Laster v. At & T Mobility LLC, 08-56394.

• Decision Date: 27 October 2009
• Docket Number: No. 08-56394.,08-56394.
• Citation: 584 F.3d 849
• Parties: Jennifer L. LASTER; Andrew Thompson; Elizabeth Voorhies, on behalf of themselves and all others similarly situated and on behalf of the general public, Plaintiffs, and Vincent Concepcion; Liza Concepcion, Plaintiffs-Appellees, v. AT & T MOBILITY LLC, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

584 F.3d 849

Jennifer L. LASTER; Andrew Thompson; Elizabeth Voorhies, on behalf of themselves and all others similarly situated and on behalf of the general public, Plaintiffs, and Vincent Concepcion; Liza Concepcion, Plaintiffs-Appellees, v. AT & T MOBILITY LLC, Defendant-Appellant.

No. 08-56394.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted September 17, 2009.

Filed October 27, 2009.

Donald M. Falk, Mayer Brown LLP, Palo Alto, CA, for the defendant-appellant.

Kirk B. Hulett, Dennis Stewart, and Sarah Pickeral Weber, Hullet Harper Stewart, LLP, San Diego, CA; Craig M. Nicholas, Matthew B. Butler, and Alex M. Tomasevic, Nicholas & Butler, LLP, San Diego, for the plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of California, Dana M. Sabraw, District Judge, Presiding. D.C. No. 3:05-cv-01167-DMS-AJB.

Before: MARY M. SCHROEDER, STEPHEN REINHARDT and CARLOS T. BEA, Circuit Judges.

BEA, Circuit Judge:

This case involves a class action claim that a telephone company's offer of a "free" phone to anyone who signs up for its service is fraudulent to the extent the phone company charges the new subscriber sales tax on the retail value of each "free" phone.

The phone company demanded the plaintiffs' claims be submitted to individual arbitration, pointing to the arbitration clause of the written agreement, which arbitration clause requires arbitration, but bars class actions. Because this is an action invoking diversity of citizenship jurisdiction, the plaintiff-subscribers point to California contract law, which they claim renders both the arbitration clause and the class action waiver unconscionable, hence, unenforceable.

At first blush, it seems we decided the invalidity of an arbitration agreement banning class actions in Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976(9th Cir.2007). But, the phone company points to a new wrinkle: unlike the arbitration clause in Shroyer, this arbitration clause provides for a "premium" payment of $7,500 (the jurisdictional limit of California's small claims court) if the arbitrator awards the customer an amount greater than the phone company's last written settlement offer made before selection of an arbitrator. Hence, says the phone company, the arbitration clause is not an artifice that has the practical effect of rendering it immune from individual claims.

We will find, on second blush, the new "premium" payment does not distinguish this case from Shroyer, and that under California law, the present arbitration clause is unconscionable and unenforceable. Further, we will also find no merit to the phone company's claim the Federal Arbitration Act (FAA) preempts California unconscionability law.

Thus, we will affirm the district court's order.

I. Factual and Procedural History

In February 2002, Vincent and Liza Concepcion signed a Wireless Service Agreement (WSA) with AT & T Mobility¹ (AT & T) for cellular phone service and the purchase of new cell phones. The Concepcions received the cell phones without charge for the devices themselves because they agreed to a two-year contract term. However, AT & T charged them $30.22 total in sales tax for the two phones², calculated as 7.75% of both phones' full retail value. The Concepcions continued to renew their WSA through the filing of this lawsuit.

The WSA included both an arbitration clause, which required any disputes to be submitted to arbitration, and a class action waiver clause, which required any dispute between the parties to be brought in an individual capacity. In December 2006, AT & T revised the arbitration agreement to add a new premium payment clause. Under this clause, AT & T will pay a customer $7,500³ if the arbitrator issues an award in favor of a California customer that is greater than AT & T's last written settlement offer made before the arbitrator was selected.

