Arbitration Class Action Defense Cases-Skirchak v. Dynamics Research: First Circuit Holds Class Action Waiver In Arbitration Clause Unconscionable And Thus Unenforceable In FLSA Class Action

Based on the Specific Facts Presented by this Class Action Case, the District Court Properly Compelled Arbitration of Plaintiffs’ Fair Labor Standards Act and State Law Equivalent Class Action Claims but Properly Found that the Class Action Waiver Clauses in the Employer’s Dispute Resolution Program were Unconscionable First Circuit Holds

Plaintiffs filed a class action lawsuit against their former employer, Dynamics Research, alleging violations of the federal Fair Labor Standards Act (FLSA) and the Massachusetts Minimum Fair Wage Law. Skirchak v. Dynamics Research Corp., ___ F. 3d ___, 2007 WL 4098823, *1 (1st Cir. November 19, 2007). The class action complaint followed a complaint by Skirchak with the U.S. Department of Labor that resulted in an agreement by the company to pay back $75,000 to employees and to change its practices, _id._ Plaintiffs’ class action alleged that Dynamics misclassified employees as exempt in order to avoid paying them overtime and improperly made partial-day deductions from employee paid leave balances, and sought damages beyond those recovered by the DOL. _Id._ Defense attorneys moved to dismiss the complaint and compel arbitration pursuant to the terms of a Dispute Resolution Program that required arbitration of all disputes and prohibited class action claims. _Id._, at *2. The district court granted the defense motion to compel arbitration, but held that class-wide relief could be pursued therein because the class action waiver was unconscionable under Massachusetts state law, _id._ Our prior article discussing the district court opinion may be found here. Both sides appealed: the defense challenged the striking of the class action waiver; plaintiffs challenged the order compelling arbitration. _Id._ Plaintiffs subsequently agreed to arbitration but insisted on the right to pursue a class action because the class action waiver was unenforceable, _id._ The First Circuit affirmed.

Preliminarily, it bears noting that the First Circuit “[did] not reach the argument that waivers of class actions themselves violate either the FLSA or public policy.” Skirchak, at *1. Further, whether plaintiffs will succeed in obtaining class action certification was left to the arbitrator, id. The Circuit Court addressed only (1) whether the arbitration clause was enforceable, and (2) whether the class action waiver was enforceable. The First Circuit began by summarizing the Dispute Resolution Program and the notice provided to employees of its terms. See id., at *2-*3. In pertinent part, the Circuit Court observed that if an employee “read only the e-mail, the descriptive memorandum and the fifteen-page Program description” concerning the Program, she “would not know of the class action waiver.” Id., at *3. The class action waiver clauses were contained only in the Appendices to the Program, id., but even if an employee found the class action waiver provisions he “would likely still be confused” because of apparent inconsistencies in the documentation, id., at *4. Finally, the First Circuit noted that the adopted and implemented by e-mail notification to employees sent shortly before a holiday that deemed employees to have consented to the class action waivers if they returned to work following the holiday. Id., at *5.

Arbitration Class Action Court Decisions Employment Law Class Actions Uncategorized

Comcast Class Action Defense Cases-Anderson v. Comcast: First Circuit Upholds Comcast Arbitration Clause But Severs Class Action Waiver and Holds Severability of Class Action Waiver Saves Arbitration Agreement from Unconscionability Claim

First Circuit Leaves Validity of Class Action Waiver in Arbitration Clause to Arbitrator, Holds Bar on Multiple Damages Invalid and Severs from Arbitration Agreement, Holds Bar on Recovery of Attorney Fees Invalid and Severs from Agreement, and Invalidates One-Year Limitations Period on Claims Against Comcast and Severs from Agreement

