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Schnuerle v. Insight Communications

Kentucky Supreme Court Reverses Pro-Consumer Ruling

    

Kentucky’s highest court in 2010 ruled against an Internet provider seeking to limit customers’ right to seek redress. Two years later, in the wake of a U.S. Supreme Court decision severely limiting state contract law defenses, the Kentucky court reversed itself and found that federal arbitration law preempts state law.

Background

In 2006, Insight Communications was the only provider of broadband service in Louisville, Ky. In April 2006, Insight customers began to experience service disruptions that lasted in some cases weeks. Customers claimed that when they called the company they often could not get through or were given misleading information. The customers filed a class action lawsuit alleging breach of contract and violation of Kentucky’s Consumer Protection Act. Insight invoked the arbitration clause in its contract and noted that the clause prohibited class actions.

Arbitration is an out-of-court dispute resolution mechanism that increasingly appears in a range of contracts, including for consumer products and services, employment, health care and nursing home admissions. Originally designed to resolve disputes between businesses with comparable bargaining power, companies with greater sophistication and control over the contract process now impose these clauses on consumers in form contracts over which consumers have no ability to negotiate. Arbitration generally is much more expensive for consumers than is a court proceeding, and it severely limits the rights and protections they would have in court. The class action ban prevents consumers from aggregating claims that would be too expensive to bring individually because the remedy available is less than the cost of pursuing it.

AARP Foundation Litigation attorneys filed several AARP friend-of-the-court briefs as this case worked its way through the courts. The briefs discussed the many federal and state courts that have refused to enforce class action bans in arbitration clauses because they deprive consumers of any way to recover their losses and, in effect, allow corporations to continue their unlawful practices without any fear of liability. Corporations are able to keep the ill-gotten gains when consumers cannot enforce their rights, giving them a financial incentive to violate the law.

In 2010 the Kentucky Supreme Court ruled that a class action ban “comprehensive and absolute, prohibiting the joining of lawsuits in all situations and in all forums” was unenforceable. The case was sent back to trial court for consideration of whether this class action ban met that test. While that case was pending, in 2011 the U.S. Supreme Court handed down a decision in AT&T v. Concepcion that eliminated state law contract defenses to arbitration clauses that banned class actions. In the wake of that decision, the Kentucky Supreme Court asked the parties for supplemental briefings and argument, and subsequently reversed its earlier decision regarding enforceability of the class action ban, holding that the claims would have to be individually arbitrated.

What’s at Stake

Arbitration clauses generally prevent consumers from having their day in court. Class action bans in these clauses are even more pernicious. The Supreme Court’s decision in AT&T v. Concepcion now prevents class actions to proceed in arbitration and preempts state contract law defenses that protected consumers from onerous contract terms designed to limit consumer remedies and evade consumer protect law.

Case Status

Schnuerle v. Insight Communications was decided by the Kentucky Supreme Court.


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AARP Foundation Litigation (AFL) is an advocate in courts nationwide for the rights of people 50 and older, addressing diverse legal issues that affect their daily lives and assuring that they have a voice in the judicial system. Learn more about our litigation teams.