Frankel v. Citicorp Insurance Services, Inc.Frankel v. Citicorp Insurance Services, Inc.
APPEARANCES OF COUNSEL
Stroock & Stroock & Lavan LLP, New York City (Julia B. Strickland pro hac vice and Joseph E. Strauss of counsel), for respondents.
OPINION OF THE COURT
HALL, J.
In 1987, the plaintiff Mark Frankel (hereinafter the plaintiff) opened a credit card account with the defendant Citibank (South Dakota) N.A. (hereinafter Citibank), subject to a written agreement which provided, among other things, that Citibank could unilaterally change any of the terms of the agreement at any time. About 14 years later, Citibank allegedly mailed the plaintiff a notice that it was changing the terms of the agreement by adding terms which provided that any dispute between the parties would be subject to mandatory, binding arbitration
The plaintiff enrolled in a “Voluntary Flight Insurance Program” which automatically billed him the sum of $13 for flight insurance whenever he purchased airplane tickets with his credit card. Thereafter, he was consistently billed for flight insurance whenever he made any type of travel-related transaction (e.g., cancelled trips, ticket upgrades, and travel agent fees). The plaintiff was erroneously billed in this manner on about 10 occasions, and the record indicates that Citibank continued to impose these erroneous charges despite having knowledge of their impropriety.
The plaintiff commenced this putative class action on behalf of himself and all others who have been erroneously charged for flight insurance. The plaintiff alleged that this pattern of erroneous billing was calculated to elicit small sums of money from a large number of consumers, amounting to significant aggregate revenue for the defendants.
Approximately two months after service of the summons and verified complaint, the defendants Citicorp Insurance Services, Inc. and Citibank (hereinafter together the respondents) moved to compel arbitration and stay the action pending arbitration on the ground that the plaintiff‘s claims were subject to arbitration under the arbitration change-in-terms. The plaintiff opposed the motion and cross-moved to permanently stay arbitration or, in effect, in the alternative, to temporarily stay arbitration pending a framed-issue hearing. The plaintiff contended, among other things, that (1) the respondents failed to demonstrate that they had given him notice of the arbitration change-in-terms; (2) the alleged agreement to arbitrate was unconscionable and exculpatory; (3) the South Dakota choice-of-law provision in the subject contract was unenforceable; and (4) the motion was premature as discovery was needed.
The Supreme Court determined that the respondents had demonstrated that the action was subject to a valid agreement to arbitrate and that there was no basis to order discovery. Accordingly, the Supreme Court granted the motion, denied the cross motion, and directed the parties to proceed to arbitration of the plaintiff‘s claims on an individual (non-class) basis (2008 NY Slip Op 32722[U] [2008]). The plaintiff appeals, contending, among other things, that the respondents failed to demonstrate
Pursuant to
“In order to compel a party to arbitrate pursuant to a contractual agreement there must be ‘no substantial question [as to] whether a valid agreement was made or complied with’ ” (Manos v Interbank of N.Y., 202 AD2d 403, 403 [1994], quoting
In this case, the respondents failed to demonstrate that the parties agreed to arbitrate because the evidence was insufficient to establish that the respondents “deliver[ed] or mail[ed]” the arbitration change-in-terms to the plaintiff (
The respondents similarly failed to establish the existence of the alleged choice-of-law provision. Assuming, however, that the existence of a binding choice-of-law provision is established by sufficient proof of mailing (see
We note that New York courts will generally enforce a clear and unambiguous choice-of-law clause contained in an agreement so as to give effect to the parties’ intent (see Welsbach Elec. Corp. v MasTec N. Am., Inc., 7 NY3d at 629; Millennium Falcon Corp. v WRD Sales, Inc., 46 AD3d 862, 863 [2007]; see generally Greenfield v Philles Records, 98 NY2d 562, 569 [2002]; 19A NY Jur 2d, Conflict of Laws § 33).
