Court Holds that Arbitration Clause in Effect at Time Class Action Plaintiff Terminated her Service Agreement Governed in Motion to Compel Arbitration, and Class Action Waiver in Wireless Service Provider’s Arbitration Clause Held Unenforceable by Illinois Supreme Court
Plaintiff filed a class action in Illinois state court against her cellular telephone service provider, Cingular Wireless, for alleged violations of the state’s Consumer Fraud and Deceptive Business Practice Act on the ground that the early termination fee is an unlawful penalty. Defense attorneys moved to compel arbitration pursuant to an arbitration clause that provided that “‘no arbitrator has the authority’ to resolve class claims.” Kinkel v. Cingular Wireless LLC, ___ N.E.2d ___, 2006 WL 2828664 (Ill. October 5, 2006) [Slip Opn., at 1]. The trial court refused to compel arbitration. The appellate court held that the arbitration clause was enforceable, but that the prohibition against class action arbitrations was not; accordingly, it reversed the trial court’s ruling. Id. The Illinois Supreme Court rejected defense arguments that the class action bar was enforceable and affirmed the decision of the appellate court.
Plaintiff signed a two-year service contract with Cingular in July 2001, but terminated her service in April 2002. Cingular charged her a $150 early-termination fee, in accordance with the terms of the service agreement plaintiff signed when she became a customer. Slip Opn., at 2. Plaintiff filed a class action against Cingular, arguing that the early-termination fee was an illegal penalty and that the class action waiver in the arbitration clause “prevents her and others from ‘effectively vindicating their statutory and common law causes of action and facilitates rather than remedies Cingular’s fraudulent and unlawful conduct.’” Id. The trial court denied a defense motion to compel arbitration; the appellate court found the class-action waiver provision to be unenforceable but severable from the balance of the arbitration clause, and so reversed. Id.
Preliminarily, the Illinois Supreme Court addressed the issue of which arbitration clause controlled – the one in effect when plaintiff terminated the service contract, or the one in effect when plaintiff filed her class action lawsuit. Cingular modified its arbitration clause in July 2003 to provide that it would pay “all AAA filing, administration and arbitrator fees” unless the lawsuit was frivolous. Slip Opn., at 4. Cingular’s prior arbitration clause was silent on the issue, id., at 2-3. Consistent with the conclusions of other courts that visited this issue, the Court held (1) that Cingular’s post-complaint offer to pay all arbitration costs and to reimburse plaintiff’s attorney fees if she wins the arbitration did not have any bearing on its analysis, and (2) that the arbitration clause in effect at the time plaintiff terminated her contract controlled. Id., at 4-6.
The Supreme Court recognized that class-action waivers are not per se unconscionable, Slip Opn., at 16-17, but on the facts of this case it concurred with the findings of both the trial court and appellate court that the arbitration clause was procedurally and substantively unconscionable, id., at 9-18. With respect to procedural unconscionability, at page 10 the Court summarized with approval the appellate court’s findings as follows:
First, the service agreement containing the class action waiver was “offered in a form contract on a take-it-or-leave it basis,” which the appellate court found was “an important factor to consider.” Second, the appellate court quoted Frank’s Maintenance for the proposition that “in order to be a part of the parties’ bargain, a contract provision must be ‘bargained for, brought to the [consumer’s] attention[,] or *** conspicuous.” [Citation.] Although the class action waiver term in the arbitration provision may have been brought to plaintiff’s attention by the capitalized portion of the introductory paragraph at the top of the terms-and-conditions page [citation], the appellate court concluded that the arbitration clause containing the waiver provision could not have been “less conspicuous” because it was “hidden in a maze of fine print where it was unlikely to be noticed, much less read.” [Citation.] This, the appellate court held, was “sufficient for a finding of procedural unconscionability.” [Citation.]
With respect to substantive unconscionability, at page 12 the Court summarized with approval the appellate court’s findings as follows:
The appellate court found the class action waiver in the Cingular service agreement to be substantively unconscionable for two reasons. First, because the cost of litigating or arbitrating a claim for $150 would have approached if not exceeded the potential recovery, “consumers in the plaintiff’s position are left without an effective remedy in the absence of a mechanism for class arbitration or litigation.” [Citation.] Second, the limitation is one-sided because commercial entities like Cingular do not have occasion to sue their customers as a class. That is, although both parties ostensibly waived the ability to pursue a class action, the limitation applies, in practice, only to prevent customers “‘from seeking redress for relatively small amounts of money.’” [Citation.]
Finally, the Illinois Supreme Court agreed with the appellate court that even though the class-action waiver was not enforceable, the arbitration clause otherwise should be given full force and effect because the class-action wavier was severable. Slip Opn., at 19-20.
NOTE: The Illinois Supreme Court also rejected defense claims that federal law preempted state court consideration of a class-action waiver in an arbitration clause governed by the Federal Arbitration Act. Slip Opn., at 6-8.