Class Actions: Ninth Circuit Sends Cingular Wireless to Court, Reversing an Order (Web)

In Shroyer v. New Cingular Wireless Services Inc., No. 06-55964 (9th Cir. Aug.17, 2007)(available at: http://blog.wired.com/27bstroke6/files/cingulardecision.pdf), the Ninth U.S. Circuit Court of Appeals reversed a district court order compelling arbitration, holding that a class arbitration waiver in the cellular provider’s standard phone services contract is unconscionable, and, thus, unenforceable. It also held that “the invalidation of the contract provision is not preempted by the Federal Arbitration Act.”

Plaintiff Shroyer filed a class action suit in California state court against Cingular and AT&T Corp. for injuries suffered as result of the 2004 merger between the companies.

Shroyer had subscribed to AT&T, but the service deteriorated post-merger. Cingular told him that it would be improved if he signed a new Cingular contract. Shroyer entered into new service agreements by, executing the contract electronically over the telephone. Shroyer answered “Yes” in response to the statement, “You agree to the terms as stated in the Wireless Service Agreement and terms of service.”

The form contract included a binding arbitration clause. It stated that “Cingular and you . . . agree to arbitrate all disputes and claims . . . arising out of or relating to this Agreement, or to any prior oral or written agreement, for Equipment or services between Cingular and you.”

Most significantly, the arbitration provision contained a class arbitration waiver that barred individuals from bringing representative claims:

You and Cingular agree that YOU AND CINGULAR MAY BRING CLAIMS AGAINST THE OTHER ONLY IN YOUR OR ITS INDIVIDUAL CAPACITY, and not as a plaintiff or class member in any purported class or representative proceeding. Further, you agree that the arbitrator may not consolidate proceedings of more than one person's claims, and may not otherwise preside over any form of representative or class proceeding, and that if this specific proviso is found to be unenforceable, then the entirety of this arbitration clause shall be null and void.

(Emphasis is in the opinion.)

Cingular responded to the complaint by removing the action to the U.S. District Court for California’s Central District, and moved to compel arbitration and stay litigation.

Cingular asserted that the arbitration clause was valid and enforceable under Federal Arbitration Act § 2, and the clause was neither procedurally nor substantively unconscionable. “Alternatively,” the opinion noted, “it asserted that a holding that the clause is unconscionable would be expressly and impliedly preempted by § 2 of the FAA.”

The federal court granted Cingular's motion to compel arbitration, and dismissed the action without prejudice. The plaintiff appealed to the Ninth Circuit.

The primary issues on appeal were 1) whether the class arbitration waiver is unconscionable procedurally and substantively under California law so that the clause is not enforceable under FAA § 2, and 2) whether a finding that the waiver is unconscionable would be expressly and impliedly preempted by the FAA.
FAA § 2 provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

Consistent with this law, “It is well-established that unconscionability is a generally applicable contract defense, which may render an arbitration provision unenforceable.” Nagrampa v. MailCoups Inc., 469 F.3d 1257, 1280 (9th Cir.2006), citing Doctor’s Assocs.Inc. v. Casarotto, 517 U.S. 681 (1996).

Under California law, notes the unanimous opinion written by Circuit Judge Stephen Reinhardt, a contract provision is unenforceable due to unconscionability only if it is both procedurally and substantively unconscionable.

The Ninth Circuit applied the test in Discover Bank v. Superior Court of Los Angeles, 36 Cal.4th 148 (Cal.2005), which, the opinion notes, requires the court to decide “(1) whether the agreement is ‘a consumer contract of adhesion’ drafted by a party that has superior bargaining power; (2) whether the agreement occurs ‘in a setting in which disputes between the contracting parties predictably involve small amounts of damages’; and (3) whether ‘it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.’”

Under this test, the court concluded that the Cingular class arbitration waiver satisfies all the circumstances, so it is both procedurally and substantively unconscionable.

First, Cingular's cell phone services agreements are “consumer” contracts and “contracts of adhesion.” Under California law, “a contract of adhesion is defined as ‘a standardized contract, imposed upon the subscribing party without an opportunity to negotiate the terms.’” (Citations omitted.)

Cingular didn’t offer any opportunity to negotiate the service agreements’ terms, or to sign agreements without class arbitration waiver. Instead, it merely presented the customers with take-it-or-leave-it standardized contract with its substantially greater bargaining power compared to individual class members.

Second, the Cingular agreements satisfied the second Discover Bank prong, occurring “in a setting in which disputes between the contracting parties predictably involve small amounts of damages.” Although Shroyer's complaint alleges that the class members are entitled to several types of damages, Cingular charged Shroyer $59.99 per month for his first account, and $9.99 per month for his second account.