However, “under common-law rules matters of procedure are governed by the law of the forum” (Martin v Dierck Equip. Co., 43 NY2d 583, 588 [1978]; see Tanges v Heidelberg N. Am., 93 NY2d at 53; Kilberg v Northeast Airlines, 9 NY2d 34, 41 [1961]; Education Resources Inst., Inc. v Piazza, 17 AD3d 513, 513 [2005]; see also Restatement [Second] of Conflict of Laws § 122). “On the other hand, matters of substantive law fall within the course charted by choice of law analysis” (Tanges v Heidelberg N. Am., 93 NY2d at 53; see Oltarsh v Aetna Ins. Co., 15 NY2d 111, 115 [1965]; Millennium Falcon Corp. v WRD Sales, Inc., 46 AD3d at 863).
Even when agreements direct the application of foreign substantive law, New York courts may decline to enforce choice-of-law provisions if the chosen law does not bear a reasonable relationship to the parties or the transaction (see Welsbach Elec. Corp. v MasTec N. Am., Inc., 7 NY3d at 629; Friedman v Roman, 65 AD3d 1187, 1188 [2009]; Restatement [Second] of Conflict of Laws § 187 [2] [a]; 19A NY Jur 2d, Conflict of Laws § 34), or where the chosen law violates “some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal” (Loucks v Standard Oil Co. of N.Y., 224 NY 99, 111 [1918]; see Welsbach Elec. Corp. v MasTec N. Am., Inc., 7 NY3d 624, 629 [2006]; Cooney v Osgood Mach., 81 NY2d 66, 78 [1993]; Restatement [Second] of Conflict of Laws § 187 [2] [b]; 19A NY Jur 2d, Conflict of Laws § 35).
Neither of these exceptions is applicable here. The record demonstrates that there is a reasonable relationship between the parties and the State of South Dakota (see Welsbach Elec. Corp. v MasTec N. Am., Inc., 23 AD3d 639, 642 [2005], revd on other grounds 7 NY3d 624 [2006]; see also Hageman v Home Depot U.S.A., Inc., 45 AD3d 732, 734 [2007]; Finucane v Interior Constr. Corp., 264 AD2d 618, 620 [1999]), and the plaintiff failed to sustain his “heavy burden” of demonstrating that the laws of South Dakota are “truly obnoxious” to the laws of this state (Cooney v Osgood Mach., 81 NY2d 66, 79 [1993] [internal quotation marks omitted]; see Welsbach Elec. Corp. v MasTec N. Am., Inc., 7 NY3d at 627; Finucane v Interior Constr. Corp., 264 AD2d 618, 621 [1999]).
Moreover, contrary to the plaintiff‘s contention, the type-size requirements of
Turning to the applicable substantive law under the alleged choice-of-law provision, we conclude that there is a substantial question as to whether the arbitration change-in-terms are unconscionable under South Dakota law.
“[W]hile § 2 of the [Federal Arbitration Act] preempts state law which treats arbitration agreements differently from any other contracts, it also ‘preserves general principles of state contract law as rules of decision on whether the parties have entered into an agreement to arbitrate’ ” (Progressive Cas. Ins. Co. v C.A. Reaseguradora Nacional De Venezuela, 991 F2d 42, 46 [1993], quoting Cook Chocolate Co. v Salomon, Inc., 684 F Supp 1177, 1182 [1988]; see
9 USC § 2 ; Mitsubishi Motors Corp. v Soler Chrysler-Plymouth, Inc., 473 US 614, 626 [1985]; Perry v Thomas, 482 US 483, 492 n 9 [1987]; Southland Corp. v Keating, 465 US 1, 16 n 11 [1984]; Prima Paint Corp. v Flood & Conklin Mfg. Co., 388 US 395, 404 n 12 [1967]).