Plaintiff filed a putative class action lawsuit in Massachusetts state court against his telecommunications provider, Comcast, for violations of the state’s unfair business practices statute and other tort claims based on the allegation that it charged customers a monthly to lease a cable converter box and remote control for television service even if the customer already owned a cable-ready television. Anderson v. Comcast Corp., 500 F.3d 66, 68(1st Cir. 2007). Defense attorneys removed the class action to federal court based on diversity jurisdiction, and then moved to compel arbitration under an arbitration clause the prohibited class actions as well as “multiple or punitive damages,” id., at 69. Among the arbitration provisions central to the appeal were the following: (1) a class action waiver provision, (2) a requirement that any claims against Comcast be brought within one year, (3) a requirement that consumers pay their own costs of arbitration, including attorney’s fees, (4) a bar on any award in arbitration of multiple or punitive damages, and (5) a severance clause. Id. The district court agreed with defense attorneys that plaintiff must arbitrate his claims but held that he could pursue a class action in arbitration, and while the district court granted the motion to compel arbitration and dismissed the class action complaint, id., at 69-70, it severed several other portions of the arbitration agreement, such as the requirement that each side bear its own costs – including attorney and expert fees, id., at 69 n.5. The First Circuit largely upheld the district court’s order, holding in part that the validity of the class action waiver provision must be addressed first by the arbitrator.

Plaintiff’s class action complaint alleged that Comcast violated the Massachusetts Consumer Protection Act and various common law torts. Anderson, at 68. The class action also sought treble damages, punitive damages and attorney fees, id., at 69. Defense attorneys moved to compel arbitration under provisions of its standard agreement with subscribers entitled, “Notice to Customers Regarding Policies, Complaint Procedures & Dispute Resolution.” Id., at 68 n.1. The district court applied the First Circuit’s recent decision in Kristian v. Comcast, Corp., 446 F.3d 25 (1st Cir. 2006) – summarizedhere – and granted the motion to compel, but “only after severing provisions in the arbitration agreement prohibiting attorney’s fees, double or treble damages and a class action remedy in the arbitral forum.” Anderson, at 68. The district court also ruled that “the arbitrator will have the power to determine the validity and applicability of the agreement’s one-year statute of limitations.” Id. Both plaintiff and defense appealed the district court’s ruling.

The First Circuit began its analysis by observing that it considered the appeal “against the backdrop of a strong pro-arbitration policy expressed by Congress and repeatedly upheld by the courts.” Anderson, at 70. With respect to the class action bar, the Circuit Court held that there was no conflict between Massachusetts state law and the class action waiver provision, id., at 71. The First Circuit distinguished its holding in Kristian, which invalidated a Comcast class action wavier in an arbitration clause, because it found a conflict between such a waiver and the “nature and purposes of antitrust law”; here, by contrast, the class action bar, by its terms, applies “unless your state’s laws provide otherwise,” and the consumer law statute in question expressly permits class action lawsuits be filed to enforce it. Id., at 72. The Court did not hold that the exception to class action litigation applied, however, concluding that the question of arbitrability must be addressed first by the arbitrator, id.

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Arbitration Class Action Defense Cases-Dale v. Comcast: Eleventh Circuit Holds Class Action Arbitration Waiver Unenforceable And Reinstates Class Action By Subscribers Against Comcast

Class Action Waiver in Arbitration Provision Substantively Unconscionable “to the Extent it Prohibits the Subscribers from Bringing a Class Action Alleging State Law Claims” and Entire Arbitration Clause Fails Because Class Action Waiver “Cannot be Severed from the Agreement” Eleventh Circuit Holds

Plaintiffs filed a class action against their cable television service provider, Comcast, in Georgia state court alleging that it improperly passed through to customers franchise fees based on estimated revenue instead of the actual franchise fees paid local governments as allowed by the Cable Communications Policy Act of 1984, and that these estimates resulted in overcharges to subscribers. Dale v. Comcast Corp., 498 F.3d 1216, 1217-18 (11th Cir. 2007). Defense attorneys removed the class action to federal court, and then moved to compel arbitration and dismiss the class action complaint based on the mandatory arbitration clause (that included a class action waiver) contained in the subscriber agreements, id., at 1218. The “Mandatory & Binding Arbitration” provision permits either party to elect arbitration and “contains a class action waiver clause prohibiting subscribers from bringing claims on a class action or consolidated basis,” expressly providing that “[a]ll parties to the arbitration must be individually named” and that the parties shall have “no right or authority for any claims to be arbitrated or litigated on a class-action or consolidated basis.” Id. Plaintiffs’ lawyer argued that the class action waiver was unconscionable; the district court disagreed and granted the defense motion to compel arbitration and dismiss the class action complaint. Id. The Eleventh Circuit reversed.

