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In Stern v. Cingular Wireless Corp., No. CV 05-8842 CASCTX, 2006 WL 2789367 (C.D. Cal. July 28, 2006), a federal district court in California invalidated an older version of the parties’ arbitration agreement instead of considering a newer version that contained more reasonable terms.
Stern brought a class action against Cingular, his wireless phone service provider. When Stern originally obtained the phone service, she received a phone that came with a booklet containing an arbitration agreement that barred class-wide proceedings. Cingular later amended the service agreement to include a similar arbitration agreement with terms more favorable to the consumer. Specifically, the arbitration agreement in the amended service agreement required Cingular to pay the costs of arbitration and to pay attorney fees to a prevailing consumer.
Cingular moved to compel arbitration pursuant to the service agreement. In conducting its analysis, the Court focused on the circumstances surrounding the original arbitration agreement because “the critical juncture for determining whether a contract is unconscionable is the moment when it is entered into by both parties – not whether it is unconscionable in light of subsequent events.” Applying that principle, the Court held that the original arbitration agreement was unconscionable and therefore unenforceable.
In reaching its holding, the Court relied largely on Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), which held that under California law, a bar on class-wide proceedings is unenforceable when it is in a consumer contract of adhesion and is part of a deliberate scheme to cheat large numbers of consumers out of individually small sums of money.
The Court found a “substantial degree” of procedural unconscionability because the arbitration agreement was presented on a take-it-or-leave-it basis, and it was not even mentioned in the service agreement but instead printed in a booklet that came with the phone Stern bought.
Since California employs a “sliding scale” approach to unconscionability, the substantial degree of procedural unconscionability meant that Stern had to demonstrate only “a modicum of substantive unconscionability.” The Court found that this burden was satisfied because the bar on class-wide proceedings lacked mutuality. Specifically, the Court noted that “the likelihood of [Cingular] bringing a class action against their wireless customers is vanishingly small.”
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