So. Cal. District Court Refuses to Enforce Cell Phone Companys’ Arbitration Clauses
A District Court in the Southern District of California recently held that thearbitration clauses in the cell phone contracts of T-Mobile and Cingular are unconscionable and, therefore, notenforceable.
In a putative class action, customers sued various cellphone companies alleging that companies improperly charged sales tax on the full, undiscounted price of phones that were free or significantly discounted as part of abundled cell phone and service package. Defendants T-Mobile and Cingular moved to compel arbitration pursuant toclauses in the customer contracts. The court denied the motion, holding thatthe arbitration provisions were unconscionable.
It was not disputed that the plaintiffs were presented withnon-negotiable, take-it-or-leave-it form contracts. The court held that these types of contractsare procedurally unconscionable, leaving only the question “where on thecontinuum of procedural unconscionability do the subject agreements fall?” The court addressed the contracts of the leadplaintiffs. Plaintiff Laster hadcontracted for T-Mobile’s services, and plaintiff Voorhies had contracted forCingular’s services. The court explained:
With respect to T-Mobile, the one page Service Agreement [plaintiff]Laster signed does not include any reference to arbitration or waiver of classaction participation. Rather, Laster was theoretically notified of thearbitration clause through T-Mobile’s fifty-two page “Welcome Guide”, which wasplaced inside the sealed box containing her new phone. Laster claims sheneither signed nor acknowledged the arbitration provision, because she neverknew it existed. Nevertheless, T-Mobilecontends Laster accepted the terms of arbitration by activating her phonebecause she “had time to review and understand” the Welcome Guide and itsarbitration provision, and “she was allowed to return her phone and cancel herT-Mobile service within 14 days, with no penalty.”
Under these circumstances, Lasterhad no meaningful opportunity to negotiate the terms of the service contractbefore purchasing the phone. In other words, she had no opportunity to switchto another competitor until after she purchased the phone. On this record, itappears Laster’s ability to “negotiate” depended upon her ability to discoverthe arbitration provision on her own and then cancel her service within 14 daysof purchasing and activating her phone. The manner in which the T-Mobile’sarbitration provision was presented to Laster clearly suggests proceduralunconscionability at a heightened level.
Cingular’s arbitration clause, on the other hand, presents a closercall. In contrast to Laster, [plaintiff] Voorhies was provided with bothCingular’s Service Agreement (which specifically references arbitration) andits Terms of Service at the time she purchased the phone. As Cingular notes,“At that time, Voorhies had neither invested in a telephone nor become reliantupon the telephone number obtained when she entered into her agreement.” In other words, Voorhies could, at thatpoint, elect to “leave it” and go with a competitor, such as Verizon.
However. . . Cingular nonetheless presented Voorhies with a take-it-or-leave-itform contract that is deemed to be adhesive and thereby, procedurallyunconscionable. Similar to Laster, Voorhies had no real opportunity to“negotiate” the arbitration provision, as it was non-negotiable. She was,however, able to negotiate the transaction in the sense that she could at anearly stage reject Cingular’s terms and choose a competitor. As Cingularconcedes, “At most, [under these circumstances] adhesiveness. . . putsCingular’s contracts on the low end of the spectrum of proceduralunconscionability.” This Court would agree.
T-Mobile and Cingular next argue that Laster and Voorhies fail toshow the “surprise” element of procedural unconscionability. In support,Defendants argue the terms of the arbitration agreements are adequatelydisclosed in their service contracts. Asnoted, Laster was not made aware of the terms of the arbitration clause untilafter she had purchased the phone. The surprise element is therefore clearlyestablished by Laster against T-Mobile.
Cingular argues, however, the “surprise” element is lackingbecause it “gave its arbitration provisions special prominence in its [Service]Agreement.” While it is true Cingular’s Service Agreement providesnotice of arbitration, the agreement fails to mention the terms of arbitrationor its classwide arbitration bar. In addition, the actual arbitration clauseand class action waiver can only be determined by the customer by reading aseparate document-specifically, pages ten through twelve of Cingular’s thirteenpage Terms of Service booklet. A modicum of surprise therefore exists underthese circumstances.
Next, the plaintiffs argued that the provisions weresubstantively unconscionable because they provided for the waiver of plaintiffs’ rights to bring a class actionsuit. The court agreed withplaintiffs. The court noted that a classaction waiver is substantively unconscionable when: “(1) the class actionwaiver is contained in a consumer contract of adhesion, in which small amountsof damages are at issue; and (2) it is alleged that the party with the superiorbargaining power has carried out a scheme to deliberately cheat large numbersof consumers out of individually small sums of money.” The court held thatplaintiffs established these factors.
Laster v. T-Mobile USA, Inc., ___ F.Supp.2d ___ (S.D.
[Meredith R. Miller]