The plaintiff contends that the arbitration change-in-terms are unconscionable because they were unilaterally imposed by Citibank, and because they explicitly preclude him from bringing or participating in a class action, which effectively deprives him of any forum given the small amount of damages he has personally sustained (see Homa v American Express Co., 558 F3d 225, 233 [2009]; Skirchak v Dynamics Research Corp., 508 F3d 49, 59 [2007]; Dale v Comcast Corp., 498 F3d 1216, 1224 [2007]; Shroyer v New Cingular Wireless Servs., Inc., 498 F3d 976, 984 [2007]; Coneff v AT & T Corp., 620 F Supp 2d 1248, 1260 [2009]; Caban v J.P. Morgan Chase & Co., 606 F Supp 2d 1361, 1372 [2009]; Feeney v Dell Inc., 454 Mass 192, 207-208, 908 NE2d 753, 767 [2009]; Woods v QC Fin. Servs., Inc., 280 SW3d 90, 100 [Mo 2008]; Fiser v Dell Computer Corp., 144 NM 464, 188 P3d 1215 [2008]; Scott v Cingular Wireless, 160 Wash 2d 843, 857, 161 P3d 1000, 1008 [2007]; Discover Bank v Superior Ct., 36 Cal 4th 148, 161, 113 P3d 1100, 1109 [2005]; cf. Stolt-Nielson S.A. v Animal Feeds Intl. Corp., 559 US 662, 130 S Ct 1758 [2010]; Buckeye Check Cashing, Inc. v Cardegna, 546 US 440, 444 [2006]). Although the parties disagree as to the likely cost required to proceed with arbitration, the record remains relatively undeveloped on this issue (cf. Brower v Gateway 2000, 246 AD2d 246, 255 [1998]; Matter of Teleserve Sys. [MCI Telecom. Corp.], 230 AD2d 585, 593-594 [1997]).
The Supreme Court of South Dakota has stated that “‘[u]nconscionability’ is not susceptible of description” inasmuch as “[i]t is not a concept, but a determination to be made in light of a variety of factors not unifiable into a formula” (Johnson v John Deere Co., 306 NW2d 231, 236 [SD 1981]). However, “[t]he South Dakota Supreme Court has distinguished between procedural unconscionability and substantive unconscionability” (Braun v E.I. du Pont De Nemours & Co., 2006 WL 290552, *7, 2006 US Dist LEXIS 37431, *22 [2006]; see Nygaard v Sioux Val. Hosps. & Health Sys., 731 NW2d 184, 194-195 [SD 2007]; Johnson v John Deere Co., 306 NW2d 231, 237 [1981]).
Under South Dakota law, procedural unconscionability “deals with the process of making the contract, including a meaningful
For purposes of evaluating procedural unconscionability, the parties’ “background, experience, and business acumen” are relevant considerations (Johnson v John Deere Co., 306 NW2d at 238). In addition, “a great deal of emphasis” must be placed on any “disparity of bargaining power” (Rozeboom v Northwestern Bell Tel. Co., 358 NW2d 241, 244 [SD 1984]). Moreover, “economic inequality” may be a factor which precludes the parties from “dealing at arms length” and which may result in unfair bargaining power (
The Supreme Court of South Dakota has also engaged in an analysis of whether the services or products for which the parties contracted are available from alternative sources (see Mobile Elec. Serv., Inc. v FirsTel, Inc., 649 NW2d 603, 606 [SD 2002]; Rozeboom v Northwestern Bell Tel. Co., 358 NW2d at 244). Such analysis bears on whether a party had a meaningful choice to accept or reject a particular agreement (see Mobile Elec. Serv., Inc. v FirsTel, Inc., 649 NW2d at 606; Rozeboom v Northwestern Bell Tel. Co., 358 NW2d at 244).
