Mattingly v. Hughes Electronics Corp.

⁶²⁸ ADKINS, Judge. In an effort to initiate a class action lawsuit, John A. Mattingly, Sr., appellant, sued DIRECTV, Inc. and its parent company, Hughes Electronics Corporation (“Hughes”), appel-lees, for charging an illegal $2.81 late fee to his account for satellite television services. The Circuit Court for St. Mary’s County agreed with DIRECTV and Hughes that Mattingly is bound by an arbitration clause that DIRECTV inserted into its standard “Customer Agreement” approximately one month after Mattingly subscribed to its service, and dismissed the complaint without prejudice, to allow arbitration of the dispute. In this appeal, Mattingly challenges that dismissal.

He raisés numerous issues, which we condense and restate as follows: I. Did the circuit court err in holding that Mattingly agreed to the arbitration clause by failing to cancel his DIRECTV service?

II

Did the circuit court err in holding that Mattingly agreed to arbitrate his claims against Hughes, who was not a party to the agreement, but merely the corporate parent of DIRECTV?

III

Is the arbitration clause unconscionable?

IV

Did the circuit court err in rejecting Mattingly’s efforts to enforce an alleged “settlement agreement”? We shall hold that the circuit court erred in finding that Mattingly agreed to an amendment adding the arbitration clause because there is no evidence in this record to show that DIRECTV gave him “written notice describing the change,” as required under the terms of its customer agreement. For this reason, we will reverse the judgment in favor of DIRECTV. As to Hughes, however, we shall affirm the judgment, because Mattingly has not stated a claim upon which relief could be granted against Hughes.

Our decisions on the first two issues make it unnecessary to reach Mattingly’s alternative contention that the arbitration ⁶²⁹ clause is unconscionable. As to the so-called “settlement agreement,” we conclude that the court correctly denied relief. FACTS AND LEGAL PROCEEDINGS After purchasing satellite television equipment at Circuit City in Waldorf, Mattingly subscribed to DIRECTV’s satellite television service. In a February 20, 1997 telephone call, he agreed to accept DIRECTV service subject to the terms of a customer agreement that would later be mailed to him.

DIRECTV activated the satellite service while Mattingly was still on the telephone. The next day, DIRECTV sent Mattingly an invoice, along with a “Customer Agreement” effective “August 28, 1996, until replaced” (the “1996 Agreement”). This agreement stated that “Customer’s receipt of services constitutes Customer’s 'acceptance of and agreement to all terms and conditions of this Agreement.” One of those conditions was a “change of terms” clause, which provided: DIRECTV reserves the right to change these terms and conditions .... If any changes are made, [DIRECTV] will send you a written notice describing the change and its effective date.

If a change is not acceptable to you, you may cancel your service. If you do not cancel your service, your continued receipt of any service is considered to be your acceptance of that change. Another term of the 1996 Agreement was that Mattingly agreed that “if [his] payment is not received by DIRECTV before [his] next statement is issued, [he] may be charged an Administrative Late Fee” of up to $5.00. Less than a month after Mattingly’s subscription began, on March 18, 1997, DIRECTV mailed a new Customer Agreement to Mattingly (the “1997 Agreement”).

The 1997 Agreement differed from the 1996 Agreement in that it included an arbitration clause. That clause stated that any claim “arising out of, or relating to, this Agreement or any services provided by DIRECTV which cannot be settled by the parties shall be resolved according to binding arbitration[.]” It is undisputed ⁶³⁰ that Mattingly did not cancel his DIRECTV service, and indeed, that he has continued to be a DIRECTV customer. By invoice dated July 17,1999, DIRECTV charged Mattingly a “late fee” of $2.81 for a “past due amount” of $56.12. In the “Terms and Conditions,” “Administrative Late Fee,” and other clauses printed on the back of DIRECTV’s invoice, there is no mention of arbitration.

Mattingly paid the July 1999 late fee and his outstanding balance, then filed suit in an attempt to initiate a class action on behalf of other subscribers challenging the legality of the late fee. On August 6, 1999, he sued DIRECTV and Hughes claiming that (1) the DIRECTV invoices were mailed so late in the month that there was an unreasonably or unconscionably short period in which to make timely payment, resulting in frequent charges for an “administrative late fee,” and (2) there was no reasonable relationship between the late payment fee and the actual administrative expenses incurred in processing late payments. On September 7, 1999, Mattingly amended his complaint, seeking certification as a class action. He asserted four counts in his First Amended Class Action Complaint: (1) violations of the Maryland Consumer Protection Act, codified at Md.Code (1975, 2000 Repl.Vol, 2001 Cum.Supp.), § 13-101 et seq. of the Commercial Law Article (“CL”); (2) violations of Art. Ill, section 57 of the Maryland Constitution, which sets the legal rate of interest at six percent; 1 (3) violations of CL ⁶³¹ section 2-718, which prohibits penalties disguised as liquidated damages; and (4) breach of the implied covenant of good faith and fair dealing.

