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The Ninth Circuit Court of Appeals has reversed an order compelling arbitration of a cell phone dispute based on its holding that a class action waiver rendered the arbitration agreement unconscionable and unenforceable under California law. The outcome of this case would have been different if the arbitration agreement had contained an opt-out provision because the unilateral ability to reject an arbitration agreement in an arm’s length transaction precludes a finding of procedural unconscionability.
In Shroyer v. New Cingular Wireless Services, Inc., No. 06-55964, 2007 WL 2332068 (9th Cir. Aug. 17, 2007), Shroyer entered into a wireless service contract with Cingular after its merger with AT&T. Approximately a year later, Shroyer filed a class action lawsuit against Cingular, alleging several statutory and common law causes of action premised on alleged rate hikes and service deficiencies.
In response to the lawsuit, Cingular filed a motion to compel arbitration pursuant to an arbitration agreement in Shroyer’s service contract. This arbitration agreement contained a class action waiver requiring individual arbitration and precluding class-wide proceedings.
In opposing the motion to compel, Shroyer argued that the class action waiver rendered the arbitration agreement unconscionable under California law. The district court rejected the unconscionability challenge and issued an order compelling arbitration.
On appeal, Shroyer argued that the district court erred in upholding the arbitration agreement. In analyzing this argument, the Court followed the lead of California’s appellate courts and distilled Discover Bank v. Superior Court of Los Angeles, 113 P.3d 1100 (Cal. 2005) into a three-part test.
Based on the three-part test, the Court held that the arbitration agreement was procedurally and substantively unconscionable under California law. In reaching this holding, the Court rejected Cingular’s argument that the availability of marketplace alternatives precluded a finding of procedural unconscionability.
Cingular argued that the Federal Arbitration Act (FAA) preempted the application of Discover Bank because it would conflict with the FAA’s purpose of promoting arbitration as an efficient and expeditious means of dispute resolution. The Court rejected this argument based on its view that the FAA was not intended to encourage individual arbitration or disfavor class arbitration.
As the Court explained, the first part of the Discover Bank test requires the arbitration agreement or underlying contract to be “a consumer contract of adhesion.” Under California law, a contract of adhesion is defined as “a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” Graham v. Scissor-Tail, Inc., 623 P.2d 165, 171 (Cal. 1981).
Given the California definition of contract of adhesion, Discover Bank does not apply if the consumer in an arm’s length transaction has an opportunity to reject the arbitration agreement without consequence because the party with inferior bargaining power has ultimate say under that scenario.
The recent decision of Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007) does not cast any doubt on the significance of an opt-out provision in an arm’s length transaction because Gentry’s analysis of that issue was premised on “the economic power that [an employer] wields over [an employee],” and this economic power does not exist in an arm’s length transaction, such as the issuance of a credit card or the formation of a cell phone contract.
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