SAN FRANCISCO – The arbitration clause included in a contract with a California biotechnology company was upheld by the appeals court.

The United States Court of Appeals for the 9th Circuit declared the arbitration provisions in the terms of service agreements sent out by 23andMe Inc. to its clients are valid. The court ruled that despite a clause stating that the losing party would shoulder the attorney fees and expenses incurred during the proceedings, the conditions remain binding under the California laws.

“We hold that none of the challenged portions of the arbitration provision, alone or in concert, render the arbitration provision unconscionable under current California law,” wrote Circuit Judge Sandra Segal Ikuta of the 9th Circuit. The panel that heard the case also included Circuit Judges Stephen S. Trott and Paul J. Watford.

The issue started in November 2013 when the Food and Drug Administration (FDA) ordered 23andMe to cease with the marketing of their health services until it got approval from the government. In compliance with this, the company discontinued with their health-related marketing.

Subsequently, several customers who bought DNA test kits from 23andMe filed a lawsuit against the company. The allegations included unfair business practices, breach of warranty and misrepresentations about the health benefits. In response, the company filed a motion to require the complainants to arbitrate their claims.

Prior to the court of appeals decision, U.S. District Judge Lucy Koh of the Northern District of California declared in 2014 that the fee shifting clause in the 23andMe agreements is "substantively unconscionable.” According to Koh, the company takes advantage of this kind of arrangement as it appears to force the consumers into assenting with the terms. The district judge further took cue from the previous rulings on the matter by appellate courts in which the fee shifting practice is struck down. Ikuta disagreed.

According to Ikuta, the arrangement from 23andMe differs from the ones other companies sought to be implemented. The courts were aggressive in shutting down agreements that required a unilateral fee shifting system; that is, only the petitioners would shoulder the expenses if they lost the case. The 9th Circuit panel noted that this is not the same as the situation with 23andMe.

"By contrast, the plaintiffs have not identified any case where a state appellate court held that a bilateral clause awarding attorney fees and costs to the prevailing party was unconscionable, whether in an arbitration or non-arbitration context," explained Ikuta in the ruling.

Meanwhile, Jeremy Robinson of Casey Gerry Schenk Francavilla Blatt & Penfield in San Diego shared his disappointment over the ruling of the appellate court. He stated via The Recorder that the opinion issued by Ikuta "runs against a lot of California decisions that have held just the opposite." He viewed the order as “a significant expansion of defendants' ability to force consumers to arbitrate claims where there are attorney fee-shifting clauses in them.”

Robinson is the lawyer who argued for the plaintiffs.

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9th Circuit Appellate Court, San Francisco
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