In re  Cingular  Cases

Filed 1/16/07  In re Cingular Cases CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

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COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

            APPEAL from an order of the Superior Court of San Diego County, Jeffrey B. Barton, Judge.  Affirmed.

            Plaintiffs and respondents J. Marvin Campbell and James Giannoit filed separate but later consolidated proposed class action lawsuits (hereafter class action lawsuits) against defendants and appellants Pacific Bell Wireless LLC and Cingular Wireless LLC (collectively Cingular), asserting various causes of action based on alleged misrepresentations made by Cingular to its customers.  Cingular filed motions to compel arbitration relying on arbitration clauses in its service contracts.  The trial court denied the motions, finding the arbitration clauses procedurally and substantively unconscionable.  Cingular appeals.

BACKGROUND

            A.  Complaints

            Plaintiffs by separate but later consolidated class action lawsuits sued Cingular, challenging by way of various causes of action the adequacy of its service quality and network capacity and claiming inadequate disclosure and misrepresentations concerning those shortcomings.

            Plaintiffs alleged that through an extensive advertising campaign, Cingular successfully solicited the business of consumers seeking wireless phone service.  This Cingular did knowing but not disclosing that its facilities were insufficient to maintain a reasonable quality of service.  Cingular also installed equipment in its stores to provide a false impression of its service quality.  Plaintiffs alleged Cingular deliberately spurred a demand for its service that it could not meet.  Such inferior service resulted in the inability to complete calls, poor call quality and disconnections in mid-conversation.  Customers were forced to redial and thereby incur additional charges.  Additionally, plaintiffs alleged Cingular, aware of its inability to provide reasonable service, employed a strategy to prevent customers from switching to another wireless company or obtain refunds or credits for poor service.  This it did by placing in its service contract, and when necessary enforcing, an early termination fee provision.  The fees ranged from $150 to $500 and were designed to prevent unhappy customers from leaving Cingular.

            B.  Motions to Compel Arbitration

            Cingular moved to compel arbitration, noting that its service contracts at all times contained an agreement to submit disputes relating to the contract to arbitration.  In 2003 all prior service contracts were amended to include, and all new service contracts contained, a revised arbitration agreement more favorable to customers.  The new agreement required Cingular pay all arbitration fees, gave customers their reasonable attorney fees if the customer recovered, specified that arbitration would take place in the county of the customer's billing address, disavowed prior contract provisions making the arbitration proceeding and its results confidential, deleted any prohibition on punitive damages and specified that the rules of the American Arbitration Association and not those of the Wireless Industry Association would apply.

            Plaintiffs opposed the motion to compel arbitration.  They argued the arbitration clauses were both procedurally and substantively unconscionable and, therefore, unenforceable.  The agreements were procedurally unconscionable because they were contracts of adhesion drafted by Cingular, the party with the superior bargaining power, and there was no possibility of amendment.  They were substantively unconscionable because they were unfairly one-sided.

            C.  Denial of Motion to Compel Arbitration

            The trial court denied Cingular's motion to compel arbitration.  Citing Discover Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank), the court found the arbitration provisions in Cingular's service agreement were procedurally and substantively unconscionable.  The court stated Cingular's service agreement was a contract of adhesion.  The court found that in the original service agreements the arbitration clause was " buried."   The court noted the contract was not negotiable.  The court concluded the terms of Cingular's arbitration agreement deterred consumers from resolving disputes and operated to insulate Cingular from liability.

DISCUSSION

            Cingular argues its arbitration agreement was neither procedurally or substantively unconscionable and the trial court erred in refusing to compel arbitration.  Cingular also argues the Federal Arbitration Act (FAA) (9 U.S.C. §  2) preempted the trial court's review of the arbitration agreement for unconscionability.

            A.  Arbitration Agreements

            All Cingular customers signed a service agreement that included an arbitration clause.  Different versions of the agreement were used at different times but all required disputes arising out of or relating to the agreement be submitted to arbitration or brought in small claims court.

            In 2003 Cingular began using the arbitration clause applicable to the present case.  The 2003 arbitration clause became a part of Giannoit's and Campbell's agreements with Cingular in different ways.  Giannoit began wireless service with Cingular in December 2003 and signed an agreement containing the applicable arbitration clause.  The agreement contained three pages.  The first page had spaces for information about the customer and the service provided.  The remainder of that page and the following two pages contained extremely small, single-spaced text concerning a variety of matter.  The arbitration clause appeared at the end of the agreement.

            Campbell originally signed an agreement in 1998.  Like all other Cingular customers, he received the new arbitration provision as an insert with his July 2003 billing.

