John J. Tollefsen Arbitration Law Blog on Lawyers.com

Chalk v. T-Mobile USA, Inc., --- F.3d ----, (9th Cir.(Or.) Mar 27, 2009) (NO. 06-35909)

Plaintiffs bought Sony Wireless LAN PC card to connect wirelessly to the Internet, from T-Mobile and signed a one-year service agreement. For approximately three weeks after the purchase of the card, plaintiffs were able to insert it into their laptop computer and connect to the internet. A few months later, plaintiffs were unable to insert the card into their laptop. They contacted T-Mobile technical support several times and received refurbished cards on three separate occasions. They could not, however, insert any of the refurbished cards into the laptop. After they were unable to insert the third card, staff from T-Mobile technical support informed Plaintiffs that they would have to pursue the issue at the T-Mobile store where they purchased the original card. At the store, a Sony representative attempted to insert the card and he failed to succeed in this task as well. He then promised to contact plaintiffs about how to solve the problem. Plaintiffs never heard back from him, despite multiple email inquiries.

Plaintiffs filed a class action lawsuit in federal district court ignoring the arbitration clause in their agreement with T-Mobile. 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. Plaintiffs alleged that T-Mobile's arbitration agreement is unconscionable which may render an agreement to arbitrate unenforceable. Oregon's courts consider the contract itself to be evidence of unconscionability where the terms of the contract are unconscionable on their face.

In assessing a claim of unconscionability, Oregon courts consider both procedural and substantive unconscionability. Although both forms of unconscionability “are relevant, ... only substantive unconscionability is absolutely necessary.”

Procedural unconscionability focuses on two factors in contract formation: oppression and surprise. Oppression arises when there is inequality in bargaining power between the parties to a contract, resulting in no real opportunity to negotiate the terms of the contract and the absence of meaningful choice. Surprise involves the extent to which the supposedly agreed terms were hidden from the party seeking to avoid enforcement of the agreement.

Substantive Unconscionability is found where the arbitration agreement, while not procedurally unconscionable, was adhesive and therefore reflected an underlying inequality in the parties' ability to bargain. The arbitration clause is rendered unconscionable when the disparity in bargaining power reflected in the clause's adhesive nature is combined with terms that are unreasonably favorable to the party with the greater power.

In the Vasquez-Lopez case, the Oregon court explained that a class action waiver in a consumer contract is unreasonably favorable to a company like T-Mobile for two distinct reasons. First, such a waiver is inherently one-sided when contained in a consumer contract. Even if the waiver on its face applies equally to both parties, it is entirely unilateral in effect. Wryly noting the well-known literary passage that “ ‘the majestic equality of the laws ... forbid[s] rich and poor alike to sleep under the bridges, to beg in the streets, and to steal their bread,’ “ the Oregon Court of Appeals observed, “Although the arbitration rider with majestic equality forbids lenders as well as borrowers from bringing class actions, the likelihood of the lender seeking to do so against its own customers is as likely as the rich seeking to sleep under bridges.”

Second, a consumer class action waiver frequently prevents individuals from vindicating their rights. A ban on class action denies plaintiffs a crucial opportunity “without which many meritorious claims would simply not be filed” because the cost of pursuing each claim individually outweighs the potential relief. “‘The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.’” As Vasquez-Lopez explained, by preventing consumers from pursuing small but meritorious claims a class action waiver “gives defendant[s] a virtual license to commit, with impunity, millions of dollars' worth of small-scale fraud.”

The substantive unconscionability of T-Mobile's class action waiver is magnified by its requirement that each party bear its own costs. This provision is unconscionable as well, as it discourages individuals from litigating by precluding an award of otherwise available attorney fees to a prevailing plaintiff under the Oregon statutory law. Vasquez-Lopez held that, even when an award of attorney fees is available, individuals may not “sufficiently be motivated to spend the time and risk the expense necessary to take [their] claim[s ] to arbitration.” Where the possibility of an award of attorney fees is eliminated, the costs of individual action become even more onerous and the likelihood that the class action waiver provides T-Mobile with a “license to commit, with impunity, millions of dollars' worth of small-scale fraud,” is even greater.

Because Oregon courts have declared that class action waivers in consumer contracts where individual damages are likely to be small are substantively unconscionable and the waiver in T-Mobile’s contract was contained in a contract of adhesion, the class action waiver in T-Mobile's arbitration agreement was not enforceable. Because the arbitration agreement prohibits severance of the waiver, the agreement as a whole was unenforceable.