Enforceability of Class Action Arbitration Waiver Clause is Governed by State Law and District Court Erred in Granting Defense Motion to Compel Arbitration and Dismiss Class Action Complaint because Class Action Arbitration Waiver in Consumer Contract was Unconscionable under California Law Ninth Circuit Holds
Last Friday, the Ninth Circuit held that a class action arbitration waiver in a cellular telephone service contract is unconscionable under California law, and that the Federal Arbitration Act (FAA) did not protect the class action waiver. Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976, Slip Opn., at 9993 et seq. (9th Cir. 2007). Plaintiff filed a class action in California state court against New Cingular Wireless and AT&T alleging that cellular phone service “deteriorated significantly” following the merger of the two companies, id., at 9997-98. The class action complaint alleged in part various violations of California’s unfair competition law, id., at 9998, and defense attorneys removed the class action to federal court, id., at 10000. Defense attorneys then moved the district court to compel arbitration and dismiss the class action; arguing that the arbitration clause is enforceable under the FAA; the district court agreed and plaintiff appealed. Id., at 10000-01. The Ninth Circuit reversed.
The Ninth Circuit summarized the case as requiring it to consider “whether a class arbitration waiver in New Cingular Wireless Service Inc.’s standard contract for cellular phone services is unconscionable under California law, and whether the [FAA] preempts a holding that the waiver is unenforceable.” Shroyer, at 9997. The cellular service contract plaintiff signed with AT&T in 2000 and 2003 apparently did not contain class action waiver; but when he switched his account to Cingular in January 2005 – which he did via telephone – the contract he agreed to included a binding arbitration clause that included a class action waiver. Id., at 9998-10000. The Ninth Circuit held that, under the FAA, whether the class action arbitration clause was enforceable turned on state law, and that under Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005), the class action arbitration provision in plaintiff’s service contract was “both procedurally and substantively unconscionable and, therefore, unenforceable.” Id., at 10002.
The Circuit Court summarized California and Ninth Circuit case law regarding unconscionability of class action arbitration waivers, culminating in the three-part test set forth in Discover Bank. Shroyer, at 10002-05. That test requires court determine (1) whether the consumer contract is one of adhesion, (2) whether the contract involves disputes of “predictably…small amounts of damages,” and (3) whether the alleged intent of the contract is to permit the company to “carr[y] out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.” Id., at 10005 (quoting Discover Bank, at 162-63). The Ninth Circuit found each of these tests satisfied in this case, id. at 10006-08.
Defense attorneys argued that plaintiff and other members of the putative class action had “meaningful alternatives” to the services and contract offered by Cingular, Shroyer, at 10008; the Ninth Circuit reaffirmed prior state and circuit court authority holding that “market alternatives” did not eliminate procedural unconscionability, id., at 10008-09 – the question is whether the party with superior bargaining power presents the consumer with a contract on a “take-it-or-leave-it” basis, id., at 10009. The Ninth Circuit also rejected defense arguments that the class action arbitration waiver was not substantively unconscionable because Cingular “pays for the full cost of arbitration” absent bad faith by the consumer, id., at 10010 – the small amounts involved would still deter consumers from pursuing individual claims because of the small amount of damages involved, id., at 10010-11.
Finally, the Circuit Court dispensed with the defense argument that the FAA preempted state law as to whether the class action waiver is unconscionable. Shroyer, at 10011-22. The analysis generally follows well-settled law, and concludes that “applying California’s generally applicable contract law to refuse enforcement of the unconscionable class action waiver in this case does not stand as an obstacle to the purposes or objectives of the Federal Arbitration Act,” id., at 10022. Accordingly, the Ninth Circuit reversed the district court order compelling arbitration and dismissing the class action complaint, id.