            The agreement required Cingular pay all arbitration fees, gave customers their reasonable attorney fees if the customer recovered, specified that arbitration would take place in the county of the customer's billing address, disavowed prior contract provisions making the arbitration proceeding and its results confidential, deleted any prohibition on punitive damages and specified that the rules of the American Arbitration Association and not those of the Wireless Industry Association would apply.

            The agreement stated the parties could only bring claims against the other in their individual capacity and not as plaintiffs or class member in a class action proceeding.  The agreement also stated the arbitrator could not consolidate proceedings.  It stated that if the class action aspects of the arbitration agreement were found unenforceable, then the arbitration agreement was void.^[1]

            B.  Unconscionability

            An agreement to arbitrate is valid except when grounds exist for the revocation of any contract.  (Code Civ. Proc., §§  1281, 1281.2, subd. (b).)  Unconscionability is one ground upon which a court may refuse to enforce a contract (Civ. Code, §  1670.5), and the burden is on the party opposing arbitration to prove the defense.  (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972.)

            The determination of unconscionability  is a question of law for the court.  (Civ. Code, §  1670.5, subd. (a); Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846, 851.)  On appeal, when the extrinsic evidence is undisputed, as it is here, we review the contract de novo to determine unconscionability. (Flores v. Transamerica HomeFirst, Inc., supra, 93 Cal.App.4th at p. 851; Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1527.)

            In determining whether a particular contractual provision is unconscionable, we examine both a procedural and a substantive element of unconscionability.  The procedural element focuses on the way in which the disputed provision was presented, i.e., whether there was " oppression" or " surprise."   Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.  Surprise involves the extent to which the supposedly agreed upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.  The substantive element of unconscionability has to do with the effects of the contractual provision and whether it is overly harsh or one-sided.  (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114; A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486.)

            To be unenforceable, a contract must be both procedurally and substantively unconscionable, but the courts employ a " sliding scale" or a balancing relationship between the two elements of unconscionability, such that the greater the degree of unfair surprise or unequal bargaining power, the less the degree of substantive unconscionability required to annul the contract and vice versa.  (Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at p. 114; Marin Storage & Trucking, Inc. v. Benco Contracting & Engineering, Inc. (2001) 89 Cal.App.4th 1042, 1056.)

            The wireless service agreements here were prepared by Cingular, the party with the superior bargaining position, were presented on a take-it-or-leave-it basis and were, therefore, contracts of adhesion.  (See Discover Bank, supra, 36 Cal.4th at p. 160.)  With regard to Giannoit, the arbitration clause in his agreement came at the end of three pages of single-spaced extremely small print that is, at best, difficult to read.  In the case of Campbell, the operative arbitration clause, albeit in a far more readable form, was sent to him as a filler in his billing.  Contrary to Cingular's claim the fact that plaintiffs might have secured wireless services from other companies that did not require the arbitration of disputes is not determinative.  (Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1100; Hoffman v. Cingular Wireless LLC (Oct. 26, 2006, No. 06-CV-1021 [2006 U.S. Dist. LEXIS 79067].)  We conclude the arbitration clauses in the agreements were procedurally unconscionable.  (See Discover Bank, supra, 36 Cal.4th at p. 160; Cohen v. DIRECTV, Inc. (2006) 142 Cal.App.4th 1442, 1451; Szetela v. Discover Bank, supra, 97 Cal.App.4th at p. 1100.)^[2]

            We also find the arbitration clauses were substantively unconscionable.  The issue of substantive unconscionability was recently examined by our Supreme Court in Discover Bank, where the court focused on the exemption that a contract clause banning class action or class arbitration relief may provide to an offending business from liability for its bad business practices. The court said:  " [C]lass action waivers found in [adhesive] contracts may also be substantively unconscionable inasmuch as they may operate effectively as exculpatory clauses that are contrary to public policy.  As stated in Civil Code section 1668, 'All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.' "   (Discover Bank, supra, 36 Cal.4th at p. 161.)

            While recognizing that class action and class arbitration waivers are not, in the abstract, exculpatory clauses, the court commented that such clauses are " indisputably one-sided."   (Discover Bank, supra, 36 Cal.4th at p. 161.)  The court expressly rejected the notion that provisions in the arbitration agreement allowing litigation in small claims court or recovery of attorney fees by the prevailing party are adequate substitutes for the important mechanism of class-wide arbitration. (Id. at p. 162.)

