exhibit 2 attached to First An Decl.*fn6 Defendant's argument that Plaintiff accepted and is bound by the Customer Agreement, including its arbitration provision, is based on the following claims: 1) Plaintiff installed Defendant's "Road Runner" Internet access service using a self-installation kit, which included a) a CD-ROM containing software that could be installed only if the subscriber clicked a button accepting the terms of the Customer Agreement (which was itself provided, in an electronic version, in the CD-ROM), and b) written materials including a "Getting Started Guide" with installation instructions, and a "Road Runner User Guide," which referred, respectively, to viewing, on screen, the "License Agreement" and "Software License Agreement" (which Defendant states are the same and included the Customer Agreement), Def. Mem. Compel 4, First An. Decl. ¶¶ 2-7; 2) Plaintiff affirmatively relied on the Customer Agreement in his original Complaint, by claiming a breach of contract, Def. Mem. Compel 4 (citing Compl. ¶¶ 1, 17); and 3) after Defendant's personnel made a service call at Plaintiff's home, Plaintiff signed a work order, dated November 12, 2003, which states, above the signature line, that the signature on the order indicates that the signatory has received and agreed to the terms of the Cable Modem Service Subscription Agreement, including Section 13 of the agreement providing for arbitration, Def. Mem. Compel 4, First An. Decl. ¶ 8.*fn7

Plaintiff claims, however, that he (and other class members) "did not knowingly assent to binding arbitration," Plaintiff's Memorandum of Law in Opposition to Defendant's Motion to Compel Arbitration ("Pl. Mem. Opp. Compel") 8. He argues that he is not bound by the arbitration agreement because he was not put on "clear notice" of it. Pl. Memo. Opp. To Motion to Compel 6. In particular, as to Defendant's argument regarding the loading of the CD-ROM, Plaintiff recognizes that, in 2001, he initiated his Road Runner Internet service by loading a "Road Runner High Speed Internet software kit," but declares that: he has "no recollection . . . of having seen, either in hard copy form or electronically, any 'subscription' or 'customer' agreement of the kind attached to [First An Decl. in Exhibits 2 and 6, discussed above]"; he "do[es] not recall in [his] review of the Road Runner guides that accompanied the kit any reference to a licensing agreement, which [he] allegedly had to accept as a precondition to executing the software"; and "had no idea that [his] rights vis a vis Time Warner were to be governed by an arbitration clause" and does "not recall ever having seen any notice advising [him] that [he] was compelled to arbitrate." Declaration of Shlomo Bar-Ayal, dated April 21, 2004, in further support of his opposition to Defendant's Motion to Compel Arbitration ("Pl. Decl.") ¶¶ 2, 3, 4, 5.*fn8

Defendant contends that Plaintiff's claim of not having seen any "subscription" or "customer" agreement when loading the Road Runner software is "not credible." Def. Reply Mem. To Compel 2. Defendant states that, when an individual installs the Road Runner software with the CD-ROM provided to new cable-modem-service subscribers in July 2001, the individual is clearly notified of certain agreements, including the Customer Agreement, is repeatedly asked to indicate whether he or she accepts them, and is told that he or she cannot install the software if he or she does not accept the agreements. Def. Reply Mem. To Compel 2-3; Second Declaration of James An (in support of Defendant's Motion to Compel Arbitration), Director of Business Operations, High Speed Online Services, for Time Warner NY Cable Inc., dated April 23, 2004 ("Second An Decl.").*fn9 The process as described by Defendant will be further discussed infra. Plaintiff's counsel submitted, as a sur-reply in further opposition to Defendant's Motion to Compel Arbitration, a Declaration by co-counsel Harley J. Schnall, Esq., dated May 6, 2004 ("Schnall Decl.")*fn10 reporting on co-counsel's own experience when loading a copy of the Road Runner installation CD-ROM described in the Second An Declaration. The Schnall Declaration, which will be further discussed infra, points to issues regarding whether or not it would be clear to an individual loading the CD-ROM that he or she was accepting certain agreements, including an arbitration provision; ultimately, Plaintiff's counsel claims that, "[b]ased on [counsel's] own experience in loading the software package, assuming that it is the same package that the plaintiff allegedly loaded in 2001, it is apparent that plaintiff and members of his class were not on fair notice of the existence of an arbitration clause." Schnall Decl. ¶ 30.

Plaintiff's arguments as to whether he is bound by the arbitration provision in the Customer Agreement can be understood as a challenge either to the existence of the arbitration provision specifically, or to the existence of the overall Customer Agreement containing the arbitration provision at issue. Indeed, although Plaintiff's focus is on the arbitration provision, he also appears to be arguing, more generally, ...

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