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University of South Dakota School of Law

Tuesday, October 11, 2005

Cell Phone Arbitration Clause Unconscionable

California_flag_14 An arbitration clause in a cell phone agreement is unconscionable where it prohibits class actions for very small individual claims, according to the California Court of Appeals in an unpublished decision.

In the case, Jaime Wing bought a cell phone from a Costco store.

The phone came in a shrink-wrapped box inside a cardboard sleeve, and on that cardboard sleeve were instructions for activating wireless service with Cingular.  Beneath the shrink wrap on top of the box were several documents, including a notice advising the customer not to open the box until service had been activated.  Also on top of the box were a welcome letter, the written terms and conditions of Cingular's wireless service, and a handbook of Cingular services. The written terms and conditions of Cingular's wireless service included an arbitration clause requiring arbitration of all disputes arising out of the wireless service agreement.

After Cingular started a new practice of charging customers for portable phone numbers, Wing and others brought a class action suit, alleging breach of contract, fraud, and various statutory violations.
The court had no trouble holding that the arbitration agreement was part of the contract, since Wing knew about it before she signed the deal.  It was nevertheless unconscionable, though.  Here’s the analysis:

To be unenforceable, a contract must be both procedurally and substantively unconscionable, but the courts employ a "sliding scale" or a balancing relationship between the two elements of unconscionability, such that the greater the degree of unfair surprise or unequal bargaining power, the less the degree of substantive unconscionability required to annul the contract and vice versa. . . . .

The wireless service agreement here was presented on a take-it-or-leave-it basis, placed inside the shrink-wrapped box along with the telephone. We agree with the trial court's conclusion that the wireless service agreement was a contract of adhesion and, hence, procedurally unconscionable. . . .

. . .

The more difficult question is whether the ban on class-wide relief is substantively unconscionable. That question was recently examined by our Supreme Court in Discover Bank, where the court focused on the exemption that a contract clause banning class action or class arbitration relief may provide to an offending business from liability for its bad business practices. The court said: "Class action waivers found in [adhesive] contracts may also be substantively unconscionable inasmuch as they may operate effectively as exculpatory clauses that are contrary to public policy. . . ."

While recognizing that class action and class arbitration waivers are not, in the abstract, exculpatory clauses, the court commented that such clauses are "indisputably one-sided.” . . .  The court expressly rejected the notion that provisions in the arbitration agreement allowing litigation in small claims court or recovery of attorney fees by the prevailing party are adequate substitutes for the important mechanism of class-wide arbitration. . . .

The Supreme Court concluded as follows: "We do not hold that all class action waivers are necessarily unconscionable.  But when the 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 to the extent the obligation at issue is governed by California law, 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." . . . .

Since the claim against Cingular involved a series of very small charges (about a dollar a month per customer) the court found arbitration to be unconscionable.

Wing v. Cingular Wireless, LLC, No. A105906, 2005 Cal. App. Unpub. LEXIS 9005 (1st Dist. Oct. 3, 2005).

[Frank Snyder]

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