Class Waiver Allegedly Operates As Exculpatory Clause and Thus Renders iPhone Arbitration Agreement Unenforceable

In denying a motion to compel arbitration, a federal court in California held that where an arbitration agreement contains a class action waiver that functions as an exculpatory clause, the arbitration agreement is unconscionable under California law and thus unenforceable.

In In re Apple & AT&TM Antitrust Litigation, No. C 07-05152 JW, 2008 WL 4810067 (N.D. Cal. Oct. 1, 2008), a group of iPhone purchasers (Plaintiffs) brought a class action lawsuit against Apple and AT&T Mobility (ATTM), alleging violations of the Sherman Act and Magnuson-Moss Warranty Act. 

ATTM moved to compel arbitration pursuant to arbitration agreements that Plaintiffs signed when they activated their iPhones. Plaintiffs opposed, arguing that the arbitration agreements were unconscionable and thus unenforceable. 

Citing the California rule enunciated in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), and Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007), the Court held that whether a class action waiver is unconscionable depends on three factors: (1) whether the contract is one of adhesion; (2) whether the contract will predictably result in disputes involving small amounts of damages; and (3) whether the party with superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.

Relying heavily on its decision in Stiener v. Apple Computer, Inc., 556 F.Supp.2d 1016 (N.D. Cal. 2008), the Court agreed with Plaintiffs and held that the arbitration agreements at issue were unconscionable. The Court noted that the arbitration agreements at issue in this case were identical to the agreements at issue in Stiener, though in this case the damages alleged were up to $599 per plaintiff, while in Stiener the damages alleged were only $114.95 per plaintiff. The Court held that under the Discover Bank precedent, damages of even $1,000 are small enough to support a finding of substantive unconscionability.

Furthermore, the Court reasoned that like Stiener, this case involved an allegation that ATTM deliberately concealed post-purchase fees, which satisfied the third factor of the Discover Bank test for class waiver unconscionability. The Court thus found that the class waiver essentially operated as an exculpatory clause that immunized ATTM from liability because the Plaintiffs’ claims were so small that they were only suitable for a class action. Accordingly, the Court held that the arbitration agreements were unconscionable and denied ATTM’s motion to compel arbitration.