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University of South Dakota School of Law

Friday, January 20, 2006

So. Cal. District Court Refuses to Enforce Cell Phone Companys' Arbitration Clauses

A District Court in the Southern District of California recently held that the arbitration clauses in the cell phone contracts of T-Mobile and Cingular are unconscionable and, therefore, not enforceable.

In a putative class action, customers sued various cell phone companies alleging that companies improperly charged sales tax on the full, undiscounted price of phones that were free or significantly discounted as part of a bundled cell phone and service package. Defendants T-Mobile and Cingular moved to compel arbitration pursuant to clauses in the customer contracts. The court denied the motion, holding that the arbitration provisions were unconscionable.

It was not disputed that the plaintiffs were presented with non-negotiable, take-it-or-leave-it form contracts. The court held that these types of contracts are procedurally unconscionable, leaving only the question “where on the continuum of procedural unconscionability do the subject agreements fall?” The court addressed the contracts of the lead plaintiffs. Plaintiff Laster had contracted for T-Mobile’s services, and plaintiff Voorhies had contracted for Cingular’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 class action participation. Rather, Laster was theoretically notified of the arbitration clause through T-Mobile's fifty-two page “Welcome Guide”, which was placed inside the sealed box containing her new phone. Laster claims she neither signed nor acknowledged the arbitration provision, because she never knew it existed. Nevertheless, T-Mobile contends Laster accepted the terms of arbitration by activating her phone because she “had time to review and understand” the Welcome Guide and its arbitration provision, and “she was allowed to return her phone and cancel her T-Mobile service within 14 days, with no penalty.”

Under these circumstances, Laster had no meaningful opportunity to negotiate the terms of the service contract before purchasing the phone. In other words, she had no opportunity to switch to another competitor until after she purchased the phone. On this record, it appears Laster's ability to “negotiate” depended upon her ability to discover the arbitration provision on her own and then cancel her service within 14 days of purchasing and activating her phone. The manner in which the T-Mobile's arbitration provision was presented to Laster clearly suggests procedural unconscionability at a heightened level.

Cingular's arbitration clause, on the other hand, presents a closer call. In contrast to Laster, [plaintiff] Voorhies was provided with both Cingular's Service Agreement (which specifically references arbitration) and its 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 reliant upon the telephone number obtained when she entered into her agreement.” In other words, Voorhies could, at that point, elect to “leave it” and go with a competitor, such as Verizon.

However. . . Cingular nonetheless presented Voorhies with a take-it-or-leave-it form contract that is deemed to be adhesive and thereby, procedurally unconscionable. 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 an early stage reject Cingular's terms and choose a competitor. As Cingular concedes, “At most, [under these circumstances] adhesiveness. . . puts Cingular's contracts on the low end of the spectrum of procedural unconscionability.” This Court would agree.

T-Mobile and Cingular next argue that Laster and Voorhies fail to show the “surprise” element of procedural unconscionability. In support, Defendants argue the terms of the arbitration agreements are adequately disclosed in their service contracts. As noted, Laster was not made aware of the terms of the arbitration clause until after she had purchased the phone. The surprise element is therefore clearly established by Laster against T-Mobile.

Cingular argues, however, the “surprise” element is lacking because it “gave its arbitration provisions special prominence in its [Service] Agreement.”   While it is true Cingular's Service Agreement provides notice of arbitration, the agreement fails to mention the terms of arbitration or its classwide arbitration bar. In addition, the actual arbitration clause and class action waiver can only be determined by the customer by reading a separate document-specifically, pages ten through twelve of Cingular's thirteen page Terms of Service booklet. A modicum of surprise therefore exists under these circumstances.

Next, the plaintiffs argued that the provisions were substantively unconscionable because they provided for the waiver of plaintiffs' rights to bring a class action suit. The court agreed with plaintiffs. The court noted that a class action waiver is substantively unconscionable when: “(1) the class action waiver is contained in a consumer contract of adhesion, in which small amounts of damages are at issue; and (2) 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.” The court held that plaintiffs established these factors.

Laster v. T-Mobile USA, Inc., ___ F.Supp.2d ___ (S.D. Cal. Nov. 30, 2005).

[Meredith R. Miller]

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