9th Circuit Holds Arbitration Clause in Cell Phone Contract Unenforceable

August 17, 2007. The U.S. Court of Appeals (9thCir) issued its opinion [29 pages in PDF] in Shroyer v. New Cingular Wireless Services and AT&T, holding that a mandatory arbitration clause in a standard cell phone service contract is unconscionable, and therefore, unenforceable.

Kennith Shroyer filed a complaint, and sought class action status, in state court in California, against Cingular and AT&T, alleging unfair competition, misleading advertising, and other state causes of action. He complained about cell phone service plans. When he obtained service, he executed a form contract that includes a binding arbitration clause, and a waiver of class action rights.

Cingular removed the action to the U.S. District Court (CDCal), asserting jurisdiction under the Class Action Fairness Act of 2005 (CAFA). It also moved to compel arbitration. The District Court granted the motion. This appeal followed.

The Court of Appeals reversed. It held that the question of whether or not the contract terms are unconscionable is a matter of California state law. It then held that under California law the mandatory arbitration clause is unconscionable, and hence, unenforceable. In addition, the Court of Appeals held that the invalidation of the contract clause is not preempted by the Federal Arbitration Act (FAA).

The case is remanded to the District Court with instructions to consider the class action.

This case is Kennith Shroyer v. New Cingular Wireless Services, Inc. and AT&T Corporation, U.S. Court of Appeals for the 9th Circuit, App. Ct. No. 06-55964, an appeal from the U.S. District Court for the Central District of California, D.C. No. CV-06-01792-R, Judge Manuel Real presiding. Judge Stephen Reinhardt wrote the opinion of the Court of Appeals, in which Judge Dorothy Nelson joined. Judge Pam Rymer wrote a one sentence concurring opinion.