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Class Action Defense Cases-Sanford v. MemberWorks: Ninth Circuit Holds District Court Erred In Failing To Determine Existence of Membership Contract Prior To Compelling Arbitration But Correctly Dismissed Class Action Complaint Against Co-Defendants

District Court must Resolve Issues Regarding Existence of Contract before Compelling Arbitration and Dismissing Class Action Allegations, but Class Action Complaint Against Co-Defendant Properly Dismissed Ninth Circuit Holds

Plaintiff filed a putative class action in federal court against MemberWorks and West Telemarketing alleging she was charged a membership fee for joining the “Essentials program” – a service that, for an annual fee, offers members a 20% discount at certain retailers – in violation of 39 U.S.C. § 3009 (prohibiting mailing unordered merchandise) and various state laws because she had not heard of, and did not join, the program. Sanford v. MemberWorks, 483 F.3d 956, 958-59 (9th Cir. 2007). Defense attorneys for MemberWorks moved to compel arbitration based on a clause in the membership agreement and to strike the class action allegations; defense attorneys for West joined in the motion to compel arbitration. Id., at 959. Plaintiff objected to the arbitration demand on the ground that she never enrolled in the Essentials program, id. The district court granted the motion to compel arbitration as to MemberWorks, holding that a determination as to the enforceability of the contract as a whole must be made by the arbitrator; but the court denied the motion as to West because it was not in privity with plaintiff, and instead dismissed the class action complaint as to West because West had not mailed plaintiff any merchandise that she had not ordered and because the court refused to exercise supplemental jurisdiction over the state law class action claims – namely, conversion, unjust enrichment and fraud – against West. Id. The Ninth Circuit affirmed the dismissal of the class action complaint as against West, but reversed the district court order compelling arbitration and reinstated the class action allegations as against MemberWorks.

Plaintiff purchased by telephone Tae-Bo fitness tapes through West Telemarketing. Sanford, at 958. Sales agents were instructed to read purchasers a script at the conclusion of the transaction stating that, with the purchaser’s consent, they would be sent a “risk-free 30-day membership” in the Essentials program, and that the $72 annual fee would be billed to their credit card if membership was not canceled within 30 days. Id. Plaintiff denied hearing the script or agreeing to the trial membership; MemberWorks’ records showed that plaintiff enrolled in the program and received a membership kit that included a membership agreement containing an arbitration clause. Id., at 958-59. Plaintiff did not cancel the membership so a $72 fee was charged to her card, and the next year a renewal fee of $84 was billed to her card. Id., at 959. Plaintiff disputed the renewal fee and MemberWorks reversed the charge, id. Plaintiff then filed her putative class action against MemberWorks and West.

The district court granted MemberWorks motion to compel arbitration because plaintiff “challenges the validity of the whole contract and not specifically the arbitration agreement” so she presented “an issue for the arbitrator [to decide] and not the Court.” Sanford, at 959. The Ninth Circuit reversed. Because a party cannot be compelled to submit to arbitration, the district court must resolve challenges to the formation of the contract containing any arbitration clause before compelling arbitration thereunder. Id., at 962. The Ninth Circuit explained at page 962, “Issues regarding the validity or enforcement of a putative contract mandating arbitration should be referred to an arbitrator, but challenges to the existence of a contract as a whole must be determined by the court prior to ordering arbitration.” Plaintiff clearly challenged the validity of the membership agreement because the basis of her claim is that she never requested nor authorized the membership, and was not even aware of the Essentials program until she noticed the renewal charge and canceled her membership. Id. at 963.

Defense attorneys argued that the district court “implicitly” made such a finding because the order compelling arbitration was based on “the authorities upon which it relied to support its holding” and because the order reflected the court’s understanding that it had to determine “whether a valid agreement to arbitrate exists.” Sanford, at 963. The Circuit Court was not convinced. To the contrary, the Ninth Circuit concluded that “[t]he 2002 order could not have implicitly decided the question of contract formation” because “it explicitly refused to decide the question.” Id. Accordingly, the appellate court reversed the district court order compelling arbitration and remanded the matter for a determination on the issue of the existence of the contract. Id. In so doing, the Court reinstated the class action allegations and stated that on remand plaintiff “shall be permitted to seek relief on a class-wide basis.” Id.

With respect to the district court order dismissing the class action complaint as to West, however, the Ninth Circuit reached a different result. The Circuit Court agreed that the class action allegations centered on federal law that prohibits “the mailing of unordered merchandise” and agreed with the lower court that “West never actually mailed any merchandise to [plaintiff]”; in fact, plaintiff did not contend otherwise. Sanford, at 964. The Ninth Circuit rejected plaintiff’s invitation to construe the statute broadly enough to “include those who cause an item to be mailed,” id., at 964-65. Accordingly, the district court did not err in dismissing the complaint as to West. Id., at 965.

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