It is well established that the enforceability of an arbitration clause is determined based on state law. Dale, at 1219 n.2. This is true because the Federal Arbitration Act (FAA) requires that federal court look to state law governing contracts generally (not arbitration agreements specifically) to determine the validity and enforceability of an arbitration agreement, id., at 1219 (citation omitted). Accordingly, the issue on appeal was “whether the Arbitration Provision’s class action waiver is unconscionable under Georgia law and thus unenforceable as a matter of law.” Id. Georgia law recognizes both procedural and substantive unconscionability, and the Circuit Court focused on substantive unconscionability of the class action waiver. Id.

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Class Action Defense Cases-Murphy v. Check ‘N Go: California Appellate Court Upholds Trial Court Order That Class Action Waiver Rendered Arbitration Clause Unenforceable

Class Action Waiver Unconscionable and Contractual Provision Requiring Arbitrator to Determine Enforceability of Class Action Waiver and Arbitration Provision also Unconscionable California Court Holds

Plaintiff filed a class action lawsuit against his employer, a payday lending company, for violations of state labor laws alleging “failure to pay…overtime…, accurate itemized wage statements, adequate meal and rest periods, and wages upon termination.” Murphy v. Check ‘N Go of Cal., Inc., ___ Cal.App.4th ___, 67 Cal.Rptr.3d 120, 2007 WL 3016414, *1 (Cal.App. 2007). Defense attorneys moved to compel arbitration and dismiss the class action complaint on the grounds that plaintiff had signed a “Dispute Resolution Agreement” that included an arbitration provision and a class action waiver, _id._ The trial court refused to compel arbitration, concluding that the class action waiver rendered the arbitration agreement unconscionable, _id._ Defense attorneys appealed, contending that the class action waiver is not unconscionable and that whether the class action waiver was unconscionable should be decided by the arbitrator, not by the trial court. _Id._ The Court of Appeal rejected the defense arguments and affirmed the trial court order.

Plaintiff spent 7 years as a “salaried retail manager” for defendant; her class action complaint alleged that defendant misclassified salaried retail managers as exempt employees and thus failed to pay overtime, failed to provide accurate wage statements, failed to provide required meal and rest periods, and failed to provide wages due on termination. Murphy, at *1. The class action complaint alleged that every employee had to sign the arbitration agreement, which covered “all claims arising from or relating to plaintiff’s employment,” including any claim that the arbitration agreement was “substantively or procedurally unconscionable.” Id. As noted above, the arbitration agreement contained a class action waiver, requiring that any dispute be maintained as an individual action only, id. Defense attorneys moved to dismiss the class action complaint and compel arbitration, arguing in part that the agreement expressly vests in the arbitrator the power to decide whether the class action waiver is unconscionable. Id., at *2. The Court of Appeal summarized the trial court’s order at page *2 as follows: “the court determined that : (1) it had the power to rule on the unconscionability issues; (2) the parties’ agreement…was a contract of adhesion; (3) the agreement’s class action waiver was substantively unconscionable under Discover Bank v. Superior Court (2005) 36 Cal.4th 148…; (4) the agreement’s provisions for arbitration of unconscionability issues and pre-existing claims were also substantively unconscionable; and (5) the unconscionability terms would not be severed from the agreement.”

