Shroyer v. New Cingular Wireless Services, Inc.

498 F.3d 976

Kennith SHROYER, individually and as Representative for all others similarly situated and the General Public, Plaintiff-Appellant, v. NEW CINGULAR WIRELESS SERVICES, INC., a Delaware corporation; AT & T Corporation, Defendants-Appellees.

No. 06-55964.

United States Court of Appeals, Ninth Circuit.

Submitted June 13, 2007.^*

Filed August 17, 2007.

William Weinstein, Wechsler Harwood LLP, New York, NY, for plaintiff-appellant.

Robert K. Friedl, Kirtland & Packard LLP, El Segundo, CA, for plaintiff-appellant.

Donald M. Falk, Mayer, Brown, Rowe & Maw LLP, Palo Alto, CA, for defendants-appellees.

Evan Tager and Timothy C. Lambert, Mayer, Brown, Rowe & Maw LLP, Washington, DC, for defendants-appellees.

Michael J. Stortz, Drinker Biddle & Reath LLP, San Francisco, CA, for defendants-appellees.

Appeal from the United States District Court for the Central District of California; Manuel L. Real, District Judge, Presiding. D.C. No. CV-06-01792-R.

Before: D.W. NELSON, STEPHEN REINHARDT, and PAMELA ANN RYMER, Circuit Judges.

REINHARDT, Circuit Judge:

In this case, we 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 Federal Arbitration Act preempts a holding that the waiver is unenforceable. We hold that the waiver is unconscionable, and, thus, unenforceable, and that the invalidation of the contract provision is not preempted by the Federal Arbitration Act. Accordingly, we reverse the district court's order compelling arbitration.¹

I. Procedural and Factual Background

On February 22, 2006, Appellant Kennith Shroyer filed a class action lawsuit in the California Superior Court against Appellees New Cingular Wireless Services, Inc., AT & T Corp. (AT & T), and Does 1 through 100, alleging that he and similarly situated plaintiffs ("the class" or "class members") had suffered injuries as a result of the 2004 merger between Cingular Wireless LLC and AT & T Wireless Services, Inc. (AT & T) that created New Cingular Wireless Services, Inc. (Cingular), and in particular by the actions of Cingular subsequent to the merger. Shroyer pled seven causes of action based on California state statutes and common law, including (1) unfair competition under Cal. Bus. & Prof.Code § 17200, et seq.; (2) untrue and misleading advertising under Cal. Bus. & Prof.Code § 17500; (3) violations of the Consumers Legal Remedies Act, Cal. Civil Code § 1750; (4) breach of contract; (5) breach of the covenant of good faith and fair dealing; (6) fraud and deceit under Cal. Civil Code § 1710; and (7) unjust enrichment. Shroyer requested damages, declaratory relief, and injunctive relief.

Shroyer's complaint alleges that when AT & T and Cingular merged the cellular phone services received by AT & T's customers deteriorated significantly. Simultaneously, Cingular sought to induce the customers of AT & T to transfer their service plans and equipment from AT & T to Cingular in order to increase the company's profits. When class members complained about the new problems associated with their AT & T service plans, Cingular allegedly told them that it could provide members with a "chip" that would restore their service quality. To receive the chip, however, class members would be required to extend their current contracts by entering into "Wireless Service Agreements" (Agreements) with Cingular, and, thus, to switch their service plans from AT & T to Cingular. Cingular also allegedly told class members that when they extended their contracts with Cingular, they would not be able to retain the more favorable rates contained in their existing AT & T contacts.

Shroyer initially subscribed to AT & T service plans in 2000 and 2003. After the merger, he complained about his service, and Cingular told him that it would be improved if he signed a new contract with Cingular. On January 2, 2005, Shroyer switched his two cellular phone accounts from AT & T to Cingular by entering into new Agreements with Cingular. Shroyer, like other class members who entered into Agreements with Cingular, executed an electronic signature over the telephone to assent to the terms of the Agreements. Shroyer selected the answer "Yes" in response to the statement "You agree to the terms as stated in the Wireless Service Agreement and terms of service."

The form contract to which Shroyer assented states that the Agreement incorporates by reference Cingular's Terms and Conditions Booklet, "including its binding arbitration clause," and that at the time the consumer signs the Agreement he has read and agrees to be bound by the Agreement and the terms in the Booklet, "including ... [the] Arbitration provisions." The booklet referred to by the Agreement includes an arbitration clause, which states that "Cingular and you ... agree to arbitrate all disputes and claims ... arising out of or relating to this Agreement, or to any prior oral or written agreement, for Equipment or services between Cingular and you." The clause further states that the arbitration will be governed by the procedures of the American Arbitration Association (AAA) and administered by AAA.