Shroyer and similarly situated class members suffered individual damages in the hundreds of dollars--a smaller figure than the $1,000 amount that the Court of Appeal found satisfied the second element of the Discover Bank test. in Cohen v. DirecTV Inc., 142 Cal.App. 4th 1442 (2006).

Third, the court found that “the gravamen” of Shroyer's complaint was fraud by Cingular Shroyer's complaint alleged that “the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.” Discover Bank, 36 Cal.4th at 162.


Nevertheless, Cingular counterargued that the clause was neither procedurally nor substantively unconscionable. It asserted that Shroyer had “reasonably available sources of supply to obtain desired goods or services free of the terms claimed to be unconscionable,” Wayne v. Staples Inc., 135 Cal.App. 4th 466, 482 (2006). It claimed that Shroyer failed to demonstrate that he and the class members lacked “meaningful alternatives” to the arrangements offered by Cingular.

The court rejected Cingular’s arguments. It noted that “California has rejected the notion that the availability . . . of substitute . . . services alone can defeat a claim of procedural unconscionability.” Nagrampa, 469 F.3d at 1283 (emphasis is in the opinion).

Cingular also contended that the class arbitration waiver is not substantively unconscionable. It argued that it paid for the full arbitration costs. In addition, plaintiffs who received awards that are equal to or greater than their demands can receive attorneys fees under the arbitration agreement. Therefore, Cingular argued, the clause does not deter customers from arbitrating individual small-value claims, and doesn’t insulate Cingular from liability.

But the court, citing Discover Bank, rejected the rationale that “the potential availability of attorney fees to the prevailing party in arbitration ameliorates the problem posed by such class action waivers.” 36 Cal.4th at 162.
The court reasoned that “[t]here is no indication that, in the case of small individual recovery, attorney fees are an adequate substitute for the class action or arbitration mechanism.” Id.

As a result, the class arbitration waiver was both procedurally and substantively unconscionable, and held to be unenforceable.

Cingular contended that a finding that the class arbitration clause is unconscionable would be expressly preempted by the Federal Arbitration Act.

Cingular relied on Perry v. Thomas, 482 U.S. 483 (1987), where the court held that state law applies under FAA §2, and isn’t preempted “if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.” Id at 492. Perry also noted that “Courts may not . . . invalidate arbitration agreements under state laws applicable only to arbitration provisions.”

But in Discover Bank, the Ninth Circuit panel pointed out, the California Supreme Court rejected the same express preemption argument at 36 Cal.4th at 163-166, and applied the same generally applicable California unconscionability principles. Furthermore, the opinion confirms the holding that “California contract law may be applied to invalidate a class arbitration waiver” under FAA § 2, citing the key arbitration cases of Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1170 (9th Cir.2003), and Ting v. AT&T, 319 F.3d 1126 (9th Cir.2003).

For its final argument, Cingular contended that California's unconscionability view stands as an obstacle to the accomplishment and execution of the FAA’s full purpose and objective.

Cingular argued that applying Discover Bank to require companies to permit class arbitration will increase the cost and complexity of arbitration, thereby eliminating the benefits–that is, the efficient and expeditious resolution of claims.

The circuit court panel found no basis for or merit to these arguments. First, it notes that FAA §2 expressly permits the court to decline enforcement of an arbitration agreement under generally applicable contract defenses.

Second, the FAA’s purpose is still observed under the Discover Bank holding. In Discover Bank, the California Supreme Court placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the arbitration context. Discover Bank, 36 Cal.4th at 165-66.

Third, as long as California law requires Cingular to permit its consumers to bring class arbitration proceedings, it is actually “encouraging alternative dispute resolution outside the courtroom,” rather than reducing arbitration use.

Fourth, class proceedings do not reduce the efficiency and expeditiousness of arbitration in general because they enable greater numbers of individuals to take part in and benefit from arbitration.

Finally, although Cingular claims that the alleged inefficiencies and risks of class arbitration will drive most businesses in California to abandon arbitration altogether, it offers no empirical evidence to support this bold assertion.

The Ninth Circuit held that “applying California’s generally applicable contract law to refuse enforcement of the unconscionable class action waiver . . . does not stand as an obstacle to the [FAA’s] purposes or objectives, . . . and is, therefore, not impliedly preempted.”

Therefore, the panel reversed the district court's order compelling arbitration and remanded for the district court to consider Shroyer's class action lawsuit.

--Esther SeonMin Lee, CPR Intern