Arbitration Class Action Court Decisions Employment Law Class Actions Uncategorized

Class Action Defense Cases-Clark v. First Union: California Appellate Court Affirms Trial Court Order Vacating Referral Of Certain Class Action Claims To Arbitration And Staying Other Class Action Claims

Inherent Powers of Trial Court Include Power to Reconsider Interim Rulings Long After the Statutory Time Period for Motions for Reconsideration has Lapsed California Appellate Court Holds

Plaintiffs filed a putative class action against their employer, First Union Securities, and its successor, Wachovia Securities for alleged violations of state labor laws. Clark v. First Union Securities, Inc., ___ Cal.App.4th ___, 64 Cal.Rptr.3d 313, 315 (Cal.App. 2007). Defense attorneys moved to compel arbitration before the National Association of Securities Dealers (NASD) and to stay proceedings on the class action claims for injunctive or declaratory relief, which are not subject to arbitration, _see Broughton v. Cigna Healthplans_, 21 Cal.4th 1066, 1079-80 (Cal. 1999); the trial court granted the motion. _Id._ , at 314. After the arbitrators ruled that the class action claims were “not eligible for arbitration,” the trial court _sua sponte_ reconsidered its ruling on the defense motion and ruled that the class action would proceed in state court. _Id._, at 314-15. Defense attorneys appealed, and the California court of appeal affirmed. The appellate court held that the trial court had the inherent authority to reconsider its ruling referring class action claims to arbitration, that the employment contract did not preclude state court jurisdiction over the putative class action complaint, and that the dismissal of the class action claims by the arbitrators did not constitute a class action waiver.

Plaintiff Clark was hired by First Union as an investment consultant candidate, which required that he hold a license from the NASD and to execute the SEC-approved Uniform Application for Securities Industry Registration or Transfer Form U-4 (Form U-4), which contains an arbitration clause that states “I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the [NASD] as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction.” Clark, at 315. Plaintiff executed the form in October 1998 and began working for First Union in November 1998, id. The SEC promulgated several rules directly implicated by this case, including Rule 10301(d) which addresses investor class action lawsuits filed under FRCP Rule 23. Id., at 316. As the Court of Appeal noted at page 316, “The SEC issued a public notice in connection with the approval of Rule 10301(d). In this 1992 approval order, the SEC gave notice that under the new provision class actions were excluded from arbitration.”

The class action complaint alleged numerous labor law violations based on an array of alleged misconduct ranging “from misrepresentations regarding the sale of securities, to the failure to pay wages and to reimburse for business expenses.” Clark, at 317-18. Defense attorneys moved to compel arbitration of each cause of action in the class action complaint except the claims seeking injunctive and declaratory relief; the defense argued that “because all allegations arose out of Clark’s employment or termination of employment, they must be resolved in arbitration pursuant to the arbitration provision in the Form U-4 and the NASD Code.” Id., at 318. The appellate court noted that defense attorneys did not cite Rule 10301(d) in support of the motion, id. Plaintiff countered that the NASD arbitration procedures were unconscionable – an issue the Court of Appeal found unnecessary to address – and that because the class action claim for unfair practices was asserted on behalf of all Wachovia employees it was not subject to arbitration. Id. Plaintiff’s lawyer argued, “The only forum for the unfair practice claims is a civil lawsuit. The NASD arbitration rules do not even permit putative or class claims to be arbitrated.” Id.

Arbitration Class Action Court Decisions Employment Law Class Actions Uncategorized

Arbitration Class Action Defense Cases-Dale v. Comcast: Eleventh Circuit Distinguishes Prior Cases Upholding Class Action Waivers And Holds Class Action Waiver And Arbitration Clause Unconscionable

Absence of Ability to Recover Attorney Fees Rendered Class Action Waiver and Arbitration Clause Unconscionable Because it would Effectively Insulate Company from Liability for Small-Value Claims Eleventh Circuit Holds

Plaintiffs filed a class action lawsuit in Georgia federal court against their cable television provider, Comcast, alleging violations of the federal Cable Communications Policy Act of 1984 (Cable Act), 47 U.S.C. § 521 et seq., by miscalculating the “pass-through” franchise fees charged customers. Dale v. Comcast Corp., 498 F.3d 1216, 2007 WL 2471222, *1 (11th Cir. 2007). Defense attorneys moved to dismiss the class the action and compel arbitration based on the arbitration clause contained in the subscriber agreements; the district court granted the motion and dismissed the class action. Id. The Eleventh Circuit reversed, concluding the arbitration agreement and class action waiver provision to be unenforceable.