Most important, the arbitration provision contains a class arbitration waiver that bars individuals from bringing representative claims:

You and Cingular agree that YOU AND CINGULAR MAY BRING CLAIMS AGAINST THE OTHER ONLY IN YOUR OR ITS INDIVIDUAL CAPACITY, and not as a plaintiff or class member in any purported class or representative proceeding. Further, you agree that the arbitrator may not consolidate proceedings of more than one person's claims, and may not otherwise preside over any form of representative or class proceeding, and that if this specific proviso is found to be unenforceable, then the entirety of this arbitration clause shall be null and void.

One month after Shroyer filed his complaint, Cingular removed the action to the United States District Court for the Central District of California pursuant to 28 U.S.C. §§ 1441, 1446, and 1453, asserting subject matter jurisdiction under the Class Action Fairness Act of 2005 (CAFA), Pub.L. 109-2, 119 Stat. 14 (2005), 28 U.S.C. § 1332(d). Cingular then promptly filed a motion to compel arbitration and stay further proceedings in the litigation pursuant to § 3² and § 4³ of the Federal Arbitration Act (FAA), 9 U.S.C. §§ 3-4. It asserted that the arbitration clause is valid and enforceable under § 2 of the Federal Arbitration Act⁴ and that the clause is neither procedurally nor substantively unconscionable. Alternatively, it asserted that a holding that the clause is unconscionable would be expressly preempted by § 2 of the Federal Arbitration Act, as well as impliedly preempted because such a holding would frustrate the purpose of the Act.

After hearing oral argument, District Judge Manuel Real announced that he would grant Cingular's motion to compel arbitration and dismiss the action without prejudice. Ten days later, Cingular filed a seven-page proposed order — "[Defendant's Proposed] Order Compelling Arbitration and Dismissing the Action Without Prejudice" — that contained virtually all of the legal arguments and factual allegations that Cingular had made in its memorandum to support its motion to compel arbitration, and nothing else. Shortly thereafter, Judge Real entered the proposed order without making any changes to it. Shroyer filed a timely notice of appeal.

II. Jurisdiction and Standard of Review

The district court had subject matter jurisdiction pursuant to 28 U.S.C. § 1332(d), and we have appellate jurisdiction over its order compelling arbitration and dismissing the action without prejudice pursuant to 9 U.S.C. § 16(a)(3). See Sanford v. Memberworks, Inc., 483 F.3d 956, 961 (9th Cir.2007) (citing Interactive Flight Techs., Inc. v. Swissair Swiss Air Transp. Co., 249 F.3d 1177, 1179 (9th Cir. 2001)).

We review the district court's order de novo. Davis v. O'Melveny & Myers, 485 F.3d 1066, 1072 (9th Cir.2007) (citing Circuit City Stores, Inc. v. Mantor, 417 F.3d 1060, 1063 (9th Cir.2005)); accord Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1267 (9th Cir.2006) (en banc) ("The validity and scope of an arbitration clause are reviewed de novo." (citing Ticknor v. Choice Hotels Int'l, Inc., 265 F.3d 931, 936 (9th Cir.2001))).

III. Discussion

A. Unconscionability

Section 2 of the Federal Arbitration Act provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. "It is well-established that unconscionability is a generally applicable contract defense, which may render an arbitration provision unenforceable." Nagrampa, 469 F.3d at 1280 (citing Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)). Both Shroyer and Cingular agree that we should apply California contract law to determine whether the class arbitration waiver is unconscionable. Applying that law to the class arbitration waiver at issue here, we conclude that under the test set forth in Discover Bank v. Superior Court of Los Angeles, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (Cal.2005), the waiver is both procedurally and substantively unconscionable and, therefore, unenforceable. Accordingly, we agree with Shroyer that the district court erred in holding that the class arbitration waiver is neither procedurally nor substantively unconscionable.

Under California law, a contract provision is unenforceable due to unconscionability only if it is both procedurally and substantively unconscionable. Nagrampa, 469 F.3d at 1280 (citing Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal.4th 83, 114, 99 Cal.Rptr.2d 745, 6 P.3d 669 (Cal.2000)); see also Discover Bank, 36 Cal.4th at 160, 30 Cal.Rptr.3d 76, 113 P.3d 1100. But the two types of unconscionability "need not...