DIRECTV and Hughes removed the case to federal court, but that court dismissed it on the ground that the claim did not meet the $75,000 amount in controversy requirement for federal diversity jurisdiction. When the case returned to circuit court, DIRECTV and Hughes promptly moved to dismiss Mattingly’s claims on the ground that they are arbi-trable, or in the alternative, to stay the proceedings and compel arbitration. After a hearing on the motion, the court agreed that, under the terms of the 1997 Agreement and subsequent agreements, Mattingly was obligated to arbitrate his claims against both DIRECTV and Hughes. From a judgment dismissing his complaint without prejudice, Mattingly noted this timely appeal.

DISCUSSION I. The Circuit Court Erred In Finding That Mattingly Knowingly Agreed To Arbitrate His Claims Against DIRECTV Mattingly argues that the circuit court erred in concluding that he agreed to arbitrate his claims against DIRECTV. He concedes that, beginning with the 1997 Agreement that took effect less than one month after he subscribed to DIRECTV service, there was an arbitration clause in DIRECTV’s customer agreement. He claims, however, that he did not knowingly agree to DIRECTV’s addition of that clause. For this reason, he argues, his continued subscription to DIRECTV’s services did not constitute his consent to arbitration.

The Federal Arbitration Act (“FAA”), 9 U.S.C. § 2 , states that “an agreement in writing to submit to arbitration ⁶³² an existing controversy arising out of ... a contract [involving interstate commerce] ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The FAA is applicable to private contracts made and enforced in Maryland when, as in this case, the contract affects interstate commerce. See Long v. Silver, 248 F.3d 309, 315-16 (4th Cir.), cert. denied,-U.S. -, 122 S.Ct. 213 , 151 L.Ed.2d 151 (2001); Bischoff v. DirecTV, Inc., 180 F.Supp.2d 1097, 1102 (C.D.Cal.2002). Under the FAA, the question of whether the parties agreed to arbitrate the dispute in question is a matter of state law governing the formation of contracts. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943-44 , 115 S.Ct. 1920, 1924 , 131 L.Ed.2d 985 (1995).

Under both Maryland and federal law, arbitration is a purely consensual and contractual means of resolving disputes. See id., 514 U.S. at 947 , 115 S.Ct. at 1925 ; Curtis G. Testerman Co. v. Buck, 340 Md. 569, 579 , 667 A.2d 649 (1995); Md.Code (1974, 1998 Repl.Vol.), § 3-207 of the Courts & Judicial Proceedings Article (“CJ”). For this reason, courts cannot compel arbitration unless the parties have voluntarily agreed to arbitrate their disputes. It is axiomatic that an arbitration panel derives it authority to decide a given dispute from the disputing parties themselves.... “ ‘The question is one of intention, to be ascertained by the same tests that are applied to contracts generally....

No one is under a duty to resort to ... [arbitration] tribunals, however helpful their processes, except to the extent that he has signified his willingness.’ ” ... [A]bsent an arbitration agreement between the parties, an arbitration panel cannot validly assert jurisdiction to decide a dispute between them. Stephen L. Messersmith, Inc. v. Barclay Townhouse Assocs., 313 Md. 652, 658 , 547 A.2d 1048 (1988)(quoting Continental Milling & Feed Co. v. Doughnut Corp. of America, 186 Md. 669, 675 , 48 A.2d 447 (1946)). “Whether there is an agreement to arbitrate the parties’ dispute is a legal question of contract interpretation.” ⁶³³ NRT Mid-Atlantic, Inc. v. Innovative Props., Inc., 144 Md. App. 263, 279 , 797 A.2d 824 (2002). When the existence of an arbitration agreement is in dispute, that dispute must be resolved by a court. See, e.g., CJ § 3-207(b)(under Maryland Uniform Arbitration Act, “if the opposing party denies existence of an arbitration agreement, the court shall proceed expeditiously to determine if the agreement exists”); NRT Mid-Atlantic, 144 Md.App. at 278 , 797 A.2d 824 (petition asking court to compel arbitration, when filed in response to complaint filed in court, is subject to provisions of Maryland Uniform Arbitration Act).

