Class Action Challenging Advertisement of “Free” Phones may Proceed as Putative Class Action Despite Arbitration Clause Containing Class Action Waiver because under California Law Class Action Waiver Rendered Arbitration Clause Unconscionable Ninth Circuit Holds
Plaintiffs filed a putative class action against AT&T Mobility challenging its “offer of a ‘free’ phone to anyone who signs up for its service” because AT&T “charges the new subscriber sales tax on the retail value of each ‘free’ phone.” Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009) [Slip Opn., at 14387, 14390.] Defense attorneys moved to compel plaintiffs to arbitrate their claims individually, rather than as part of a class action, pursuant to an arbitration clause that requires arbitration of disputes and prohibits class actions. Id., at 14390. Plaintiffs argued that because federal jurisdiction was predicated on diversity, California law governed the district court’s interpretation of the arbitration clause and, under California law, “both the arbitration clause and the class action waiver [were] unconscionable, hence, unenforceable.” Id. The district court denied AT&T’s motion based on the Ninth Circuit opinion in Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007). Id., at 14390-91. On appeal, defense attorneys argued that the arbitration clause was distinguishable from the one at issue in Shroyer because “this arbitration clause provides for a ‘premium’ payment of $7,500…if the arbitrator awards the customer an amount greater than [AT&T’s] last written settlement offer,” id., at 14391. Defense attorneys also argued that “the Federal Arbitration Act (FAA) preempts California’s unconscionability law.” Id. The Ninth Circuit found the provision for a premium payment did not sufficiently distinguish the case from Shroyer and that the FAA does not preempt California law; accordingly, the Circuit Court affirmed the district court order.
Plaintiffs executed a Wireless Service Agreement with AT&T and received free cell phones by agreeing to a 2-year contract. Laster, at 14391. However, AT&T charged plaintiffs $30 in sales tax for the phones, calculated by using the full retail value of the phones. Id., at 14391-92. As noted above, the Agreement contained an arbitration clause that required arbitration of disputes and barred class actions. Id., at 14392. Plaintiffs filed suit in California federal court alleging that AT&T’s advertisement for a free phone was fraudulent; AT&T thereafter amended the Agreement to include the “premium payment clause” and, later still, moved to compel plaintiffs to arbitrate their claims on an individual basis, not as a class action, based on the revised arbitration clause. Id. The district court denied the motion, holding that the class action waiver in the arbitration clause rendered it unconscionable under California law and that the FAA did not preempt California law regarding unconscionability. Id.
The Ninth Circuit readily determined that, in the absence of the premium payment provision, AT&T’s class action waiver was unconscionable under California law. See Laster, at 14393-96. The question, then, was whether the premium payment clause saved the class action waiver. AT&T urged that by providing for a $7,500 award if the arbitrator determines the company’s pre-arbitrator selection settlement offer is less than the amount owed the consumer “punishes” the company for “low-ball offers in settlement” and “provide[s] individual customers [with] an adequate incentive to pursue individually small damage claims with higher potential,” id., at 14397. The Circuit Court disagreed, noting that AT&T would “simply pay the face value of the claim before the selection of an arbitrator to avoid potentially paying $7,500.” Id., at 14397-98. Thus, the actual damages suffered by any individual consumer ‘remain predictably small,” rendering the class action waiver unconscionable as an exculpatory clause. Id., at 14398-99. The Circuit Court also rejected AT&T’s argument that the FAA preempts California law based on its analysis of the identical arguments in Shroyer. See id., at 14399-14403. Accordingly, the Ninth Circuit affirmed the district court order denying AT&T’s motion to compel arbitration. Id., at 144043.