October 01, 2005
Business Litigation, Corporate & Securities, Intellectual Property, Media Law, Telecommunications, Telecom, Broadband & Media Alerts

Memo To Communications Clients: Arbitration Cautions; VC Alert: Quasi-California Corporations; Outsider Harassment as Hostile Environment; Software Licensing Survey; USF Rural Support; "No" to Some City RFIs; CALEA for VOIP; Digital-to-Analog Converters?

Recent notable developments include:

  • Cautions on Arbitration:  A decision was published this week from the California Courts of Appeal which opens with the advice that "the first rule of contracting should be 'Read the documents'", and goes on to a rare finding, reversing a judgment produced by arbitration.  The decision reviews a printed form real estate arbitration clause which reads in part, "Arbitration of Disputes:  Notice:  By initialing in the space below, you are agreeing to have neutral arbitration of all disputes to which it applies and you are giving up any rights you might possess to have the dispute litigated in a court or jury trial."  The appellate court's reading is that the "it" in the foregoing clause must refer to a separate arbitration provision which was omitted from the contract as signed by the parties, and therefore they had in fact failed to agree to arbitrate their dispute, even though they had initialed this arbitration language.  Thus, the arbitration which had been held was invalid, and the losing party is not bound by the result and cannot be compelled to arbitrate.  The appellate decision was authored by Justice Bedsworth, known for his pointedly clever opinions and an occasional newspaper column of appellate humor.  In any event the opinion reinforces the merit of using and proofreading understandable arbitration clauses and other terms in consumer contracts.  (Villacreses v. Molinari, California Court of Appeal No. G034719, September 26, 2005) 
      
    Similarly, an arbitration clause in a consumer healthcare agreement was given quite demanding scrutiny and held invalid, for slight noncompliance with healthcare statutory requirements that arbitration clauses be "prominently displayed" and placed "immediately" over the signature line (Robertson v. Health Net, California Court of Appeal No. A106879, September 28, 2005). 
      
    Separately, a mandatory arbitration clause in a consumer contract for cellular telephone services, while generally upheld, had its class-action exclusion from arbitration, surgically removed by an Illinois court of appeals as "unconscionable".  The Illinois court applied a "sliding scale" to consider the mix of procedural unconscionability (a non-negotiable printed consumer contract, with the offending provisions "hidden in a maze of fine print"), and substantive unconscionability (a "one-sided limitation on customers' ability to seek relief here damages are quite low").  (Kinkel v. Cingular Wireless LLC, 357 Il.App.3d 556 (2005)). 

  • Venture Capital Alert:  California, Delaware Split Over California's Quasi-Foreign Corporation Statute.  California corporate law has provided since the 1980 that corporations doing business in California but organized in other states such as popular Delaware, are subject to certain overriding California internal corporate laws affecting shareholder rights, if the corporation has a predominantly California center of gravity based on in-state property, payroll and sales together with in-state California shareholders (the so-called quasi-California corporation statute, Corporations Code Section 2115).  While objected to by various national businesses active in the large California market, Section 2115 has been decisively affirmed in California courts.  However, the Delaware Supreme Court decided this year that as a matter of Delaware law, California's Section 2115 is to be disregarded, and the rights of shareholders of a Delaware corporation are determined solely under Delaware corporate law.  
     
    The Delaware decision reflects the doctrine that the internal affairs of corporations are governed by the statutes under which they were organized, and Delaware declined in this instance to allow a public-policy exception giving priority to the special interests of another jurisdiction. (Vantage Point Venture Partners 1996 v. Examen, Inc., 871 A2d 1108 (Del. 2005)).  As a result, according to commentary from the Business Law Section of the State Bar of California, the result is a potential race to the courthouse in cases where Section 2115 would apply different governance rules than Delaware law (e.g. minority shareholder rights in a parent-subsidiary merger), since Section 2115 remains enforceable in California courts but will be disregarded in Delaware courts.

