Chalk v. T-Mobile Usa, Inc.

Decision Date27 March 2009
Docket NumberNo. 06-35909.,06-35909.
Citation560 F.3d 1087
PartiesEllen CHALK; Paul Stewart, husband and wife, and all others similarly situated, Plaintiffs-Appellants, v. T-MOBILE USA, INC., a Delaware corporation; Sony Ericsson Mobile Communications USA, Inc., a Delaware corporation, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Karen E. Read, Lake Oswego, OR, for the plaintiffs-appellants.

Scott Ferrell, John O'Malley, and Ward Lott, Call, Jensen & Ferrell, Newport Beach, CA, Nancy Erfle, Christopher Dorr, and Michael T. Garone, Schwabe, Williamson, & Wyatt, Portland, OR, for the defendants-appellees.

Appeal from the United States District Court for the District of Oregon; Anna J. Brown, District Judge, Presiding. D.C. No. CV-06-00158-BR.

Before: ALFRED T. GOODWIN, HARRY PREGERSON, and STEPHEN REINHARDT, Circuit Judges.

REINHARDT, Circuit Judge:

In this case, we consider whether the district court properly dismissed a consumer class action pursuant to an arbitration agreement between T-Mobile and its customers. We hold that the agreement's class action waiver is substantively unconscionable and therefore unenforceable under Oregon law. We also note that under the agreement the waiver is not severable. We reverse the district court's order dismissing the case pending arbitration.

I. Procedural and Factual Background

Plaintiffs-Appellants Paul Stewart and Ellen Chalk bought a GC79 GPRS/Wireless LAN PC card ("card"), a device manufactured by Defendant-Appellee Sony Ericsson Mobile Communications (USA), Inc. ("Sony") that enables computers to connect wirelessly to the Internet, from Defendant-Appellee T-Mobile USA, Inc. ("T-Mobile"). Plaintiffs also signed a one-year service agreement with T-Mobile. The Service Agreement provided:

BY SIGNING THIS FORM OR ACTIVATING OR USING T-MOBILE SERVICE I ACKNOWLEDGE AND AGREE THAT:

THIS IS MY CONTRACT WITH T-MOBILE USA, INC. FOR WIRELESS SERVICES. MY CONTRACT IS CALLED A "SERVICE AGREEMENT" AND IT INCLUDES THIS DOCUMENT, THE SEPARATE T-MOBILE TERMS AND CONDITIONS, AND MY RATE PLAN INFORMATION. THE T-MOBILE TERMS AND CONDITIONS ARE IN MY WELCOME GUIDE OR WERE OTHERWISE PROVIDED TO ME AT THE TIME OF SALE.

... BY SIGNING, I ACKNOWLEDGE THAT I HAVE RECEIVED AND READ THIS DOCUMENT, THE T-MOBILE TERMS AND CONDITIONS, AND MY RATE PLAN INFORMATION....

• I UNDERSTAND THAT THE SERVICE AGREEMENT AFFECTS MY AND T-MOBILE'S LEGAL RIGHTS. AMONG OTHER THINGS, IT:

REQUIRES MANDATORY ARBITRATION OF DISPUTES;

REQUIRES MANDATORY WAIVER OF THE RIGHT TO JURY TRIAL AND WAIVER OF ANY ABILITY TO PARTICIPATE IN A CLASS ACTION;

The box containing the card and Welcome Guide was sealed with a label that stated:

IMPORTANT

Read the enclosed T-Mobile Terms & Conditions. By using T-Mobile service, you agree to be bound by the Terms & Conditions, including the mandatory arbitration and early termination fee provisions.

The first paragraph of the Terms and Conditions instructs purchasers to read the terms carefully and advises those who do not agree to refrain from using the service or the unit. Section Three of the Terms and Conditions contains a mandatory arbitration clause, which provides that the parties will arbitrate all claims, and, in doing so, will follow the American Arbitration Association's published wireless industry arbitration rules. The clause states that each party agrees to pay its "own other fees, costs and expenses including those for counsel, experts, and witnesses."

That section also contains a class action waiver and a severability clause:

Neither you nor we may be representative of other potential claimants or a class of potential claimants in any dispute ... YOU AND WE ACKNOWLEDGE AND AGREE THAT THIS SEC. 3 WAIVES ANY RIGHT TO A JURY TRIAL OR PARTICIPATION AS A PLAINTIFF IN A CLASS ACTION. IF A COURT OR ARBITRATOR DETERMINES THAT YOUR WAIVER OF YOUR ABILITY TO PURSUE CLASS OR REPRESENTATIVE CLAIMS IS UNENFORCEABLE, THE ARBITRATION AGREEMENT WILL NOT APPLY AND OUR DISPUTE WILL BE RESOLVED BY A COURT OF APPROPRIATE JURISDICTION. ... SHOULD ANY OTHER PROVISION OF THIS ARBITRATION AGREEMENT BE DEEMED UNENFORCEABLE, THAT PROVISION SHALL BE REMOVED, AND THE AGREEMENT SHALL OTHERWISE REMAIN BINDING.