The Supreme Court of South Dakota has noted that “the bulk of successful cases . . . deal with the unprotected and unsuspecting consumers in the market for consumer goods, often the victims of sharp practices: the over-priced stereos, the unreasonably favorable security devices, the illiterate buyer, and the fine-printed clauses” (Johnson v John Deere Co., 306 NW2d at 237). Although a “standardized and preprinted” contract is not necessarily “[an] unenforceable . . . contract of adhesion” (Rozeboom v Northwestern Bell Tel. Co., 358 NW2d at 245), the Supreme Court of South Dakota has indicated that it “will declare an arbitration clause unenforceable ‘when the remedies available in [that forum] are so inadequate that enforcement would be fundamentally unfair’ ” (Nature‘s 10 Jewelers v Gunderson, 648 NW2d 804, 811 [SD 2002], Konen-kamp,
In this regard, the Supreme Court of South Dakota has repeatedly recognized that “[o]ne-sided agreements whereby one party is left without a remedy for another party‘s breach are oppressive and should be declared unconscionable” (Durham v Ciba-Geigy Corp., 315 NW2d 696, 700 [SD 1982], citing United States Leasing Corp. v Franklin Plaza Apts., 65 Misc 2d 1082 [1971]; see Mobile Elec. Serv., Inc. v FirsTel, Inc., 649 NW2d at 606). This sentiment is rooted in the Constitution of South Dakota which provides that “every man for an injury done him in his property, person or reputation, shall have remedy by due course of law, and right and justice, administered without denial or delay” (
Bearing these principles in mind, we conclude that under the circumstances present here, there is a substantial question as to whether the arbitration change-in-terms are procedurally and substantively unconscionable under South Dakota law (see Mobile Elec. Serv., Inc. v FirsTel, Inc., 649 NW2d at 606; Durham v Ciba-Geigy Corp., 315 NW2d at 700; Rozeboom v Northwestern Bell Tel. Co., 358 NW2d at 245; see also Braun v E.I. du Pont De Nemours & Co., 2006 WL 290552, *8, 2006 US Dist LEXIS 37431, *25 [2006]; accord Allied-Bruce Terminix Cos. v Dobson, 513 US 265, 281 [1995] [noting that the power to invalidate arbitration agreements under general principles of contract law “gives States a method for protecting consumers against unfair pressure to agree to a contract with an unwanted arbitration provision“]).
Since there is a substantial question as to whether the arbitration agreement is enforceable under South Dakota law, the Supreme Court erred in granting the respondents’ motion, inter alia, to compel arbitration, and it should have granted that branch of the plaintiff‘s cross motion which was, in effect, to temporarily stay arbitration pending a framed-issue hearing (see
At the hearing, if the respondents adequately demonstrate that the plaintiff agreed to both the choice-of-law provision and the arbitration change-in-terms, the burden of proving that the arbitration change-in-terms are unconscionable is on the plaintiff (see Matter of Schreiber v K-Sea Transp. Corp., 9 NY3d at 340; see also Green Tree Financial Corp.-Ala. v Randolph, 531 US 79, 91-92 [2000]). The parties’ evidence should address factors relevant to unconscionability under South Dakota law, including the extent to which the plaintiff had a meaningful choice to reject the arbitration change-in-terms and the availability of similar credit devices that are free of terms that serve to prohibit class actions (see generally Hayes v County Bank, 286 AD2d 371 [2001]; State of New York v Wolowitz, 96 AD2d 47, 70 [1983]). The parties should also address the costs of prosecuting the plaintiff‘s claim on an individual basis, including anticipated fees for experts and attorneys, the availability of attorneys willing to undertake such a claim, and the corresponding costs likely incurred if the matter proceeded on a class-wide basis (see generally In re American Express Merchants’ Litig., 554 F3d 300, 304 [2009]; Scott v Cingular Wireless, 160 Wash 2d 843, 857, 161 P3d 1000, 1008 [2007]).
The parties’ remaining contentions either have been rendered academic or are without merit.
Accordingly, the order is modified, on the law, (1) by deleting the provision thereof granting the motion of the defendants Citicorp Insurance Services, Inc. and Citibank to compel arbitration and stay the action pending arbitration, and substituting therefor a provision denying the motion, and (2) by deleting the provision thereof denying that branch of the plaintiff‘s cross motion which was, in effect, to temporarily stay arbitration pending a framed-issue hearing, and substituting therefor a provision granting that branch of the cross motion; as so modified, the order is affirmed, and the matter is remitted to the Supreme Court, Queens County, for a framed-issue hearing in accordance herewith.
SKELOS, J.P., CHAMBERS and LOTT, JJ., concur.
Ordered that the order is modified, on the law, (1) by deleting the provision thereof granting the motion of the defendants Citicorp Insurance Services, Inc. and Citibank (South Dakota)