Tuesday, July 23, 2013

As the Nebuad Litigation Turns.... Mortensen v. Bresnan Communications

The litigation fallout from ISPs partnership with Nebuad continues.  Today's decision is the latest chapter out a lawsuit against a Montana ISP:
In 2008, Bresnan [Defendant ISP] entered into a temporary arrangement with advertising company NebuAd, Inc. Under the arrangement, in exchange for a share of NebuAd's advertising revenue, Bresnan [Defendant ISP] allowed NebuAd to place an appliance in its Billings, Montana, network. The appliance allowed NebuAd to gather information and create profiles of subscribers in order to target them with preference-sensitive advertising. Bresnan contends that it provided specific notice to consumers about the NebuAd trial and allowed individuals to opt out. Under a heading labeled "About Advanced Advertising," the company website provided detailed information about the trial. It also gave a list of thirteen frequently asked questions with corresponding answers that assured customers that no personally identifying information, such as first and last name, physical street address, email address, telephone numbers, or social security numbers would be collected. Plaintiffs contend that this notice was misleading and that consent was never obtained.
Plaintiffs brought suit Defendant ISP for violations of the Electronic Communications Privacy Act (dismissed previously), the Computer Fraud and Abuse Act, Montana state privacy law (dismissed previously), and trespass to chattels. 

Today's decision takes a contortious turn, not on Internet law (my normal beat), but on the Supremacy Clause of the U.S. Constitution and Defendant ISP's choice of law provision in the terms of service.  Today's case involves a Montana subscriber, an ISP doing business in Montana, an action that transpired in Montana, and a claim for a violation of a Montana law.  Pop Quiz: what state's law should apply??

Hint: The ISP is headquartered in New York and incorporated in Delaware.

Hint two:  The terms of service say that the law of New York applies (thus a cause of action based on Montana law would be bupkis).

Hint Three: The terms of service says that all claims shall be submitted to arbitration pursuant to the Federal Arbitration Act.

Okay, that seems unfair.  The case involves a Montana subscriber, an ISP's operations in Montana, and a violation that purportedly transpired in Montana.  Why should New York's law apply?? 

And when its seems this unfair, and when the customer has no choice in the matter, we call this a contract of adhesion, void as a matter of public policy.  That's what the lower court concluded, stating that Montana citizens had a constitutional right to trail by jury and access to the courts. Therefore, Plaintiff's litigation should go forward.

Not so fast, said the appeals court.  You see, there is this federal law called the Federal Arbitration Act, and it strongly favors arbitration. "Any general state-law contract defense, based in unconscionability or otherwise, that has a disproportionate effect on arbitration is displaced by the FAA."  If you are going to say that a contractual provision requiring arbitration is unconscionable because of some Montana law, then that state law is preempted - you lose.

Now comes the twister:  The Federal Arbitration Act just kicked the legs out from Montana saying its citizens have a right to a trail over arbitration.  Okay, what about the choice of law?  Does Montana law or New York law apply?  "Montana uses the Restatement (Second) of Conflict of Laws § 187(2), which finds a choice-of-law provision overcome where 
(1) Montana has a materially greater interest in the transaction than the state whose law was selected by the parties and 
(2) application of the selected state's law would be contrary to Montana's public policy."
Does Montana have a greater interest in this case?  Sure, says the court.  "The contract was received by the consumers in Montana as part of their Welcome Kit, and the contract governed services provided in Montana to Montana residents. The subject matter of the contract and performance of it took place almost entirely in Montana."

But here's the problem.  With the preemption of Montana law by the Federal Arbitration Act, there is no longer a public policy conflict with Montana law.  New York law favors arbitration; Montana law does not - Montana's disfavorance of arbitration got the boot.  Lacking a public policy conflict, the test for overriding a choice-of-law provision in a contract now fails.

Outside of the legal holding and the status of this litigation, the Court provides background on how another Nebuad litigation was resolved:
After NebuAd's temporary arrangement with Bresnan to gather information from the subscribers ended, a class of plaintiffs, including those involved in the present action, brought suit in the United States District Court for the Northern District of California against NebuAd and several Internet service providers who hosted NebuAd appliances, including Bresnan. Bresnan and the other providers moved to dismiss the action for lack of personal jurisdiction and failure to state a claim. The district court granted this motion finding personal jurisdiction lacking. Valentine v. NebuAd, Inc., No. C08-05113 TEH, 2009 WL 8186130, at *3-10 (N.D. Cal. Oct. 6, 2009). NebuAd became the sole defendant in that action and eventually reached a court-approved settlement with the plaintiffs.
According to Wikipedia, "Due to fallout following public and Congressional concern, NebuAd's largest ISP customers have all pulled out. NebuAd closed for business in the UK in August 2008, followed by the US in May 2009. NebuAd UK Ltd was dissolved in February 2010."
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