California Federal District Court Holds Arbitration Clause Requiring Arbitration at Customers’ Expense and Waiving Right to Class Action Device to be Unconscionable and Unenforceable
In November 2004, plaintiff signed a service agreement with AT&T Wireless, and received a booklet entitled “Important Information and Service Agreement” that contained in part an arbitration clause governed by the Federal Arbitration Act (FAA) and a class action waiver. Cingular Wireless thereafter acquired AT&T Wireless; its customers also signed service agreements that contained arbitration clauses, but Cingular’s agreement provided that the company would pay the cost of the arbitration unless the customer’s action is frivolous, and that the company would pay the customer’s attorney fees if the arbitrator awarded the amount the customer demanded or more. In December 2005, plaintiff filed a class action lawsuit in California federal court against AT&T and Cingular for violations of the Federal Communications Act, declaratory relief, breach of contract, violations of California’s unfair competition law (UCL), and violations of California’s Consumers Legal Remedies Act (CLRA), based on the allegation that defendants charged customers for services that the customers had not authorized, totaling approximately $9 per month. Stern v. Cingular Wireless Corp., 453 F.Supp.2d 1138, 1141-43 and 1149 (C.D. Cal. July 28, 2006). Defense attorneys moved to compel arbitration and stay the litigation; plaintiff’s lawyer argued that the arbitration clause was unconscionable and unenforceable. The district court denied the defense motion, concluding that the class action waiver was unconscionable.
Preliminarily, the federal court observed that “Under the FAA, the court, not the arbitrator, must decide whether a particular dispute is arbitrable.” Stern, at 1143 (citations omitted). The court also held that the question was whether arbitration must be compelled under the terms of AT&T’s arbitration clause, not the arbitration clause contained in Cingular’s service agreement. The court explained at page 1144:
Under California law, “[t]he critical juncture for determining whether a contract is unconscionable is the moment when it is entered into by both parties-not whether it is unconscionable in light of subsequent events.” [Citations.] Accordingly, for purposes of this motion, the Court concludes that the operable arbitration clause is not Cingular Wireless’, but rather that contained in the AT & T Wireless Booklet provided to plaintiff at the time she entered into the Service Agreement.
Turning to the question of unconscionability, the federal court turned to the test enunciated by the California Supreme Court in the seminal case of Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005). Id., at 1145 et seq. Defense attorneys argued that the clause was not procedurally unconscionable, in part because plaintiff could have chosen to sign up with a competitor that did not require a class action waiver, id., at 1146; the district court rejected the argument because “[plaintiff’s] first opportunity to avail herself of a wireless competitor’s services came after her purchase of the phone,” as did her first opportunity to “negotiate” the arbitration clause, id., at 1147. Moreover, the court believed the option of negotiating the contract to be illusory because “That negotiation could take but one form: cancel her service.” Id. With respect to substantive unconscionability, the district court was persuaded by the Ninth Circuit opinion in Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003), which rejected a claim that an arbitration clause was “bilateral” because “It is not only difficult to imagine AT&T bringing a class action against its own customers, but AT&T fails to allege that it has ever or would ever do so.” Id., at 1148-49. In light of this reality, the district court concluded that “the present class action waiver operates exclusively to defendants’ advantage.” Id., at 1149.
NOTE: The court readily disposed of a defense argument that the FAA preempts consideration of whether the arbitration clause is unconscionable under California law. Stern, at 1149-50. The court also stated, in dicta, that it believed the result would have been the same under Cingular’s agreement. The court explained in footnote 10, “Cingular Wireless’ commitment to pay the costs of arbitration and attorneys’ fees under certain circumstances does not obviate the disincentive to pursue a small individual claim. . . . While Cingular Wireless’ arbitration provision obliges it to pay attorney’s fees, that obligation is conditioned on the arbitrator awarding the amount of the customer’s demand or more. Thus, attorneys’ fees remain only potentially available.” Id., at 1149 n.10 (citation omitted).