Defense attorneys argued that the class action had to be dismissed because in 2004, either in the “welcome kit” given new subscribers or with the December invoice of existing subscribers, each customer received a “Policies and Procedures” notice that contained a mandatory arbitration clause. Dale, at *1. The arbitration clause contained a class action waiver provision, id., and “Comcast argued the subscribers accepted the Arbitration Provision, including the class action waiver, by their continued subscription to Comcast’s services after receiving the notices,” id., at *2. Plaintiffs argued that the damages suffered by the class in this case were $0.66 every three months, or a total of $10.56 over the four-year class period, and so the class action waiver was substantively unconscionable because “if Comcast’s class action waiver is held valid, they will effectively be denied any remedy.” Id., at *3. Plaintiffs also challenged the arbitration fee structure imposed under the subscriber agreement, which placed on subscribers the financial burden of attorney fees and all costs incurred in the arbitration other than the filing fee and arbitrator’s costs. Id. The district court rejected plaintiffs’ argument that the class action waiver was unconscionable, dismissed the class action, and compelled arbitration of the dispute. Id., at *2.

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Arbitration Class Action Defense Cases-Gatton v. T-Mobile: California Court Holds Class Action Waiver Renders Arbitration Clause Unconscionable And Unenforceable Despite Consumer Alternatives To Services From Defendant

Class Action Waiver Rendered Arbitration Clause Unconscionable “Notwithstanding the Availability of Market Alternatives” and Federal Arbitration Act (FAA) does not Preempt California State Court Holding that Class Action Waivers are Unconscionable under California Law

Plaintiffs filed a putative class action in California state court against T-Mobile alleging violations of the state’s unfair business practices statute arising out of the early termination fees charged cellular telephone service customers and the sale of “locked” cellular phones that customers cannot use if they switch to another carrier. Gatton v. T-Mobile USA, Inc., 152 Cal.App.4th 571, 61 Cal.Rptr.3d 344, 346 (Cal.App. 2007). The trial court denied a defense motion to compel arbitration pursuant to the service agreement’s arbitration clause, which included a class action waiver, id., at 346-47. The California Court of Appeal affirmed, holding that “the class action waiver rendered the arbitration provision unenforceable” and that the Federal Arbitration Act (FAA) did not “preempt[] any rule that class action waivers are unconscionable under California law.” Id., at 347. The appellate court therefore affirmed the trial court order, which permitted plaintiffs to prosecute the putative class action in state court. The appellate court’s discussion of the FAA’s impact on class action waivers is contained in a portion of the court’s opinion that, pursuant to California Rules of Court, is not published and therefore many not cited; accordingly, we summarize here only that part of the opinion holding that the class action waiver rendered the arbitration clause unenforceable.

Plaintiffs signed cellular telephone service agreements with T-Mobile, acknowledging that they had “received and reviewed the T-Mobile Terms and Conditions” and that “ All disputes are subject to mandatory arbitration in accordance with paragraph 3 of the Terms and Conditions.” Gatton, at 347. The introductory paragraph of the Terms and Conditions advised people to “carefully read these Terms and Conditions” and to “NOT USE THIS SERVICE OR YOUR UNIT” if they are unwilling to agree to be bound by the provisions contained therein. Id. Section 3 of the Terms and Conditions, entitled “Mandatory Arbitration; Dispute Resolution,” precluded customers from seeking class action relief, id., and the appellate court summarized at pages 347 and 348 that “The terms and conditions incorporated into each of the plaintiff’s agreements included a mandatory arbitration clause including a class action waiver.” The contract required each party to pay for their own attorney fees, and for customers to pay $25 toward the arbitrator’s fee (save for claims of less than $25, in which case T-Mobile would pay for the arbitrator’s fee). Id., at 348, n.3.

