California Court Holds that Arbitration Clause Barring Class Action Lawsuits in Contract Governed by Federal Arbitration Act (FAA) Unconscionable and that FAA does not Preempt State Law Against Class Action Waivers
Plaintiff filed a putative class action against his cellular telephone provider – for, inter alia, violations of the Federal Communications Act, and California’s unfair competition laws (UCL) and Consumers Legal Remedies Act (CLRA) – alleging that it charged his cell phone calls to himself (primarily to check his voicemail) against his “limited number of ‘anytime minutes’” instead of treating them as part of his “unlimited free ‘mobile to mobile’ calls,” contrary to promises made to him by Cingular representatives when he entered into the service contract. Winig v. Cingular Wireless LLC, ___ F.Supp.2d ___, 2006 WL 2766007, *1 (N.D. Cal. September 27, 2006). Defense attorneys moved to compel arbitration under a clause governed by the Federal Arbitration Act (FAA), id.; that arbitration clause required customers to bring claims only in an “individual capacity,” thereby precluding participation in class action lawsuits, id., at *3. The district court denied the motion.
The federal court held that it was bound to apply California law in interpreting the service contract, Winig, at *2, and that the defense motion to compel arbitration turned on the application of the factors set forth in Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005), id., at *3-*4. In considering those factors, the district court first concluded that the arbitration clause was procedurally unconscionable because the service agreement was non-negotiable. Id., at *4. The court rejected Cingular’s argument that plaintiff was free to use the services of a competitor that did not require customers consent to arbitration. Id.
The district court next held that the arbitration clause was substantively unconscionable, even though it provided that Cingular would “(1) pay the full cost of arbitrating any dispute that is not frivolous or brought for an improper purpose and (2) pay the customer’s reasonable attorneys’ fees if the arbitrator awards them the amount of their demand or more.” Winig, at *5. In so holding, the Court relied upon the language in Discover Bank that there is “‘no indication … that, in the case of small individual recovery, attorney fees are an adequate substitute for the class action or arbitration mechanism.’” Id. (quoting Discover Bank, at 162).
Finally, the federal court rejected Cingular’s claim that the FAA preempted the holdings of Discover Bank to the extent that those holdings would render the class action waiver provision unenforceable. Winig, at *6. While state laws may not invalidate arbitration clauses on grounds applicable solely to arbitration agreements, Discover Bank expressly stated that its holdings concerning unconscionability of class action waivers “applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements.” Id. (quoting Discover Bank, at 165). Nor did conflict preemption preclude application of Discover Bank to the class-wide arbitration waiver provision. Id. Accordingly, the court refused to compel arbitration.
NOTE: The district court found the particular facts of the case persuasive: “plaintiff in the instant suit alleges Cingular unilaterally changed its longstanding billing practices and began charging its customers for making calls from their mobile phones to their own mobile phone numbers …, thus, in essence, alleging Cingular was engaged in ‘a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.’” Winig, at *5 (quoting Discover Bank, at 162-63).
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