When there is a dispute of fact material to determining whether there is an agreement to arbitrate, the court resolves that dispute before determining whether the agreement to arbitrate exists. See Stephen L. Messersmith, 313 Md. at 664 , 547 A.2d 1048 (“After receiving ... evidence, the court shall decide by a preponderance of the evidence whether an agreement to arbitrate exists”). Mattingly asks us to hold that the circuit court erred in finding that he agreed to arbitrate his claims against DIRECTV. He first argues that a consumer cannot, merely by virtue of a “change of terms” clause in a customer agreement, “constructively accept” an amendment adding an arbitration clause.

In his brief, Mattingly broadly suggests that as a matter of public policy, DIRECTV should not be permitted to amend its customer agreement by simply mailing a revised customer agreement that contains a new arbitration clause, in the same envelope along with its standard monthly billing invoice, with no other mention of arbitration. In effect, he advocates, courts should hold that, as a matter of law, and regardless of the contract terms they accepted when purchasing the product or service, consumers must be given a separate written notice conspicuously pointing out that the terms of the customer agreement have been changed to add an arbitration clause. DIRECTV interprets this argument as a broad attack on the entire concept of “constructive acceptance,” and warns that Mattingly’s argument “threaten[s][a] basic tool of modern commerce.” Citing the strong public policy favoring arbitra ⁶³⁴ tion, it seeks to preserve the “method of contract formation” by which “[t]he business provides the product or service and sends detailed contract terms for the customer’s review,” and then the customer decides whether to reject the contract terms by returning the product or cancelling the service. DIRECTV asserts that this is a time-honored, “simple,” “convenient,” and “common” method of consumer contracting that has been upheld in “courts across the country.” DIRECTV also posits that the logical corollary to forming an agreement through “constructive acceptance” is that amending such agreements also may be accomplished by the same “constructive acceptance” method.

According to DIRECTV, Mattingly accepted not only the original 1996 Agreement in this manner, but also all of its subsequent customer agreements, including the 1997 Agreement that added the arbitration clause. The fairness and wisdom of this “constructive acceptance” method for forming and amending consumer contracts has been the subject of scholarly, legislative, and judicial debate. 2 It certainly raises important and interesting questions. Despite the parties’ invitations to tackle some of them, however, ⁶³⁵ we will not do so. To resolve this appeal, we need not decide whether Mattingly’s global attack on this procedure for amending a consumer service agreement is legally or socially meritorious.

We need only to decide a simple but dispositive matter of contract law raised by Mattingly. Mattingly argues that, as a matter of fact, DIRECTV did not “send [him] a written notice describing the change and its effective date,” as the 1996 Agreement required “[i]f any changes [were] made” to it. (Emphasis added.) Absent such notice, Mattingly contends, he did not “constructively accept” the arbitration clause. We agree.

For the reasons detailed below, we conclude that, even assuming that the “change of terms” clause in DIRECTV’s customer agreements permitted DIRECTV to obtain Mattingly’s “constructive acceptance” of the newly added arbitration clause, DIRECTV failed to avail itself of the method that it established for doing so. According to an affidavit submitted by DIRECTV in support of its motion to dismiss, DIRECTV notified Mattingly of the new arbitration clause by sending him a copy of the 1997 Agreement in its March 1997 mailing. That mailing included its standard monthly billing invoice, which did not mention arbitration or otherwise alert Mattingly that changes had been made to the customer agreement. In fact, the only place where arbitration was mentioned was in the newly added arbitration clause itself.

The clause was printed in regular type at paragraph 23, as a new last paragraph in the agreement. The new arbitration clause appears to be the only significant difference between the 1996 and 1997 Agreements. DIRECTV argues that the circuit court correctly concluded that by sending Mattingly the 1997 Agreement containing the arbitration clause, it gave Mattingly notice of the newly added arbitration clause. Thus, we must decide whether the 1997 Agreement that DIRECTV mailed to Mattingly along with its regular March 1997 monthly billing invoice gave Mattingly “written notice describing the change.” We conclude that it did not. ⁶³⁶ We read the terms of the 1996 Agreement objectively, through the eyes of a “reasonable person.” See, e.g., G.M.A.C. v. Daniels, 303 Md. 254, 261 , 492 A.2d 1306 (1985)(“the true test of what is meant is ... what a reasonable person in the position of the parties would have thought” the contract meant).

