Case: Gatton v. T-Mobile USA, Inc., Nos. A112082, A112084 (Cal. Ct. App. 6/22/07)

The One Sentence Summary: Class action waiver in arbitration clause of T-Mobile’s service agreement was both procedurally and substantively unconscionable and therefore unenforceable.

What They Were Fighting About: Plaintiffs filed class action claims challenging T-Mobile’s practice of (1) imposing fee for termination of service agreement before its expiration date, and (2) installing a locking device in T-Mobile handsets that prevented subscribers from switching cell phone providers without purchasing a new handset. T-Mobile’s service agreement contained an arbitration provision that included language waiving any right to seek classwide relief. T-Mobile moved to compel arbitration of the plaintiffs’ claims pursuant to the service agreement provision. The trial court denied the motion on the grounds that the arbitration provision was unconscionable and therefore unenforceable.

Court Holdings:

• The court of appeal affirmed and held that the arbitration provision waiving class action relief was both procedurally and substantively unconscionable.
• Under the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), a waiver of classwide relief found in a consumer contract of adhesion will be deemed unconscionable and unenforceable if it is alleged that the party with superior bargaining power cheated large numbers of consumers out of individually small amounts of money. The reason is that a classwide waiver in that situation will operate to exempt the responsible party from liability for its fraud or willful injury to the property of another, in violation of Civil Code section 1668, because individual consumers will not sue for such small amounts.
• Procedural unconscionability focuses on the manner in which the contract was negotiated. Substantive unconscionability focuses on overly harsh or one-sided results.
• The court found T-Mobile’s arbitration provision waiving classwide relief to be at least minimally procedurally unconscionable as a contract of adhesion, notwithstanding the consumer’s option to obtain mobile phone service from other providers whose service agreements did not contain class action waivers. T-Mobile prepared the service agreement and required its customers to accept it entirely or else forego T-Mobile’s service. Despite being a contract of adhesion, if the challenged provision did not have a high degree of substantive unconscionability, it should be enforced.
• However, T-Mobile’s class action waiver was substantively unconscionable enough to render the arbitration provision in its service agreement unenforceable. The California Supreme Court’s decision in Discover Bank was directly on point in that regard. Trial court properly denied T-Mobile’s motion to compel arbitration of plaintiffs’ claims.