On March 27, 2006, before the premium payment clause was added, the Concepcions filed a complaint in the United States District Court for the Southern District of California. The Concepcions alleged the practice of charging sales tax on a cell phone advertised as "free" was fraudulent. In September 2006, the district court consolidated the Concepcions' case with the Laster case, a putative class action addressing the same issues. In March 2008, after the premium payment clause was added, AT & T filed a motion to compel the Concepcion plaintiffs to submit their claims to individual arbitration under the revised arbitration agreement. The district court denied the motion. It held that the class waiver provision of the arbitration agreement is unconscionable under California law and that California unconscionability law is not preempted by the Federal Arbitration Act. AT & T timely appealed.

II. Jurisdiction and Standard of Review

This is an interlocutory appeal from the denial of a motion to compel arbitration. We have jurisdiction under 9 U.S.C. § 16(a)(1)(B). We review the denial of a motion to compel arbitration de novo. Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976, 981 (9th Cir. 2007).

III. Discussion

A. AT & T's class action waiver is unconscionable under California law.

The district court did not err when it held AT & T's class action waiver was unconscionable under California law, and thus unenforceable. Under the Federal Arbitration Act, 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. "It is wellestablished that unconscionability is a generally applicable contract defense, which may render an arbitration provision unenforceable." Shroyer, 498 F.3d at 981(internal citations omitted).

To be unenforceable under California law, a contract provision must be both procedurally and substantively unconscionable. Id. at 981. Procedural unconscionability generally takes the form of a contract of adhesion, that is, a contract drafted by the party of superior bargaining strength and imposed on the other, without the opportunity to negotiate the terms. Id at 982. Substantive unconscionability focuses on overly harsh or one-sided contract terms. Id. Both elements of unconscionability need not be present to the same degree; California courts use a sliding-scale: the more substantively unconscionable the contract term, the less procedurally unconscionable it need be to be unenforceable and vice versa. Id. at 981-82.

The California Supreme Court addressed the unconscionability of class action waivers in arbitration agreements for the first time in Discover Bank v. Sup.Ct., 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005), holding that class action waivers were at least sometimes unconscionable under California law. 30 Cal.Rptr.3d 76, 113 P.3d at 1108. Class actions, the court reasoned, serve the important policy function of deterring and redressing wrongdoing, particularly where a company defrauds large numbers of consumers out of individually small sums of money.⁴ Id. at 1105. Class action waivers pose a problem because, "small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights." Id. at 1106. In this way, the class action waiver allows the company to insulate itself from liability for its wrongdoing and the policy behind class actions is thwarted. Id. at 1109. With this in mind, the Discover Bank court held:

when the [class] waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when 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, then, at least ... the waiver becomes in practice the exemption of the party from responsibility for its own fraud, or willful injury to the person or property of another. Under these circumstances, such waivers are unconscionable under California law and should not be enforced.

Id. at 1110 (internal quotations omitted). The reasoning behind this rule is pretty easy to grasp. As we explained in Shroyer: "when the potential for individual gain is small, very few plaintiffs, if any, will pursue individual arbitration or litigation, which greatly reduces the aggregate liability a company faces when it has exacted small sums from millions of consumers." 498 F.3d at 986.

We have interpreted Discover Bank as creating a three-part test to determine whether a class action waiver in a consumer contract is unconscionable: (1) is the agreement a contract of adhesion; (2) are disputes between the contracting parties likely to involve small amounts of damages; and (3) is it alleged that the party with superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money. Id. at 983. In Shroyer, we noted that "there are most certainly circumstances in which a class action waiver is unconscionable under California law despite the fact that all three parts of the Discover Bank test are not satisfied." Id. Because we hold that the class action waiver at issue satisfies all three parts of the test, as was true in Shroyer, "it is unnecessary to explore those circumstances here." Id.

1. AT & T's class action waiver is unconscionable under the three-part Discover Bank test.

a. AT & T's WSA is a contract of adhesion.

As we noted in Shroyer, a contract of adhesion under California law is a standardized contract imposed on the subscribing party without an opportunity to negotiate the terms. Id. The Concepcions were given the standardized WSA without the opportunity to negotiate the terms. Thus, under California law, it is a contract of adhesion.

b. The dispute involves predictably small amounts of damages.

In both Shroyer and Discover Bank the...