In doing so, we look to the ordinary meaning of the terms used in the agreement. See Curtis G. Testerman, 340 Md. at 580 , 667 A.2d 649 ; The Redemptorists v. Coulthard Svcs., Inc., 145 Md.App. 116, 144-45 , 801 A.2d 1104 (2002). In this case, our focus is on the “notice describing the change” language in the change of terms clause. ' A “notice” is commonly understood to be “a note, placard, or the like conveying information or a warning.” The Random House Dictionary of the English Language 986 (unabr.1973). “Describing” something is “to tell or depict in written or spoken words” or to “give an account of.” Id. at 390. A “change” occurs when “the content ... of (something)” is made “different from what it is[.]” Id. at 246.

Applying the ordinary and common meaning of these words, we conclude that DIRECTV agreed that Mattingly would be bound by any changes that it made to the 1996 Agreement only if DIRECTV gave him some sort of written notice advising him about a particular change, and identifying that change clearly enough that he could find and review it in the revised agreement. Thus, DIRECTV obligated itself to send Mattingly enough information that he could exercise an informed decision as to whether he wished to continue DIRECTV service, with the understanding that he would be required to arbitrate any claims he might have against DIRECTV. Whether it did so by a separate mailing, or by a separate document sent along with the new agreement and the billing invoice, or otherwise by a separate provision in that invoice or another document, DIRECTV had a contractual duty to give Mattingly some written warning, (i.e., “notice”) that the new 1997 Agreement included a new arbitration clause significantly limiting his right to litigate in court (i.e., “describing the change”). ⁶³⁷ We reject DIRECTV’s contention that the 1997 Agreement itself constituted adequate notice of this amendment. Merely sending Mattingly a new customer agreement, without identifying in any manner the subject matter, substance, or location of that change, cannot reasonably be characterized as “sending a written notice describing the change.” Indeed, that construction would effectively negate that entire notice provision, by allowing DIRECTV to change the terms of its customer agreement without making any effort whatsoever to “des-crib[e] the change.” At oral argument, DIRECTV conceded that there is nothing else in this record to establish that it sent Mattingly any other document that could be construed as “a notice describing the change.” In the absence of any evidence that DIRECTV gave Mattingly such notice, we hold that the circuit court erred in concluding that Mattingly “constructively agreed” to arbitrate his claims against DIRECTV. 3 Our holding is consistent with established principles of contract law.

To be sure, under Maryland law, parties may change the terms of their contract by remaining silent if, in light of a previous course of dealing, the offeree was obligated to notify the offeror that he is not willing to accept the revised terms. See Int’l Bhd. of Teamsters v. Willis Corroon Corp., 369 Md. 724 , 738 n. 3, 802 A.2d 1050 (2002)(citing Restatement (Second) of Contracts § 69 (1981)); Porter v. Gen. Boiler Casing Co., 284 Md. 402, 411-12 , 396 A.2d 1090 (1979). When that course of dealing includes an explicit agreement that the offeree’s continuation of a contractual relationship after receiving notice of the proposed change constitutes acceptance of the change, courts may enforce that agreement by finding that the offeree’s silence constituted either actual or constructive acceptance of the contract change.

See Willis Corroon, 369 Md. at 738 n. 3, 802 A.2d 1050 . ⁶³⁸ In order for the offeree’s silence to be an assent to the revised terms of the contract, however, the offeree must have had actual or constructive knowledge that there was a proposal to change the contract terms. Even without a specific provision governing the nature of the notice to be given, we have required that notice of the change in contract terms must at least make the offeree aware that there is a change. 4 See, e.g., Dominion Natl Bank v. Sundowner Joint Venture, 50 Md.App. 145, 167 , 436 A.2d 501 (1981)(refusing to “stretch[ ] fiction” of constructive notice when there is no notice of “a most disadvantageous change in the contract that is in no way reflected or even hinted at in the new agreement”). In this case, we need not decide whether the mere mailing of a new' customer agreement, with no accompanying notice that it changed the terms of a prior agreement, met the minimum threshold for notice, because here, the existing agreement between DIRECTV and Mattingly had a higher notice threshold. That agreement specifically assured Mat-tingly that, “[i]f any changes are made,” DIRECTV would “send [him] a notice describing the change and the effective date.” We may not simply ignore that language. ⁶³⁹ We are not persuaded otherwise by the cases that DIRECTV cites in support of the proposition that Mattingly accepted the terms of the 1997 Agreement by continuing to receive DIRECTV service.

A number of these cases turned on whether the consumer