            The Supreme Court concluded as follows:  " We do not hold that all class action waivers are necessarily unconscionable.  But when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party 'from responsibility for [its] own fraud, or willful injury to the person or property of another.'  [Citation.]  Under these circumstances, such waivers are unconscionable under California law and should not be enforced."  (Discover Bank, supra, 36 Cal.4th at pp. 162-163.)

            The present case involves a consumer contract.  The plaintiffs allege an intentionally wrongful act by Cingular, the misleading of its customers to their detriment.  As noted above it is no answer to a claim of substantive unconscionability that Cingular's contract allows individual customers to sue it in small claims court or that the agreement provides individual customers with certain procedural advantages in arbitration proceedings.

            Cingular argues, however, that unlike the situation in Discover, the claimed losses here, perhaps $1,000 to $2,000, are not small and there is, therefore, sufficient incentive for individual customers to seek redress.  That being the case, there is no substantive unconscionability in its contract denying customers the right to seek collective action.

            In Cohen v. DIRECTV, Inc., supra, 142 Cal.App.4th 1442, filed after the decision in Discover, DIRECTV argued its contract compelling arbitration and prohibiting class litigation was not unconscionable because the amount of damages sought was not small.  In that case the plaintiff sought damages for the cost of equipment, i.e., $1,000, and a monthly subscription fee of $10.99.

            The court in Cohen rejected DIRECTV's argument.  It stated:  " DIRECTV asserts that the individual stakes are higher in this case, because the damages Cohen alleged included, in addition to the $ 10.99 monthly fee, the cost for the decoder box the consumer must purchase in order to receive DIRECTV's high definition package− an expense amounting, in some instances, to more than $ 1,000.  We are not persuaded that this additional element of damages in any way affects the foundational premise that DIRECTV's class action waiver occurs in a setting where disputes between the contracting parties 'predictably involve small amounts of damages.'  [Citation.]  While $1,000 is not an insignificant  sum, many consumers of services such as those offered by DIRECTV may not view that amount as sufficient ' " ' " to warrant individual litigation," ' " ' " and certainly it is not sufficient to obtain legal assistance in prosecuting the claim.  [Citation.]  In short, the class action device remains, in our view, the only practicable way for consumers of services such as DIRECTV's to deter and redress wrongdoing of the type Cohen alleges.  Damages that may or may not exceed $ 1,000 do not take DIRECTV's class action waiver outside 'a setting in which disputes between the contracting parties predictably involve small amounts of damages . . . .'  [Citation.]"   (Cohen v. DIRECTV, Inc., supra, 142 Cal.App.4th at p. 1452, fn. omitted.)

            We agree with Cohen and conclude the clause in Cingular's contract denying to customers the right to bring collective actions is substantively unconscionable.

            C.  Preemption

            Cingular argues section 2 of the FAA preempts a finding that its arbitration clause was unconscionable under California law.

            Cingular makes this contention in two forms.  First, it argues the FAA prohibits a court from " distorting" generally applicable principles of state unconscionability law such that it thwarts enforcement of arbitration proceedings.  Cingular contends California law allows a finding of unconscionability only when the contract provision so shocks the conscience that " no man in his sense, and not under delusion" would agree to it.  It contends no such finding in this case was reasonable and, therefore, the trial court's finding of unconscionability could only have been based on a distortion of general principles such that it thwarts enforcement of arbitration proceedings.  Cingular argues this impediment to arbitration is not allowed by the FAA.

            Second, Cingular argues the trial court's holding is preempted by the FAA because it would force it and other companies to abandon arbitration.

            Cingular concedes the second of its arguments has been rejected by our Supreme Court in Discover and raises it merely to preserve the issue in the event this case is considered by higher courts.  We conclude both arguments fail under Discover.

            In Discover the court began its discussion of FAA preemption by stating:  " We begin by reviewing some basic principles pertaining to the enforcement of arbitration agreements.  'California law, like federal law, favors enforcement of valid arbitration agreements.  [Citation.]  . . . .  Thus, under both federal and California law, arbitration agreements are valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.'  [Citations.]  In other words, although under federal and California law, arbitration agreements are enforced 'in accordance with their terms' [citation], such enforcement is limited by certain general contract principles '  " at law or in equity for the revocation of any contract." '  [Citation.]

            " At the outset of our discussion, we note that the FAA is silent on the matter of class actions and class action arbitration.  Indeed, not only is class wide arbitration a relatively recent development, but class action litigation for damages was for the most part unknown in federal jurisdictions at the time the FAA was enacted in 1925.   [Citation.]  The Congress that enacted the FAA therefore cannot be said to have contemplated the issues before us.  Accordingly, our conclusions with respect to FAA preemption must come from the United States Supreme Court's articulation of general principles regarding such preemption."   (Discover, supra, 36 Cal.4th at pp. 163-164, fn. omitted.)

