Kensu v. Jpay, Inc.

Temujin Kensu, Plaintiff, v. JPay, Inc., Defendant.

Case No. 18-11086

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

March 11, 2019

Sean F. Cox United States District Court Judge

ORDER ADOPTING JUDGE MORRIS'S OCTOBER 22, 2018 REPORT AND RECOMMENDATION (ECF No. 23) AND STAYING THIS CASE PENDING ARBITRATION

On June 26, 2018, Plaintiff Temujin Kensu filed his amended complaint in this putative class action against JPay, Inc., the exclusive provider of e-communications and e-entertainment for the Michigan Department of Corrections ("MDOC"). Kensu, a prisoner, seeks to represent all similarly situated prisoners who have "purchased products, contents, and services from [JPay], represented by [JPay] to be of a different kind, quality, and fundamental model than the product content or service actually was." (ECF No. 18, PageID 697).

Kensu's amended complaint includes ten counts: (1) declaratory relief under 28 U.S.C. § 2201; (2) breach of contract; (3) violation of the Michigan Consumer Protection Act, MCL § 445.901 et seq.; (4) violation of the Fourth and Fourteenth Amendment right to be free from unreasonable seizure under 42 U.S.C. § 1983; (5) breach of the duty of good faith and fair dealing; (6) negligent misrepresentation; (7) unjust enrichment; (8) fraud/intentional misrepresentation; (9) breach of express warranty; (10) breach of implied warranty. Kensu seeks restitution, injunctive relief, costs and attorney fees, and any other relief the court deems appropriate.

The Court referred all pre-trial matters to Magistrate Judge Patricia T. Morris. (ECF No. 7). On July 10, 2018, JPay filed a motion to compel arbitration. (ECF No. 19). On October 22, 2018, Judge Morris issued a Report and Recommendation ("R&R"), wherein she recommended that the Court grant JPay's motion to compel arbitration. (ECF No. 23).

Kensu filed timely objections to Judge Morris's R&R. (ECF No. 24). JPay responded. (ECF No. 25). The Court will review Kensu's objections de novo. Fed. R. Civ. P. 72(b)(3).

First, Kensu objects to Judge Morris's R&R because she failed to consider that this case cannot be arbitrated by JAMS, the arbitrator specified in the agreement. Kensu argues that, because "JAMS...will find that the [agreement's] terms fail to meet [its] minimum consumer standards," JAMS will refuse to arbitrate this case. Kensu further contends that, because JAMS's participation is "an integral part" of the agreement, its absence precludes enforcement. (ECF No. 24, PageID 1124-1128).

Kensu is correct that Judge Morris did not address this argument. But this omission was likely for good reason: the Court should not—and will not—speculate on how a private entity might interpret and apply its own internal standards. Further, if JAMS does decline to arbitrate this case, the Federal Arbitration Act already provides for the appropriate path forward. See 9 U.S.C. § 5.¹ At that time, Kensu's argument that JAMS's participation is necessary might be appropriate. Until then, it is not. The Court overrules this objection.

In Kensu's second objection, he argues that Judge Morris incorrectly concluded that (1) his claims attacked the validity of JPay's Terms of Use ("TOU") as a whole rather than only the arbitration agreement, and (2) he was required to plead fraud in the inducement.

"[I]n deciding whether a valid agreement to arbitrate exists, district courts may consider only claims concerning the validity of the arbitration clause itself, as opposed to challenges to the validity of the contract as a whole," Great Earth Companies, Inc. v. Simons, 288 F.3d 878, 889 (6th Cir. 2002) ("Great Earth"), because "attacks on an entire contract's validity, as distinct from attacks on the arbitration clause alone, are within the arbitrator's ken." Preston v. Ferrer, 552 U.S. 346, 353 (2008). Arbitration agreements need not be enforced when "grounds ... exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Thus, "agreements to arbitrate [may] be invalidated by 'generally applicable contract defenses, such as ... unconscionability.' " AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (quoting Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996))

Here, Kensu argues that "[t]he JPay Contract is the definition of an oppressive adhesion contract" because it is procedurally and substantively unconscionable. Judge Morris concluded that Kensu's "unconscionability argument based on the take it or go without e-communication in prison aspect of the TOUs 'unquestionably go[es] to the validity of the [] agreement as a whole, rather than the arbitration provisions specifically.'" (ECF No. 23, PageID 1107) (citing McGrew v. VCG Holding Corp., et. al., 244 F.Supp.3d 580, 592 (W.D. Ky. 2017)).

Although Kensu attempts to limit his unconscionability argument to the arbitration agreement, the Court agrees with Judge Morris that this argument goes to the validity of the contract as a whole. If Kensu's acceptance of the arbitration agreement is unconscionable, then so is hisacceptance of the TOUs, and vice versa. Kensu's unconscionability argument should be considered by the arbitrator, not the Court.

Further, Kensu mischaracterizes the R&R by arguing that Judge Morris concluded that the Sixth Circuit's decision in Great Earth required him to plead fraud in the inducement. Although Judge Morris cited language in Great Earth that references fraud in the inducement, and noted that Kensu "does not contend that there was any fraud in the inducement to enter into the TOU," she then addressed his unconscionability argument.² (ECF No. 23, PageID 1106-1107). This suggests that Judge Morris did not conclude that Kensu must plead fraud in the inducement. Rather, by addressing Kensu's argument, Judge Morris apparently concluded that—under the right circumstances—unconscionability could invalidate an arbitration agreement. The Court agrees. See Casarotto, 517 U.S. at 687. For these reasons, the Court overrules Kensu's second objection.

In his third objection, Kensu attempts to sidestep the arbitration agreement by arguing that his suit can proceed because he is a third-party beneficiary of the contract between the MDOC and JPay, which does not have an arbitration agreement. Kensu argues that "there are two parrallel contracts governing Defendant's relationship with the MDOC. One contract between the MDOC and Defendant to provide services to the prison population, and contract(s) Plaintiff(s) entered into with Defendant in order to access said services." (ECF No. 24, PageID 1138).

This argument misstates the relationships between Kensu, JPay, and the MDOC. The contracts are not parallel; one is parasitic of the other. The first creates a relationship between JPay and MDOC, and the second creates a relationship between JPAY and the prisoners who use itsservices.³ The second cannot exist without the first and Kensu's access to either flows through the TOUs. Further, all of Kensu's claims arise out of or relate to his use of JPay and, therefore, fall within the TOUs's arbitration agreements. The Court overrules this objection.

In this fourth objection, Kensu argues that, under 9 U.S.C. § 4, he is entitled to a jury trial on the issue of whether he entered into a valid arbitration agreement. "[I]n order to show that the validity of the agreement is 'in issue' [under 9 U.S.C. § 4], the party opposing arbitration must show a genuine issue of material fact as to the validity of the agreement." Mazera v. Varsity Ford Mgmt. Servs., LLC, 565 F.3d 997, 1001 (6th Cir. 2009).

JPay provided an affidavit from its paralegal, Atinuke Sode, who reviewed Kensu's records.⁴ Sode swears that Kensu made purchases through JPay after the implementation of each new TOU, and that he was required to accept the TOUs before making such purchases. Kensu does not deny that he accepted the TOUs or provide any competent evidence in response to...