Gatton v. T-Mobile Usa, Inc.
| Citation | 152 Cal.App.4th 571,61 Cal.Rptr.3d 344 |
| Decision Date | 22 June 2007 |
| Docket Number | No. A112084.,No. A112082.,A112082.,A112084. |
| Court | California Court of Appeals |
| Parties | Bruce GATTON et al., Plaintiffs and Respondents, v. T-MOBILE USA, INC., Defendant and Appellant. Christina Nguyen et al., Plaintiffs and Respondents, v. T-Mobile USA, Inc., Defendant and Appellant. |
Franklin & Franklin and J. David Franklin, San Diego; Lerach Coughlin Stoia Geller Rudman & Robbins and Jacqueline E. Mottek, San Francisco; Bramson, Plutzki, Mahler & Birkheuser, Alan R. Plutzik, Walnut Creek, and Lawrence Timothy Fisher for Plaintiffs and Respondents.
Bingham McCutchen, Christopher B. Hockett, Thomas S. Hixson and Tanya King Dumas, San Francisco, for Defendant and Appellant.
In this consolidated appeal, T-Mobile USA, Inc. appeals from an order denying its motion to compel arbitration of actions challenging the early termination fee charged to cellular telephone service subscribers and challenging the practice of selling locked handsets that a subscriber cannot use when switching carriers. Mobile contends the court erred in concluding that the arbitration clause in its service agreement is unconscionable.
In the published portion of this opinion, we hold that the adhesive nature of the service agreement established a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives and that the high degree of substantive unconscionability arising from the class action waiver rendered the arbitration provision unenforceable.
In the unpublished portion of this opinion, we reject T-Mobile's contention that the Federal Arbitration Act preempts any rule that class action waivers are unconscionable under California law.
We affirm the trial court order.
T-Mobile USA, Inc. (T-Mobile) is a cellular telephone provider in California. Plaintiffs are or were subscribers to Mobile.1
All plaintiffs executed service agreements drafted by T-Mobile. Each agreement incorporated terms and conditions drafted by T-Mobile.2 Directly above the signature line in the service agreement executed by plaintiffs is a short paragraph stating,
The introductory paragraph to the terms and conditions incorporated into the agreement states: Similarly, the handset shipping box was sealed across the closing seam with a sticker that stated: The terms and conditions were also included in a "Welcome Guide" enclosed in the boxes containing the handsets.
Section 3 of the terms and conditions incorporated into the agreement is entitled "Mandatory Arbitration; Dispute Resolution." It includes language waiving any right to seek classwide relief.3 The terms and conditions incorporated into each of the plaintiffs agreements included a mandatory arbitration clause including a class action waiver.
Early Termination Fees Case (A112082)
The action of plaintiffs Gatton, Hull, Nguyen, and Vaughan, brought on behalf of themselves individually and on behalf of all similarly situated California residents, challenges the fee imposed by T-Mobile for termination of the service agreement before its expiration date.
The complaint includes the following allegations. The service agreement between T-Mobile and its subscribers is typically one or two years in duration. Under the terms of the agreement, subscribers who terminate the service before the expiration of the agreement are subject to an early termination penalty of approximately $200 per telephone. The early termination penalties are also imposed if T-Mobile terminates the agreement for, among other reasons, nonpayment by the subscriber. The amount of the fee does not vary according to how long the contract has been in effect at the time of termination; it is the same whether the contract has been in effect for several weeks or several months. The flat-fee early termination penalty constitutes an unlawful penalty under Civil Code section 1671, subdivision (d),4 is unlawful under the unfair competition law (Bus. & Prof.Code, § 17200 et seq.), and is unconscionable under the Consumers Legal Remedies Act (CLRA) (Civ.Code, § 1750 et seq.).
Plaintiffs seek a permanent injunction prohibiting T-Mobile from collecting or enforcing the early termination penalty; a constructive trust on all monies collected as early termination penalties; and all other relief to which they are statutorily entitled, including restitution.
Handset Locking Case (A112084)
The action of plaintiffs Nguyen and Grant, brought on behalf of themselves individually and on behalf of all similarly situated California residents, challenges the practice of installing a locking device in T-Mobile handsets that prevents its subscribers from switching cell phone providers without purchasing a new handset.
The complaint includes the following allegations. The handsets T-Mobile sells its subscribers are manufactured by equipment vendors such as Nokia, Motorola, or Samsung. Each handset has a receptacle into which a machine readable SIM (subscriber information module) card can be inserted. The card is approximately the size of a postage stamp and contains the subscriber and the provider identifying information. The SIM card can be inserted and removed by hand; no special tools or equipment are required. T-Mobile employs a SIM lock to prevent its handsets from operating with a SIM card programmed for any other network. The SIM lock can be unlocked by entering an eight digit code number; once unlocked, the handset will operate with any compatible SIM card for any network. T-Mobile requires equipment vendors to alter the handsets they sell to T-Mobile by locking them with SIM locks and setting the SIM unlock code based on a secret algorithm provided by T-Mobile. The agreement between T-Mobile and its subscribers falsely states that T-Mobile handsets are not compatible with and will not work with other wireless networks. That misrepresentation constitutes unfair competition and violates the CLRA. The secret locking makes it impossible or impracticable for subscribers to switch cell phone service providers without purchasing a new handset.
Plaintiffs seek an order directing T-Mobile to disclose the existence and effect of the handset locks and to offer to unlock the handsets free of charge; an injunction prohibiting T-Mobile from secretly programming and selling handsets with SIM locks and from representing that the handsets are not compatible with services provided by other wireless carriers; and for restitution and/or disgorgement of all amounts wrongfully charged to plaintiffs and members of the class.
T-Mobile moved to compel arbitration of the two actions in accord with the service agreement. Plaintiffs opposed the motion on the grounds that (1) their claims for injunctive relief under the Unfair Competition Law and the CLRA were not arbitrable, and (2) their remaining claims were not arbitrable because the arbitration clause was unconscionable.
The trial court denied the motion to compel. It concluded that the claims for injunctive relief were primarily for the benefit of the public and, consequently, were not subject to arbitration. As to the other claims, it concluded that the arbitration provision was unconscionable and therefore unenforceable. The trial court held that although the indications of procedural unconscionability were "not particularly strong," under Discover Bank v. Superior Court (2005) 36 Cal.4th 148, 30 Cal. Rptr.3d 76, 113 P.3d 1100 (Discover Bank), the arbitration clause was substantively unconscionable because its prohibition on class arbitrations or participation in a class action was against public policy.
Appellant T-Mobile contends the trial court erred in denying its motion to compel because the class action waiver did not render the arbitration provision unconscionable and because principles of federal preemption require enforcement of the provision.
An agreement to arbitrate is valid except when grounds exist for revocation of a contract. (Code Civ. Proc., §§ 1281, 1281.2, subd. (b).) Unconscionability is one ground on which a court may refuse to enforce a contract. (Civ.Code, § 1670.5.) The petitioner, T-Mobile here, bears the burden of proving the existence of a valid arbitration agreement and the opposing party, plaintiffs here, bears the burden of proving any fact necessary to its defense. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972, 64 Cal. Rptr.2d 843, 938 P.2d 903.)
Whether a provision is unconscionable is a question of law. (Civ.Code, § 1670.5, subd. (a); Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal. App.4th 846, 851, 113 Cal.Rptr.2d 376 (Flores).) On appeal, when the extrinsic evidence is undisputed, as it is here, we review the contract de novo to determine unconscionability. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1527, 60 Cal.Rptr.2d 138 (Stirlen); Flores, at p. 851, 113 Cal.Rptr.2d 376.)
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