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Asch Webhosting, Inc. v. Adelphia Business Solutions Investment, LLC

2010 WL 258784 (U.S. Ct. App. 3rd Cir. 2010) (Unpublished)

CONTRACTS; EXCULPATION — Exculpatory clauses in private contracts are generally sustained so long as they do not adversely affect the public interest, if the exculpated party is not otherwise under a legal duty to perform, and the contract does not grow out of unequal bargaining power or be otherwise unconscionable.

An internet supplier (ISP) agreed to provide services. The written agreement to provide those services included an exculpatory clause stating that the ISP would not be liable for any incidental or consequential damages, including damages for loss of revenues or business suffered by the customer in connection with its use or inability to use the internet services. The ISP sent a notice to a customer indicating its intent to terminate internet service after it received complaints about emails sent by the customer using an internet protocol (IP) address associated with the ISP. It then gave the customer an opportunity to find another internet provider. The ISP terminated service a short while later after the customer could not reach an agreement with another internet provider. The customer ceased operations and sued the ISP, seeking the fair market value of its business as consequential damages.

The District Court dismissed the claim against the ISP, holding that the agreed-upon exculpatory clause was enforceable. It noted that, under New Jersey law, such clauses in private contracts were “generally sustained so long as they do not adversely affect the public interest.” It also stated that exculpatory clauses will be enforced if the exculpated party is not under a legal duty to perform, and the contract does not grow out of unequal bargaining power or is otherwise unconscionable. In addition, it believed there was no evidence that the ISP was acting in bad faith when it considered the complaints made by others against the company. The Court further ruled that none of the exceptions barring enforcement of the exculpatory clause applied here. The customer appealed.

The United States Court of Appeals affirmed for essentially the same reasons set forth by the United States District Court. First, it found that the exculpatory language barred the customer from recovering damages. Second, it determined that the clause was enforceable under New Jersey law because the clause was neither adverse to the public interest nor unconscionable. It declared that the ISP’s actions were not “predatory” since the ISP had received numerous complaints about activity related to the company’s IP address and decided, in good faith, to terminate service on that basis. It also found that the customer presented no evidence that the ISP had other reasons for terminating its services to a paying client. Moreover, even if the customer could prove that the ISP breached its contract, the Court ruled that enforcing an exculpatory clause after a willful contract breach did not necessarily violate public policy. As to the issue of whether a contract is unconscionable, the Court noted that courts focus on the parties’ relative bargaining power, the conspicuousness of the putative unfair term, and the term’s oppressiveness and unreasonableness. Here, it agreed with the lower court’s findings that: (a) there was no evidence of unequal bargaining power; (b) the contract’s provision was prominently presented in the parties’ agreement; and (c) the contract was not unreasonable or oppressive. It also thought the ISP acted reasonably when it gave its customer notice of termination and an opportunity to find another provider.

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