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The California Court of Appeal held that an arbitration agreement was unconscionable by virtue of its class action waiver even though the party seeking arbitration – a cellular phone provider – challenged the finding of procedural unconscionability by presenting evidence of market alternatives.
In Gatton v. T-Mobile USA, Inc., Nos. A112082, A112084, 2007 WL 1793444 (Cal. Ct. App. June 22, 2007), T-Mobile was the defendant in two class actions, one challenging the assessment of an early termination fee, and one challenging T-Mobile's policy of locking handsets to prevent their use with other cellular providers.
T-Mobile moved to compel arbitration. In opposing the motion, the plaintiffs argued that the arbitration agreement was unconscionable by virtue of its class action waiver. The trial court denied the motion.
On appeal, the Court affirmed the denial of T-Mobile's motion to compel, despite finding no surprise and little oppression, the two factors indicating procedural unconscionability. While the Court was satisfied that "[t]he arbitration provision was not disguised or hidden," the Court found the contract to be one of adhesion, "imposed and drafted by the party of superior bargaining strength, and relegat[ing] to the subscribing party only the opportunity to adhere to the contract or reject it." The Court agreed with the courts that "have routinely found the procedural [unconscionability] element satisfied where the agreement containing the challenged provision was a contract of adhesion."
The Court rejected a rule of adhesion contracts that the existence of market alternatives at the time of contracting would preclude any finding of procedural unconscionability. The Court viewed that rule as "disregard[ing] the sliding scale balancing" of the relative levels of procedural and substantive unconscionability, and held instead that "absent unusual circumstances, use of a contract of adhesion establishes a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives." The Court saw no obligation "to enforce highly unfair provisions that undermine important public policies simply because there is some degree of consumer choice in the market."
The Court also found a high level of substantive unconscionability in the agreement, noting that (1) the class waiver provision within the agreement was unconscionable because it was "found in a consumer contract of adhesion," (2) the covered claims "predictably involve[d] small amount of damages," and (3) "the class action device remain[ed]… the only practicable way for consumers… to deter and redress wrongdoing" in such instances. Therefore, despite the low level of procedural unconscionability, the Court found that the high level of substantive unconscionability was sufficient to find the agreement unconscionable and unenforceable.
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