With respect to the early termination fees underlying the class action allegations of certain plaintiffs, the class action complaint alleged that customers who terminate service prior to the expiration of the service contract are required to pay approximately $200 per telephone, and that this fee is also charged if T-Mobile cancels the contract for nonpayment or other reasons. Gatton, at 348. According to the class action complaint, the early termination fee is the same “whether the contract has been in effect for several weeks or several months,” and this “flat-fee early termination penalty constitutes an unlawful penalty under Civil Code section 1671, subdivision (d), is unlawful under the unfair competition law [(UCL)] (Bus. & Prof. Code, § 17200 et seq.), and is unconscionable under the Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.).” Id., at 348-49 (footnote omitted). With respect to the class action’s claims concerning handset, the complaint charges that it is unlawful require prevent customers to purchase a new phone if they switch service providers. Id., at 349. The class action alleged that T-Mobile locked the SIM card so that the phone could not be programmed to operate on the service network of a competitor, and that the SIM can be unlocked simply by entering a numerical code, id. The class action complaint alleges that T-Mobile falsely represents that its phones “are not compatible with and will not work with other wireless networks” in violation of the UCL and the CLRA. Id. The complaint further alleges that locking the SIM “makes it impossible or impracticable for subscribers to switch cell phone service providers without purchasing a new handset.” Id.

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Circuit City Class Action Defense Case-Gentry v. Superior Court: California Supreme Court Invalidates Class Action Waiver In Arbitration Clause As Against Public Policy And Concludes Arbitration Clause Procedurally Unconscionable Despite Right To Opt Out

Class Action Lawsuits are More Effective in Redressing Employee Labor Law Claims thus Rendering Class Action Waiver in Arbitration Clause Unenforceable, and Arbitration Clause was Procedurally Unconscionable Despite 30-Day Window to Opt Out of Entirely Voluntary Dispute Resolution Program California Supreme Court Holds

Plaintiff filed a putative class action in California state court against Circuit City alleging violations of the state’s unfair and deceptive business practices statutes and labor code arising out of its misclassifying employees as exempt in order to deny them overtime pay. Gentry v. Superior Court, ___ Cal.4th ___, 64 Cal.Rptr.3d 773, Slip Opn., at 2-3 (Cal. August 30, 2007). Defense attorneys moved to dismiss the class action and compel arbitration pursuant to an arbitration clause with a class action waiver. The trial court found the arbitration clause and the class action waiver to be fully enforceable, and granted the defense motion. The Court of Appeal agreed with the trial court’s reasoning, but the California Supreme Court reversed.

At the time Circuit City hired plaintiff, he was provided with written materials that included the company’s “Dispute Resolution Rules and Procedures”; the program gave employees “various options, including arbitration, for resolving employment-related disputes” and provided that if the employee elected arbitration – a choice that was subject to a class action arbitration waiver – then the company could compel the employee to dismiss any civil action in favor of arbitration. Gentry, at 3. As the Supreme Court explained, “The packet included a form that gave the employee 30 days to opt out of the arbitration agreement. [Plaintiff] Gentry did not do so.” Id. Both the trial court and the appellate court were influenced by the fact that plaintiff failed to opt out of the arbitration program within the 30-day window, despite the fact that there would have been no adverse employment ramifications had he done so. Id., at 3-4. The Supreme Court, however, disagreed.

In a strangely vague and sharply split opinion, the Supreme Court held that class action arbitration waiver provisions in overtime cases “may be contrary to public policy,” Gentry, at 5 (italics added). But despite all of its hedging, the Court seems to be clear that anything short of an attorney-supervised waiver would not withstand scrutiny, explaining at page 12:

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Arbitration Class Action Defense Cases-Douglas v. U.S. District Court: Ninth Circuit Holds Class Action Plaintiff Cannot Be Compelled To Arbitrate Class Action Dispute Against Long Distance Telephone Service Carrier If Not Told Of Contract Modifications

Modification of Telephone Service Contract to Include Class Action Waiver and Arbitration Clause not Binding on Class Action Plaintiff Where Customer did not Receive Notice of Change in Contract Terms Ninth Circuit Holds, Reversing District Court Order Compelling Arbitration in Favor of Telephone Company in Class Action Challenging New, Undisclosed Charges

Plaintiff filed a putative class action in California federal court against Talk America, his long distance telephone service company, alleging violations of the Federal Communications Act, breach of contract, and violations of various California consumer protection laws based on its unilateral revision of the service contract, without notice, to add additional service charges. Douglas v. U.S. District Court, 495 F.3d 1062, Slip Opn., at 2 (9th Cir. 2007). Defense attorneys moved to compel arbitration based on another unilateral revision to the service contract that added, without notice to customers, an arbitration clause as well as a class action waiver. Id. The district court granted the motion, and plaintiff petitioned for a writ of mandate because the Federal Arbitration Act does not authorize interlocutory appeals. Id., at 2-3.

