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In holding that a bar on class-wide proceedings rendered an arbitration agreement unconscionable and therefore unenforceable, a California Court of Appeal rejected the notion that California courts apply an across-the-board rule against arbitration agreements that bar class-wide proceedings.
In Merritt v. Cingular Wireless LLC, No. B178747, 2006 WL 2744357 (Cal. Ct. App. Sep. 27, 2006), Merritt brought a class action against Cingular, her wireless phone service provider, alleging that certain charges were falsely described as “taxes.” Cingular moved to compel arbitration pursuant to the service agreement, which contained an arbitration agreement barring class-wide proceedings. The trial court denied the motion.
On appeal, the Court affirmed the trial court and held that the bar on class-wide proceedings rendered the arbitration agreement unconscionable and therefore unenforceable. In reaching this holding, the Court found that the case fell “squarely within the holding of Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005).”
As part of an unsuccessful attempt to distinguish Discover Bank, Cingular pointed out that the arbitration agreement required Cingular to pay attorney fees to a consumer who obtained an award in an amount equal to or greater than her demand. Despite this provision, the Court found that the bar on class-wide proceedings “operate[d] as an exculpatory clause” because the underlying allegations involved “small losses to individual customers but huge profits to the company.”
Cingular also argued that the Federal Arbitration Act preempted “an across-the-board rule that class-action prohibitions are substantively unconscionable under California law because that rule does not apply equally to all contracts.” In rejecting this argument, the Court noted that Discover Bank does not establish “an across-the-board rule.” The Court also maintained that the principles underlying Discover Bank “apply to any contract, not only contracts to arbitrate.” The Court did not identify any instances in which a class action prohibition in a contract was enforced in California under the Discover Bank holding.
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