Appeal from the United States District Court for the Southern District of California, Dana M. Sabraw, District Judge, Presiding. D.C. No. and 3:05-cv-01167-DMS-AJB.
The opinion of the court was delivered by: Bea, Circuit Judge
Argued and Submitted September 17, 2009 -- San Francisco, California
Before: Mary M. Schroeder, Stephen Reinhardt and Carlos T. Bea, Circuit Judges.
This case involves a class action claim that a telephone company's offer of a "free" phone to anyone who signs up for its service is fraudulent to the extent the phone company charges the new subscriber sales tax on the retail value of each "free" phone.
The phone company demanded the plaintiffs' claims be submitted to individual arbitration, pointing to the arbitration clause of the written agreement, which arbitration clause requires arbitration, but bars class actions. Because this is an action invoking diversity of citizenship jurisdiction, the plaintiff-subscribers point to California contract law, which they claim renders both the arbitration clause and the class action waiver unconscionable, hence, unenforceable.
At first blush, it seems we decided the invalidity of an arbitration agreement banning class actions in Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007). But, the phone company points to a new wrinkle: unlike the arbitration clause in Shroyer, this arbitration clause provides for a "premium" payment of $7,500 (the jurisdictional limit of California's small claims court) if the arbitrator awards the customer an amount greater than the phone company's last written settlement offer made before selection of an arbitrator. Hence, says the phone company, the arbitration clause is not an artifice that has the practical effect of rendering it immune from individual claims.
We will find, on second blush, the new "premium" payment does not distinguish this case from Shroyer, and that under California law, the present arbitration clause is unconscionable and unenforcable. Further, we will also find no merit to the phone company's claim the Federal Arbitration Act (FAA) preempts California unconscionability law.
Thus, we will affirm the district court's order.
I. Factual and Procedural History
In February 2002, Vincent and Liza Concepcion signed a Wireless Service Agreement (WSA) with AT&T Mobility*fn1
(AT&T) for cellular phone service and the purchase of new cell phones. The Concepcions received the cell phones without charge for the devices themselves because they agreed to a two-year contract term. However, AT&T charged them $30.22 total in sales tax for the two phones*fn2 , calculated as 7.75% of both phones' full retail value. The Concepcions continued to renew their WSA through the filing of this lawsuit.
The WSA included both an arbitration clause, which required any disputes to be submitted to arbitration, and a class action waiver clause, which required any dispute between the parties to be brought in an individual capacity. In December 2006, AT&T revised the arbitration agreement to add a new premium payment clause. Under this clause, AT&T will pay a customer $7,500*fn3 if the arbitrator issues an award in favor of a California customer that is greater than AT&T's last written settlement offer made before the arbitrator was selected.
On March 27, 2006, before the premium payment clause was added, the Concepcions filed a complaint in the United States District Court for the Southern District of California. The Concepcions alleged the practice of charging sales tax on a cell phone advertised as "free" was fraudulent. In September 2006, the district court consolidated the Concepcions' case with the Laster case, a putative class action addressing the same issues. In March 2008, after the premium payment clause was added, AT&T filed a motion to compel the Concepcion plaintiffs to submit their claims to individual arbitration under the revised arbitration agreement. The district court denied the motion. It held that the class waiver provision ...