Talk America acquired AOL’s long distance telephone service, and then modified the terms of the service contract with former AOL customers to add four provisions: “(1) additional service charges; (2) a class action waiver; (3) an arbitration clause; and (4) a choice-of-law provision point to New York law.” Douglas, at 2. The class action complaint alleged that Talk America did not provide notice of these revisions to its customers, and that the revised contract was only available on Talk America’s website. Id., at 4. The class action alleged that a customer would only learn of the revisions to the service contract if he visited the website and compared the terms of the contract online with prior versions of the contract, id. The district court “seems to have assumed” plaintiff did this as it noted that the contract was available on “the web site on which Plaintiff paid his bills,” id.; but plaintiff argued that “he authorized AOL to charge his credit card automatically and Talk America continued this practice, so he had no occasion to visit Talk America’s website to pay his bills” and that in any event “he would have had no reason to look at the contract posted there” as he was not notified that the terms of the contract had been changed. Id.

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Arbitration Class Action Defense Cases–Shroyer v. New Cingular: Ninth Circuit Holds Class Action Arbitration Waiver Unconscionable Under California Law And Federal Arbitration Act Does Not Preempt Enforceability Of Class Action Waiver Provision

Enforceability of Class Action Arbitration Waiver Clause is Governed by State Law and District Court Erred in Granting Defense Motion to Compel Arbitration and Dismiss Class Action Complaint because Class Action Arbitration Waiver in Consumer Contract was Unconscionable under California Law Ninth Circuit Holds

Last Friday, the Ninth Circuit held that a class action arbitration waiver in a cellular telephone service contract is unconscionable under California law, and that the Federal Arbitration Act (FAA) did not protect the class action waiver. Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976, Slip Opn., at 9993 et seq. (9th Cir. 2007). Plaintiff filed a class action in California state court against New Cingular Wireless and AT&T alleging that cellular phone service “deteriorated significantly” following the merger of the two companies, id., at 9997-98. The class action complaint alleged in part various violations of California’s unfair competition law, id., at 9998, and defense attorneys removed the class action to federal court, id., at 10000. Defense attorneys then moved the district court to compel arbitration and dismiss the class action; arguing that the arbitration clause is enforceable under the FAA; the district court agreed and plaintiff appealed. Id., at 10000-01. The Ninth Circuit reversed.

The Ninth Circuit summarized the case as requiring it to consider “whether a class arbitration waiver in New Cingular Wireless Service Inc.’s standard contract for cellular phone services is unconscionable under California law, and whether the [FAA] preempts a holding that the waiver is unenforceable.” Shroyer, at 9997. The cellular service contract plaintiff signed with AT&T in 2000 and 2003 apparently did not contain class action waiver; but when he switched his account to Cingular in January 2005 – which he did via telephone – the contract he agreed to included a binding arbitration clause that included a class action waiver. Id., at 9998-10000. The Ninth Circuit held that, under the FAA, whether the class action arbitration clause was enforceable turned on state law, and that under Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005), the class action arbitration provision in plaintiff’s service contract was “both procedurally and substantively unconscionable and, therefore, unenforceable.” Id., at 10002.

The Circuit Court summarized California and Ninth Circuit case law regarding unconscionability of class action arbitration waivers, culminating in the three-part test set forth in Discover Bank. Shroyer, at 10002-05. That test requires court determine (1) whether the consumer contract is one of adhesion, (2) whether the contract involves disputes of “predictably…small amounts of damages,” and (3) whether the alleged intent of the contract is to permit the company to “carr[y] out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.” Id., at 10005 (quoting Discover Bank, at 162-63). The Ninth Circuit found each of these tests satisfied in this case, id. at 10006-08.

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