For approximately three weeks after the purchase of the card, Plaintiffs were able to insert it into their IBM ThinkPad laptop computer ("ThinkPad") and connect to the internet without any difficulty. They then did not attempt to use the card again for a few months, at which time they were unable to insert the card into their ThinkPad. They contacted T-Mobile technical support several times and received refurbished cards on three separate occasions. They could not, however, insert any of the refurbished cards into the Think-Pad. After they were unable to insert the third card, staff from T-Mobile technical support informed Plaintiffs that they would have to pursue the issue at the T-Mobile store where they purchased the original card. At the store, a Sony representative attempted to insert the card and he failed to succeed in this task as well. He then promised to contact Plaintiffs about how to solve the problem. Plaintiffs never heard back from him, despite multiple email inquiries.

Ultimately, Plaintiffs filed a class action lawsuit in federal district court against T-Mobile and Sony. Plaintiffs alleged violations of various federal and state laws, including Oregon's Unlawful Trade Practices Act ("UTPA"), OR. REV. STAT. § 646.605, the federal Magnuson-Moss Warranty Act, 15 U.S.C. § 2301, and the federal Lanham Act, 15 U.S.C. § 1125(a). Plaintiffs also raised a number of common law theories of liability, including negligence, unjust enrichment, fraud by concealment, negligent misrepresentation, breach of implied warranties, breach of express warranty, breach of implied warranty of merchantability, and breach of implied warranty of fitness. The complaint alleged that defendants knew or should have known that the card "was not compatible and/or did not fit into the IBM ThinkPad laptop" computers, and that Defendants allowed customers to purchase cards and enter into long-term service contracts from which consumers would receive no benefit without a compatible card.

Three months after Plaintiffs filed their lawsuit, Defendants filed a motion to dismiss the case or stay proceedings and compel arbitration under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. ("FAA"). Plaintiffs opposed the motion, contending that the arbitration clause was unconscionable and therefore unenforceable. The district court granted Defendants' motion and dismissed the case. The court agreed with Plaintiffs that the provision requiring each party to bear its own attorney fees was unconscionable because Oregon's UTPA provides for prevailing party attorney fees, and severed that provision from the agreement.1 The court rejected Plaintiffs' remaining arguments, however, including the argument that the prohibition against class actions was unconscionable, and concluded that Plaintiffs were required to arbitrate their claims under the agreement.2 Plaintiffs filed a timely notice of appeal.3

II. Standard of Review and Applicable Law

We review the district court's ruling on the validity and scope of an arbitration clause de novo. Shroyer v. New Cingular Wireless Servs., Inc., 498 F.3d 976, 981 (9th Cir.2007).

The Federal Arbitration Act 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." 9 U.S.C. § 2. Plaintiffs allege that T-Mobile's arbitration agreement is unconscionable. As we have repeatedly recognized, unconscionability is a generally applicable contract defense that may render an agreement to arbitrate unenforceable. Shroyer, 498 F.3d at 981; see also Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1280 (9th Cir.2006) (en banc).

Both parties recognize that unconscionability is governed by state law—in this case, by Oregon law. We must "approximate state law as closely as possible" and are bound by the pronouncements of the state's highest court. Ticknor v. Choice Hotels Int'l, Inc., 265 F.3d 931, 939 (9th Cir.2001) (quoting Gee v. Tenneco, Inc., 615 F.2d 857, 861 (9th Cir.1980)). Where the state supreme court has not yet decided an issue but "there is relevant precedent from the state's intermediate appellate court, the federal court must follow the state intermediate appellate court decision unless the federal court finds convincing evidence that the state's supreme court likely would not follow it." Ryman v. Sears, Roebuck and Co., 505 F.3d 993, 994 (9th Cir.2007) (emphasis omitted).

III. Analysis
A. Burden of Production

We begin by addressing Defendants' assertion that Plaintiffs have not met their burden of producing evidence to support their claims of unconscionability. Defendants claim that "[g]overning law required [Plaintiffs] to prove both that jurisdiction existed and that the arbitration agreement was unconscionable—a burden Plaintiffs failed to meet by failing to submit any competent evidence regarding any of the facts and circumstances in existence at the time the binding arbitration agreement was made." Defendants-Appellees' Brief at 13.

Under the Oregon law of unconscionability, Defendants' argument is meritless. First, although "[t]he party asserting unconscionability bears the burden of demonstrating that the arbitration clause in question is, in fact, unconscionable," Motsinger v. Lithia Rose-FT, Inc., 211 Or.App. 610, 156 P.3d 156, 159-60 (2007) Oregon's courts consider the contract itself to be evidence of unconscionability where the terms of the contract are unconscionable on their face. In Motsinger, for example, the Oregon Court of Appeals considered whether a contract provision requiring the plaintiff to submit all potential claims to arbitration without similarly binding the plaintiff's employer...

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