            After its review of that authority, the court in Discover found a distinction existed between state-law principles that take their meaning precisely from the fact that a contract to arbitrate is at issue, which are preempted by the FAA, and state-law principles that govern the enforceability of contracts in general, which are not preempted by the FAA.  (Discover, supra, 36 Cal.4th at p. 165.)

            The court stated:  " [T]he principle that class action waivers are, under certain circumstances, unconscionable as unlawfully exculpatory is a principle of California law that does not specifically apply to arbitration agreements, but to contracts generally.  In other words, it applies equally to class action litigation waivers in contracts without arbitration agreements as it does to class arbitration waivers in contracts with such agreements.  [Citation.]"   (Discover, supra, 36 Cal.4th at pp. 165-166.)

            California law with regard to the unconscionability of class action waivers in consumer contracts was defined by the decision in Discover.  That law is applicable to all contracts containing such waivers, not just those requiring arbitration.  We have concluded the trial court properly applied that law.  Application of that law was not, therefore, preempted by the FAA.

            The order denying the motion to compel arbitration is affirmed.

BENKE, Acting P. J.

WE CONCUR:

                                       HALLER, J.

                                   O'ROURKE, J.

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^[1]           Under the word " ARBITRATION" was the following:  " Please read this carefully.  It affects your rights.  Cingular and you . . . agree to arbitrate all disputes and claims arising out of or relating to this Agreement . . . .  Notwithstanding the foregoing, either party may bring an individual action in small claims court.  This Agreement evidences a transaction in interstate commerce, and thus the Federal Arbitration Act governs the interpretation and the enforcement of this provision.  A party who intends to seek arbitration must first send to the other, by certified mail, a written Notice of Intent to Arbitrate . . . .  The Notice must (a) describe nature and basis of the claim or dispute; and (b) set forth the specific relief sought . . . .  If we do not reach an agreement to resolve the claim within 30 days after the Notice is received, you or Cingular may commence an arbitration proceeding.  After Cingular receives notice at the Arbitration Notice Address that you have commenced arbitration, it will promptly reimburse you for your payment of the filing fee.  All issues are for the arbitrator to decide, including the scope of this arbitration clause, but the arbitrator is bound by the terms of the Agreement.  The arbitration shall be governed by the Commercial Dispute Resolution Procedures and the Supplementary Procedures for Consumer Related Disputes (collectively, 'AAA Rules') of the American Arbitration Association ('AAA'), as modified by this Agreement, and shall be administered by the AAA. . . .  Except as otherwise provided for herein, Cingular will pay all AAA filing, administration and arbitrator fees.  If, however, the arbitrator finds that either the substance of your claim or the relief sought in the Demand is improper or not warranted, as measured by the standards set forth in Federal Rule of Civil Procedure 11(b), then the payment of such fees shall be governed by the AAA Rules.  In such case, you agree to reimburse Cingular for all monies previously disbursed by it that are otherwise your obligation to pay under the AAA Rules.  If the arbitrator grants relief to you that is equal to or greater than the value of your Demand, Cingular shall reimburse you for you reasonable attorneys' fees and expenses incurred for the arbitration.  The arbitrator may make rulings and resolve disputes as to the payment and reimbursement of fees and expenses at any time during the proceeding and upon request from either party within 14 days of the arbitrator's ruling on the merits.  You agree that, by entering into this agreement, you and Cingular are waiving the right to trial by jury.  Unless Cingular and you agree otherwise, all hearings conducted as part of the arbitration shall take place in the county (or parish) of your billing address.  The arbitrator may award injunctive relief only in favor of the individual party seeking relief and only to the extent necessary to provide relief warranted by that party's individual claim.  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 or more than one person's claims, and may not otherwise preside over any form a representative or class proceeding, and that is if this specific proviso is found unenforceable, then the entirety of the arbitration clause shall be null and void.  Notwithstanding any provision in this Agreement to the contrary, we agree that if Cingular makes any change to this arbitration provision (other than a change to the Arbitration Notice Address) during your Service Commitment, you may reject any such change and require Cingular to adhere to the language in this provision."

^[2]           Cingular cites Jones v. Citigroup, Inc. (2006) 135 Cal.App.4th 1491, 1498, for the proposition that even when the contract is one of adhesion, there is no procedural unconscionability if the arbitration agreement was part of the original contract, not, as in Discover, a later add on.  Our Supreme Court has granted review in Jones.