  • Outsider Harassment as Basis for Hostile Environment Claims:  A recent decision of the federal Ninth Circuit of Court of Appeals further illustrates its rule that an employer "may be held liable for sexual harassment on the part of a private individual . . . [such as a customer or other outside party] where the employer either ratifies or acquiesces in the harassment by not taking immediate and/or corrective actions where it knew or should have known of the conduct." The employer's liability exposure in such an instance is based not on harassment law, but on the more general principle that the employer has a duty to provide a safe workplace and thus has exposure for negligence or ratification if it becomes aware of a specific risk to employees but does not take steps to remedy.  In the current case, a former Postal Service employee is found entitled to trial on her claims that as a Hispanic woman speaking accented English, she was placed in a hostile work environment when working in a small Oregon town where postal customers pervasively insulted, berated and threatened her without protection from her superiors.  (Galdamez v. Postmaster General, 9th Cir. No. 03-35682, July 15, 2005).

  • Software Licensing Survey:  A survey sponsored by Silicon Valley software firms and trade associations provides a slanted, but interesting report on business preferences among current software licensing frameworks.  The survey in part reflects the software industry push for annual subscription licenses, rather than the one-time perpetual license fees preferred by many customers.  According to the survey, by 2006 many software vendors will be starting to implement electronic enforcement of software licenses, with at least some acceptance from business customers allegedly based in part on the customer's resulting, more centralized compliance control and monitoring ability in relation to Sarbanes-Oxley considerations.  

  • USF Extension Proposed Under Anti-Deficiency Act:  Late last year, Congress applied at least a temporary fix to technical problems under the federal Anti-Deficiency Act which could have blocked certain rural communications subsidy and support payments for many months from the Universal Service Fund.  The Senate has now passed an appropriation bill which includes a further 12-month extension into 2006 of the USF exemption from anti-deficiency restrictions.

  • FCC Nixes Spontaneous City RFIs:  A recent decision of the FCC's Media Bureau dealt in part with extensive Requests for Information (RFIs), lengthy list of questions and demands for information submitted to cable operators by cities and their consultants, in this case in connection with local rate regulation.  The FCC's decision observes "that there are no Commission procedures in place for LFAs [local franchising authorities, usually cities and counties] to independently propound RFIs on cable operators claiming effective competition.  Accordingly, [the cable operator] was under no obligation to respond to the RFIs."  (FCC Memorandum Opinion and Order, DA 05-2505, September 23, 2005, ¶5)  While there may be other types of proceedings (such as franchise transfer review) where the LFA has authority to request certain information and there also may be some circumstances where it is politic to respond to an RFI even absent a legal obligation, nonetheless there is no independent general authority of LFAs to spontaneously generate RFIs to which cable operators must respond.

  • CALEA Applies to New Services:  As part of last month's FCC adoption of a common, streamlined regulatory regime for cable and DSL broadband Internet access service (reported in our memo of August 5, 2005), the FCC adopted orders released late last week spelling out the full text and certain details of its actions.  Among these, it has ruled that the Communications Assistance for Law Enforcement Act (CALEA), i.e. wiretapping cooperation will apply to facilities-based broadband Internet access service (both cable and DSL), and also to interconnected VOIP telephone service (the form of VOIP which can connect with conventional telephone users, rather than just the closed community of a given service such as Skype).  (Orders, FCC 05-150, paragraph 114 and FCC 05-153, released September 23, 2005)  The FCC also released the text of its abstract principles of broadband policy, which again as noted in our August 5 Memo, are nonbinding and "subject to reasonable network management", while pointing the way to future FCC action.

  • Rooter Paper "Questions the Need for Digital-to-Analog Converters":  And that was only one of many questions raised by the widely reported "Rooter" paper developed by enterprising MIT students.  It was accepted for presentation at a high technology conference, though it consisted entirely of random computer jargon generated by a software program employing context-free grammar to discuss such topics as "the essential unification of voice-over-IP and public-private key pair", including priceless diagrams and references. 
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